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Comment: Booking.com grabs the cash, but will it impact sales?

OTA has embarked on a major pivot in strategy, says Steve Endacott

Recent accounts for Booking.com, the world’s largest OTA in terms of hotel nights sold, highlight a major pivot in strategy, in terms of the importance of cash.

Booking.com built its business based on the “pay at hotel” agency model, because it believed hotels would sign up faster and give better rates to an OTA which delivered payment on arrival, compared to payment months after departure in the case of the leisure beach market.

Credit this stance as one of the reasons they expanded globally faster than arch rival Expedia, which primarily operates a merchant model where customers pay them directly.

However, Bookings latest accounts show a marked shift towards the merchant model with revenue jumping 53.4% to nearly $1.05 billion, while its agency revenue grew less than 1% to $3.54 billion.

The obvious advantage of the shift is the cash flow gained. Unlike Atol bonded holiday revenues, the cash does not need to be held in trust accounts and can be invested into more acquisitions or higher levels of brand advertising, to drive a virtuous circle of increased sales and cash flows.

Ironically, there also appears to be a commission advantage in the merchant model with average commission being 20% compared to 18.6% for the pay-at-hotel model, but this may be down to mixed issues, as it’s hard to see why hotels would pay more to receive cash later.

Hoteliers reaction to the shift will clearly depend on the payment terms being offered by Booking.com under the merchant model, but is it unlikely to be better than payment-on-arrival.

Interestingly the major European bed banks like Hotel Beds operate a very different cash flow model to gain their commercial advantage.

Bedbanks operate B2B2C models, where the hotels they offer are sold via third party OTAs which act as merchants, retaining the customers’ cash and only pass it to the bed bank on customer departure. The bed banks then pay most hotels 60-90 days after departure, to create a cash pot that they use to pre-pay and give turnover guarantees to other hotels.

These “castles”, as they are known, in return give the bed banks exclusive rates which allow them to dominate the price-driven beach sector, while still allowing them to make higher than average margins.

Historically, this practice allowed Booking.com to gain rapid entry into the leisure beach sector, because its payment terms were so much better than either the major tour operators or the bed banks.

It would appear therefore that Booking.com is switching from a hotel “land grab” mode, to a brand dominance mode, where they grow faster than competitors by simply out-spending them on brand awareness and rely on superior platform technology to keep customers loyal.

At the end of the day, cash will always be king, but it’s how that cash is used which seems to be evolving.

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