What are Online Travel Agencies?
The Ultimate Guide to OTAs

Love them or not, online travel agencies (OTAs) play a critical role in every property’s distribution strategy. According to Phocuswright’s 2020 research report, OTAs captured roughly 64% of online hotel & lodging bookings and have the visibility and marketing power that most individual properties cannot achieve on their own.

Working with OTAs isn’t just a matter of signing up and hoping for the best. To take advantage of the opportunities and avoid the pitfalls, you need to actively manage your listings, pricing, and inventory and take a strategic approach to online distribution.

If done correctly, adopting the right OTAs as part of your distribution strategy can actually help drive direct bookings through the "billboard effect." Building a comprehensive channel mix incorporating different types of OTAs will ensure you reach your target audience and secure a steady stream of reservations.

See which OTAs dominate globally, regionally, and across property types based on Cloudbeds customer data, and how properties like yours use OTAs as part of their distribution strategy.

At Cloudbeds, we know the world of OTAs and distribution channels can be complex. We’ve created the Big Book of OTAs to help demystify this process and explain how to create a recipe for success when working with third-party distribution channels.

What is an online travel agency (OTA)?

An online travel agency (OTA) is a website that acts as a search engine for travel. They connect providers across the travel industry to help travelers easily plan their trips. On OTA sites, travelers can often access package deals with accommodations, airfare, cruises, car rentals, and more.

Over the years, online travel agencies (OTAs) have evolved into sophisticated marketing channels for properties of all sizes and types. Never before have consumers been able to so easily compare different travel options side-by-side in terms of price, travel dates, and location. A Cornell study found that 93% of consumers switch between different OTAs before making a final decision, making it essential for properties to be active on as many channels as possible to increase brand awareness and drive bookings — even more direct bookings (more on this later). With the increased popularity of OTAs around the world, hoteliers now have access to markets once unattainable.

How do OTAs work?

Online travel agencies emerged in the 1990s, using the internet’s extensive reach to aggregate global travel supply into a single place so consumers could book their own travel online. These self-service tools reshaped the hotel industry and the way travel was researched and booked, as the general public could now easily plan their trips and reserve their airfare, accommodations, and tours on their own rather than rely on a physical travel agent.

Sites such as Expedia.com, Booking.com, Airbnb, Hotels.com, and TripAdvisor are often consumers’ first stop when researching and booking their next trip. These sites offer value to consumers at all stages of the buying process: problem/need recognition, information search, evaluation of alternatives, purchase decision, and post-purchase behavior.

Properties of all types and sizes can connect to multiple OTAs through an integrated channel manager. A channel manager shares room inventory and rates from your property management system (PMS) to your booking engine and OTAs. This properties streamline hotel operations and increase occupancy across channels.

OTA business models

Hotels basically outsource marketing to OTAs, who then make money through two business models: the merchant model (guest pays in advance) and the commission model (guest pays at check out). Most OTAs offer a blended model so that hotels can allow guests to decide which one they’d prefer.

The merchant model
In this model, the online travel agency acts as the merchant of record and collects payments from guests at the time of booking. Once the guest has checked out, the OTA pays the hotel. Contracts exist between hotels and OTAs to provide a set number of rooms to the OTA at a favorable rate. The OTA then makes a profit off each room sold but must meet its contractual thresholds.

The agency (commission) model
In this model, the consumer books via the OTA but pays the hotel directly at the time of checkout. The hotel then pays the OTA a commission on the total value of the booking after checkout. There are no contracts and rates are set by hotels.

A third model, advertising, has increased in popularity and exists on metasearch sites such as Google Hotel Ads, Tripadvisor, Trivago, and KAYAK. Metasearch engines work primarily on a cost-per-click basis where hotels can promote their rooms with links to their direct booking engine, and pay a fee based on the number of clicks they receive. Some of these sites, such as Google, also offer a cost-per-acquisition model (also known as “pay per stay”) where the property pays a percentage of the total reservation cost upon completion of the stay.

For hotels, it can be frustrating to watch distribution costs rise without getting more in return, but there are costs associated with direct bookings too. Demand doesn’t appear without at least some sort of distribution or marketing strategy in place, and those marketing campaigns, loyalty offers, special deals, and direct booking tools have a cost to the hotel. That’s why it’s important to use OTAs wisely.

