Why freeriding in online travel benefits no one

In devising products and services, every business faces the same fundamental question: make or buy. Few companies can do everything on their own and, even for those that can, it’s often not the best choice. Other companies are regularly more efficient at a particular task, so division of labor makes everyone better off.

This is particularly true when it comes to sales, marketing, and distribution. Few businesses have the know-how and the reach to serve every potential customer on their own. This is the reason why Nike sneakers are not just sold in Nike stores, and farmers sell their produce to wholesalers that will deliver it to a large number of local shops instead of catering to every consumer themselves.

Of course, this is not a binary decision and in practice companies will make use of a wide variety of distribution channels, including selling directly to consumers. The internet has made the latter a lot easier, and many businesses now have their own online storefront.

The accommodation sector is no exception. Hotels can advertise in travel magazines, sell rooms to tour operators such as TUI or ThomasCook, work with travel agencies, advertise their own website on Google or social media, partner with national or local tourism marketing organizations, and boost word-of-mouth marketing by offering unforgettable service. In fact, direct sales to consumers remains the most important sales channel for hotels.

The internet has also given rise to online platforms, such as Booking.com, that aggregate product offers and consumer demand. This generates significant benefits to everyone. First and foremost, consumers find it easier to search for, compare, and book a hotel or other accommodation. And hotels, on their part, get visibility to a large number of consumers around the world that would otherwise be hard to reach.

In a nutshell, this is the modern version of the traditional travel agency but with a much greater scale and reach. While in the past a travel agent would be able to service only a limited local audience within its capturement area, online travel platforms offer almost unlimited worldwide reach and are available in dozens of languages. And it’s always just one click away for consumers.

© Anastasia Nelen on Unsplash

Technological advancements notwithstanding, the modus operandi remained essentially the same: online travel platforms, just like their physical counterparts, work on a success-fee basis, the so-called agency model. If, and only if, a consumer books their hotel room with the travel agent, does that said agent receive a remuneration. This practice has long been valued by the hotels because it is entirely risk free, with no upfront costs. Travel agencies provide a needed service, and hoteliers retain their full entrepreneurial freedom.

The hotels sets the room rates and decides on the terms and conditions. For example, they can charge a higher rate during peak season and a lower rate during off-season, and change it whenever they see fit. Online travel platforms are also often cheaper than other forms of distribution with, for example, standard commission rates averaging 15% for Booking.com. In contrast, tour operators will typically require a 25–40% discount on the hotel’s room rate as their own sales margin.

However, the internet has created new challenges for this business model. The agency business model is based on trust. Which is to say an implicit expectation that the efforts of the travel agent or the travel platform will be rewarded when generating additional business. This trust is undermined when hotels attempt to free-ride by encouraging consumers to find their hotel on an online travel platform but then (re-) book with them directly to eschew the commission payment. While free-riding has always taken place to a certain degree, the convenience of the internet, where everything is just one click away, has scaled the size of this problem.

In the past, consumers would face high hassle costs if they first made use of a travel agent but then turned around and tried to book the hotel directly in the hope of being offered a discount. As real-time online booking engines did not exist, one would have to call the hotel and inquire about prices and availability, or send an email or a fax and wait for a reply. The level of effort often didn’t justify the level of benefit, so it deterred most of the would-be-free-riders. Now, all it takes is real-time booking function on a given hotel’s website and concerted efforts to change consumer behavior.

A study by EY-Parthenon “shows that 41% of direct bookings at smaller lodgings originate from customers finding the accommodation on a platform. As such, online platforms contribute an additional 15% –20% of bookings to the accommodation. These are bookings for which accommodation providers do not pay a commission to the platform. ” In other words, free-riding has become a widespread practice. One that undermines the business model of online platforms and reduces our incentives to invest in technologies and services that have brought great benefits to consumers and hotels alike.

© Visualization by Statista

Online travel platforms have vastly improved the choice and transparency of offerings available to consumers, which ensures that consumers get the best value for their money. In 2019 alone, EU consumers saved € 20 billion as a result.

On a flip side, the same year hotels benefited from 133 million of additional room-nights. Even during the two most difficult years for the travel accommodation industry, online platforms continued to generate additional bookings for our accommodation partner. The biggest challenge a hotelier faces is the highly perishable nature of an unsold room. In other words, the key driver of revenue is occupancy level. This is true for all properties, and double-true for the small and independent hotels.

Free-riding undermines all of these benefits and erodes the trust between platforms and accommodations that list on them. Hotels make a conscious choice to partner with platforms for sales and distribution. This partnership needs fairness and mutual trust. Without online platforms everyone would be worse off. Let us all work together and preserve this mutually beneficial business model.

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