On the surface, these apps seem to provide users with huge discounts on hotels, trains, and flights with little to no in-app advertising. How can these businesses be profitable?
In: Economics
Online Travel Agencies negotiate with hotels to get margin on bookings, so when you make a booking on one of these sites, the website keeps a small percentage of the fee you pay before handing over the rest to the hotel. So if for example Expedia negotiates a 15% margin on Marriott’s rooms, when you book a hotel for $100 a night Expedia keeps $15 for a commission on that sale and gives the remaining $85 back to the hotel. Also, when looking at metasearch engines like Kayak, they make money because those services are pay-to-play so every hotel that’s listed paid to be there.
Hotels have a lot of fixed costs, so they will often discount excess inventory heavily in order to get heads in beds, as they say. A hotel has to pay for the front desk person whether there’s someone in the room or not, so hotels would rather sell a room for a substantial discount rather than get nothing and use these sites to offload rooms. However, hotel brands want to maintain a certain sense of luxury & exclusivity, hence why when you’re buying heavily discounted rooms you often don’t know which hotel you’re booking with until after the transaction is completed.
But another thing about the industry is that hotels and online travel agencies absolutely *hate* each other. Hotels would much prefer you book directly with them rather than pay a third party for bookings, so one of the things they often require is that the OTAs maintain price parity with their own website. The OTAs violate this all the time, so if we use the example from before, if Marriott has a room listed on their website for $100, Expedia will list the room for $90 to steal Marriott’s own business and make $5 rather than let Marriott itself get the booking. As a result there’s actually a massive cat & mouse game in the travel industry where hotels are actively looking for OTAs violating their contract agreements and OTAs actively trying to hide their deception.
Overall though online travel agencies are money printing machines and they make an absolute boatload of money.
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