OTA commission rates

OTA commission rates are either a fixed payment or percentage of sale that OTAs charge properties for a listing on their website. Hoteliers pay OTAs a commission because their properties can generate more visibility and bookings from the increased traffic on OTA websites. It would be very difficult and costly to generate the same results through direct channels alone.

OTA commissions cover the enormous advertising costs that OTAs like Expedia and Booking.com spend to bring people to their site, along with support, development, reputation management, and more.

How much commission do hotels pay to OTAs?
Unfortunately for hoteliers, online travel agencies have significantly increased their commission rates over the past few years. Previously they sat at around 10%, and today the average commission rate ranges from 15-25%+.

To illustrate, if an OTA charges 20% commission for a hotel booking, then a hotel that sold their room for a nightly rate of $200 would be required to pay the OTA $40 for that OTA booking.

Some OTAs, like Airbnb, offset their commission rates and fees to guests to reduce the cost burden on properties. The commission is a critical factor for independent hotels when deciding what OTAs to include as part of their distribution strategy, as the monthly commission fees from varying OTAs can quickly add up.

How do commissions vary?
While the average commission range for many of the big online travel agents is 15-25%, some smaller and more niche OTAs offer lower rates – sometimes as low as 4%. It’s very common for commission rates for properties on the same OTA to vary based on their region and property type.

It’s crucial to visit an OTA’s website before forming a partnership to research their commission rate structure or download our directory and compare that with the value they provide. Consider each OTA’s reach and visibility within the hospitality industry and the types of hotel guests they attract.It’s crucial to visit an OTA’s website before forming a partnership to research their commission rate structure or download our directory and compare that with the value they provide. Consider each OTA’s reach and visibility within the hospitality industry and the types of hotel guests they attract.

Ask yourself:

• Does this OTA attract our target audience?
• What regions is this OTA most active in?
• How does their commission structure work? Do they offset any of the costs?
• How does this OTA add value to my distribution strategy?
• Is the higher commission fee worth it? What benefits or services does this OTA provide?>

There can often be hidden fees in addition to the commission rates charged by OTAs, making it critical to review your contract carefully.

Here are the most common costs and fees associated with OTAs.

Commission on upsells. Some OTAs will take a commission on upsells that properties offer guests on their bookings, such as breakfast, towels, parking, and more. It’s a good idea to promote extras or upsells as incentives on your own website, which may also help drive more direct bookings, instead of paying even more fees to OTAs. If your OTA contract requires you to keep rate parity with the OTA, then adding special deals or discounted upsells could be another way to capture more direct bookings.

VAT/GST. Depending on your region’s local tax laws, you may be required to pay additional taxes on top of your commission payment. If tax is not included, be sure to check with your local tax authority to see what the protocol is for reporting.

Channel manager commissions & fees. If using a channel manager to connect your property management system (PMS) to OTAs (which is recommended!), ensure that you are using a system that doesn’t charge any extra fees or commissions. Some channel managers require you to pay per OTA connection or transaction — a hidden cost that significantly adds up over time.

Cancellation rates. An indirect cost that can affect your bottom line revenue is higher cancellation rates associated with OTA listings. Many OTAs use ‘free cancellation’ to entice travelers to book, while properties are left to deal with the repercussions when guests find a better deal. Phocuswire found that OTAs under Booking Holdings had a cancellation rate of 50% compared to an average direct booking cancellation rate of 18.2%. This can prove to be a challenge across the hotel industry when it comes to forecasting occupancy.

Increased visibility. OTAs like Agoda offer hoteliers the option to pay higher commission fees in exchange for higher placement in OTA search results. Depending on your hotel’s marketing strategy, this cost could be worthwhile to help drive more online bookings.

You may be wondering — is there a way to reduce OTA commission rates?

This is a challenging question and the answer is dependent on multiple factors. Large, recognizable hotel brands are more likely to successfully negotiate commission rates, while smaller independent properties face more of a battle.

