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What’s an online travel agency (OTA)? How does it work?

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OTAs — like Booking.com, Expedia, and MakeMyTrip — are online marketplaces that help airlines and hotels list their products & services, and market them to travellers, thereby increasing the online visibility of mainly hotels. They are third parties offering services on behalf of other travel organizations.

OTAs make it easy to search and filter accommodation, transportation, tours and even forex. A user can search and filter hotels even on maps, according to prices, proximity and reviews. They are also built with a booking engine to help users make instant reservations while offering a mix of various payment methods (credit card, debit card, bank transfer, etc).

How do bookings flow from OTAs to hotels?

OTAs create a database of hotels and store the rates and availability of rooms. Hotels need to upload their rate categories, content (details, pictures & videos), amenities, etc, — which is all static data. In terms of dynamic data, hotels need to cue in their availability calendar, which is how many rooms for each room category are available on a particular day and the prices for various offerings such as European Plan, Continental Plan, American Plan or Modified American Plan. Hotels can either do this manually or use a channel manager (CM) or a property management system (PMS). However, all OTAs require hotels to upload this data by themselves.

Now, when the OTA receives a booking on its platform, it communicates this to the hotel either through an email or fax — which is becoming less popular. If the hotel uses a CM or a PMS, this data is updated in their system.

How do OTAs make money?

OTAs act as distribution partners or resellers and usually charge a commission for the sale. They operate via the following models:

Merchant Model

Hotels sell rooms to OTAs at discounted rates. Subsequently, OTAs sell these products at a markup rate to customers, which makes them the merchant of record on transactions.

Agency Model

Here, hotels receive the entire payment from the customer & do not need to wait for a payment transfer from OTAs. These third-party agents receive their entire commission after the service has been rendered to the customer.

OTAs receive full commission after the stay has taken place. The hotel directly receives the payment from the end customer and does not wait for the payment transfer from third-party distributors.

Additionally, OTAs may also market to each other. If an OTA for instance, has a strong presence in a particular region and the other doesn't, then the database is shared to help the latter cater to customers.

Online studies reveal that OTA commissions are higher for hotels (20-30%), but lower for airlines (~10%). This is because hotels are fragmented and, therefore, OTAs add a lot of value by enhancing visibility. However, there are thousands of hotels — in the same country, state, city, town and so on — competing for guests.

Why are OTAs needed?

Since travel & hospitality is a fragmented industry, OTAs fulfill the need of discovery of hotels, airlines, cab services, etc. Today, there’s a lot of shopping that happens in travel. Travellers put a lot of thought into searching and booking a hotel. This is known as the look-to-book ratio. Industry statistics reveal that the look-to-book ratio in travel & hospitality is 1,000 to 1 — for every thousand searches, there’s one booking that occurs. A Phocuswright study has observed that on average a potential guest visits at least 38 websites before booking a hotel. OTAs help aggregate hotels, airlines and various other services into one platform (thereby providing exposure), and also help the end user make an informed travel decision.