Pent-up demand provides an opportunity to raise prices. Steve Endacott explains how OTAs boost margins while remaining competitive
Travel companies are reporting surging demand and a 30% increase in average prices for Summer 22 sales. The dam of pent-up holiday demand has clearly broken and it’s vital that travel companies hold these higher prices rather than chase volume and compete them away.
Customers are clearly upgrading their holidays using Covid savings and spending more after a long absence of holidays from their lives. This results in better quality hotels and safer destinations being selected, with Spain bouncing back much faster than value destinations.
It is good news as I expect much higher complaint levels from the cheaper end of the hotel market which has seen zero investment over the last two years and will be even more tired.
Covid-19 disruption could reappear as we saw with the Omicron variant, so expectation of what is an acceptable margin needs to increase for both retailers and tour operators.
The best insurance policy a holidaymaker can take is using the expertise of travel agents to find suppliers with flexible covid terms and/or booking an Atol package where the operator takes responsibility for all disruption. This has value and must come at a cost, so agents just need to look the customer in the eye and say, ‘No discount’.
OTAs may not be able to look the customer in the eye, but customer intent can still be read from how they progress through a site and used to yield prices to maximise returns.
Travel does not have Magic Circle rules banning its members from revealing its yield tricks, so here are my top-ten favourites:
1. Price by source of traffic
Customers naively believe that the price they see on a website is the price everybody sees. This is not the case with modern websites which cache basic prices and then overlay different markup levels depending on the source of traffic. The OTA then ‘cookies’ the device to maintain these prices if the customer returns from whatever source, making these games invisible unless the individual changes device.
Price comparison site traffic: a few pence make a difference in the display order on comparison sites so OTAs apply their lowest mark-ups. However, as soon as customers move away from a selected hotel, margins jump back up on alternative hotels. If the customer adds flights these also carry a higher-than-normal margin as the OTA seeks to regain the reduced margin needed to attract clients.
Google search by hotel name: less competitive than price comparison, but margins are lower than for customers entering at a destination level as they are deemed closer to booking and more price-sensitive having done their research.
Search by destination: here the OTA boosts margins via ‘merchandising’ best-selling hotels at the top of the search results, controlling what is sold to a greater degree.
2. Lead-in flight prices
Flight prices are much easier for customers to cross-check than hundreds of individual hotels. Lead flight prices set customers’ impression of price competitiveness and carry the lowest mark-up. However, these flights tend to have the worst departure times and customers often chose better times. Monitoring clicks and applying higher margins to popular flights is vital.
3. 60%-off messages
UK trading standards’ rules state prices must have been valid for 30 days ahead of the start of any discounts and must apply to a “reasonable” volume of holidays. To create headline discount messages OTAs simply raise prices on hotels they don’t often sell by 60% for 30 days and then discount them, allowing headline-grabbing messages that drive sales of better-selling hotels where the price has never moved.
4. Split flights
Combining an outbound flight from one airline with an inbound flight from another is key in keeping OTAs competitive against low-cost carriers. It gives the OTA a better range of flight times and allows it to break the yield management of airlines which know 80%-plus customers choose seven-night durations and apply a higher markup to these flights via higher inbound pricing.
5. Buying inbound flights in euros
UK-based low-cost carriers price in sterling and convert to euros, applying a 2%-3% currency buffer. It is often £3-£4 cheaper per flight for OTAs to buy seats on an airline’s euro site and combine these with outbound flights priced in sterling.
6. Admin fees on deferred payment schemes
Most OTAs’ prices are based on paying a deposit on booking and the balance four weeks before departure. However, many now offer monthly payment options that attract ‘admin fees’ of £2.50 per payment that often remain unnoticed by customers but might boost mark-ups by £15 per booking. This never appears in the lead advertised price and allows OTAs to cut margins further based on the percentage of customers using these schemes.
7. Repeat visits
More than 10 years ago Ryanair started dropping cookies on customers’ computers adding £10 to flight prices if the customer repeated a search within 24 hours, as it indicated strong purchasing intent. Few customers notice, but even today I search on a laptop but book on a phone to stop airlines playing this game.
Many OTAs apply higher margins if customers enter their site from email marketing to previous customers as these are deemed more likely to book.
8. Misleading competitor price checks
Bed banks and hotel-only OTAs deploy considerable resources to scan competitor prices and adjust their margins to fractionally undercut these. Historically, these price checks tended to be overnight and could be cheated by reducing price for the peak evening booking period of 6pm-9pm and reverting to higher prices at night. Monitoring activity by account login for tell-tale signs of scanning also allowed competitors’ scanners to be fed false higher prices, although these needed to be randomised to avoid detection. Both have now been halted by countermeasures, but there are big volume gains if you can fool competitors’ price scanners.
9. Ignoring competitor prices
The most-profitable UK OTA ignores competitor pricing and focuses purely on its own conversion levels. When conversion levels for a destination drop below the site’s historic average, this indicates its prices are uncompetitive and margins are reduced. This sounds simple but is operated at a micro-level, with constant adjustments by flight route, destination, resort, hotel and date. Pricing your customer pipe ‘live’ is the closest any OTA has to looking a customer in the eye and knowing what they will pay
10. Ancillary sales
It amazes me how little focus travel agents or OTAs put on upselling customers with ancillaries such as Foreign Exchange or other lower margin extras such as car parking, car hire, lounges or fast pass security and customer vouchers. Having already covered marketing costs with the core holiday sale, the profit from sales of ancillaries falls straight to the bottom line.
As an industry, we have a once in a lifetime chance to reset the bar on what is acceptable margin for our labour, so let’s please take it.