It can be worth a try to see if you can negotiate a lower commission rate. However, it’s also a good idea to look at other approaches like:

Be more strategic with your OTA strategy. Instead of connecting to the most ‘well-known’ OTAs that often have the highest commission rates, take time to research other distribution channels. The travel industry has dozens of niche and regional OTAs that have much lower commission rates and the potential to better attract your ideal traveler profile. These travelers are less likely to cancel and more likely to be repeat guests.

Restrict your available inventory on OTAs. As part of your revenue management strategy, reduce your reliance on OTAs during the high season and invest in direct channels like your hotel website, booking engine, and Google Business Listing. Utilize OTAs during the low season when you need more demand to fill your hotel rooms.

Collect guest information and develop a communication strategy. OTAs are a great way to introduce guests to your property, but once they stay with you, it’s your responsibility to deliver an exceptional guest experience that makes them want to return (and book direct!) Upon check-in, ensure that you collect guest contact information such as email and mobile phone number so you can send in-stay and post-stay communication messages through text and email. Consider using a guest messaging solution to streamline guest communication with automated messaging to encourage new customers to come back.

Acquiring guests, directly and indirectly, can be costly but are both essential aspects of a hotel’s marketing strategy. As discussed above, the main costs associated with OTAs for hotels include:

• Commission rates (ranging from 15-25% on average) for each channel connection
• Channel manager fees (if your provider charges fees & commissions for connections or bookings)
• Taxes & additional fees

A successful direct booking strategy usually requires a multi-channel approach that incorporates a variety of digital channels such as social media, website, metasearch, search engine optimization (SEO), search engine marketing (SEM), and online listings like Google Business.

While many of these direct channels are free (think SEO, social media, and Google hotels free booking links), they do require a significant time investment to get set up and go through the process of optimization (this should be an ongoing process).

Paid digital marketing channels like SEM and metasearch usually operate on a cost-per-click (CPC) business model where accommodation providers pay a set fee each time a traveler visits their website.

Both OTA listings and direct hotel marketing strategies should be used for a balanced distribution strategy. As a best practice, measure the ROI for each channel and experiment throughout the year to see what works best for your property.

Online travel agencies vs. online travel agents

Before the rise of OTAs, it was the role of a travel agent to book leisure and business travel. This is because travelers back then did not have access to hotel availability and rates the way we do today. While the internet has made it easier for travelers to book their own trips online, some segments such as luxury, corporate, and group travelers still prefer to utilize a person, or online travel agent, to help with planning and booking a trip.

Travel agents are beneficial when planning complex trips such as a destination wedding, honeymoon, or corporate trip. They have the expertise and connections to find unique accommodations at better rates than most people can find themselves.

Travel agents such as Kuoni have a team of destination experts that work behind the scenes to curate tailor-made accommodations, experiences, and itineraries. Their in-person stores allow travelers to enjoy a glass of champagne while meeting with a travel expert to plan their dream vacation.

Travel agents usually have a portfolio of properties that they recommend to travelers and take a commission fee, similar to OTAs. Strong relationships with travel agents can help properties drive more bookings in alternative segments than the OTA market.

Difference between OTAs and metasearch

With so many online booking channels available today, it can be challenging to understand the difference between websites.

Metasearch websites like Skyscanner act as aggregators and display hotel information and room rates from a variety of online channels including OTAs like Agoda, Trip.com, Travelocity, or Priceline.com and a hotel’s website. It enables travelers to compare all of their hotel booking options in real-time across the web so that they can book the best deal.

OTAs provide room rates and booking capabilities for only one channel — their own. Meanwhile, metasearch sites can display up to twenty or more results.

Properties can also invest in hotel marketing efforts through metasearch engines. Metasearch sites rank listings and it pays off to be near the top. Therefore, properties can pay to have their listing higher in the ranks to drive more direct bookings.

Is Google an OTA?

Google is often a traveler's first stop when looking for a hotel room. In recent years, Google has changed the hospitality industry with its products. Google offers Google Hotel Search which acts as a hotel metasearch platform. When a traveler enters a property’s name into Google, it will show all of the rates and listing information from across the web.

Google also has free booking links, a gamechanger for independent hotels as they can list their direct rates and links to their own website within the Google Hotel Search box. This option encourages potential guests to book direct.