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Understanding Booking.com’s shift to the merchant model and a roadmap for hotels to compete with it


Four out of ten (40%) Booking.com reservations in Q1/2022 were processed through the OTA’s payment platform, an 48% increment compared to the last year (Q1/2021 accounted for 27%) and twice as much as just four years ago (2018) when the number was 20%.

This steady and growing trend shows Booking.com’s determination to migrate from its original “agency” model to the classical “merchant” model used by many OTA’s and bedbanks. After an important effort pushing this new model aggressively onto its suppliers, Booking.com has already reached 60% adoption globally. A very good number with still room to onboard more properties in coming months/years. So we expect this 40% to grow in 2022 and 2023.

What is the rationale behind this shift to the merchant model? Should it worry hoteliers? How should hotels adapt their strategy to compete with this “new” Booking.com? We cover all these topics and much more in this post.

Understanding Booking.com’s shift to the merchant model and a roadmap for hotels to compete with it— Source: mirai.com

Booking.com and the agency model

Before we go deeper, let’s briefly remember how each model works:

  • Agency model: The client pays the final price to the hotel (either at the time of the booking or at the check in). Typically after the check out month, the hotel pays the agreed commission to the OTA.
  • Merchant model: The client pays the full final price to the agency or OTA (not to the hotel). Normally after the check in date, the OTA pays the net price (final price – agreed commission) to the hotel.

“Gross rates” (when the hotel sets the final asking price) have traditionally been tied to the agency model whereas “net rates” to the merchant one. However, it’s not a technical requirement and you can distribute both rates in both models. When Booking.com first started years ago, it exclusively operated under the agency model as opposed to its archirival Expedia, that mostly operated under the merchant model. This agency model was indeed part of Booking.com’s huge initial success as hotels loved the many advantages this model offered:

  • Positive effects on cash flow.
  • Removed the risk of the agency going bankrupt without paying hotels.
  • More information about your clients before they go to the hotel.
  • For the first time, control over the final price clients paid.

Booking.com’s success story

The OTA has been extremely successful for the last 15 years without having to modify its agency model. This huge success came not only from good decisions by Booking.com’s management, but also by the many concessions the hotel industry has made so far.

Reasons for Booking.com success

Booking.com’s great decisions

  • Agency model (innovative back then and with many advantages for hotels)
  • Branding (image, security, confidence, loyalty)
  • Loyalty (Genius)
  • Technology (ux, search capabilities, filters, maps, app, etc)
  • Marketing (SEO, SEM, metasearch, email marketing, audiences, etc)
  • Content (reviews, copy, translations into 40+ languages, high quality pictures, etc)
  • Innovation (constant A/B testing, new formats, etc)
  • Partnerships and affiliate network

Hotel industry concessions

  • Considered Booking.com a true ally without noticing the many cons it had.
  • Let the OTA steal the “free cancellation” badge
  • Supported Genius program with lavish discounts paid for by the hotels
  • Allowed the OTA to bid on search engines with the hotels’ names and trademarks
  • Bought the “parity and inventory clause” that only benefited the OTAs in the long term
  • Lack of investment in their own direct channels (technology and marketing)
  • Treated clients who booked on Booking.com better in hopes they would write favorable reviews.
  • Accepted every single program or initiative that promised “more visibility” without much push back.

Why the agency model is Booking.com’s biggest bottleneck today

So far, Booking.com has grown to an unimaginable size becoming the largest OTA in the world. Its success is unquestionable. We should remember that Booking Holdings, as a public company, is pressed and even forced to constantly grow no matter what or how. The agency model, combined with an intense M&A activity, had supported this vigorous growth until very recently. However, Booking Holdings’ size makes it harder for them to sustain the same growth trajectory. Last years’ numbers confirmed that growth is mostly driven by the “merchant model”, whereas the “agency one” has stalled or even decreased, showing cannibalization or transition of bookings from one model to another. 2020 and 2021 data is an outlier and difficult to evaluate because of this. The trend continues, though, in Q12022 with the merchant model growing 241% over Q12021 – three times faster than the agency model (87%).

Additionally, most of the initiatives to achieve growth expectations demanded the capability of charging the end client, adding even more pressure to accelerate the shift.

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