When you hear the words internet, web, or online combined with the word travel what’s the first thing that comes to mind? If you are like most people “cheap” or “less expensive” was one of the first things. You may have also thought of a particular brand of online travel agency or OTA. You might have even remembered one of the many catchy ads these companies have placed on television, radio and print media. This image of internet travel=cheap travel is almost universal with consumers. It is also by design.
Back in the heady days of the ‘90’s Internet bubble, venture capitalists and stock market investors were throwing huge gobs of money at almost anything related to the internet. Remember pets.com and their sock puppet? Selling that sure to lose money company short was the best investment I ever made. My previous career was trading and analyzing stocks. It seemed clear to me that as cool as I thought the Internet was there would be more losers than winners in the long run. I began to place bets against the companies that seemed to have insane business models (like fed-exing pet food or bricks). If I had made bigger bets I would be retired and traveling instead of helping other people with their travel needs.
Among the companies to come out alive and actually make money on the internet were the large OTAs. Online travel was, along with selling books and collectables, one of the winners. They were able to raise huge sums of money with venture capital investments and stock offerings. It is how they have spent that money that is the subject of this post. Like most Internet start ups the OTAs placed large money bets on conventional advertising as well as search engine click campaigns. If you Google “travel agents” or any related term most of the ads you will see are from OTAs. The television ads of these companies are ubiquitous. So what message did all this expensive advertising with slick Madison Avenue campaigns convey? We are cheaper. Nearly all of the online travel companies focused on this concept. Cheap, cheap, cheap!
The result of all this advertising has been an almost universal assumption among consumers that the Internet is always the least expensive way to book travel. What is has not led to is any sort of loyalty by travel consumers to any one company. Despite all their expensive attempts at brand building the online travel industry has not created a repeat business among their customers. The vast majority of people booking travel on the internet say they don’t care what company they book with. They only want the lowest price and are willing to shop one web site against another.
As an example of how effective this industry wide advertising emphasis on lower prices was, I was actually surprised when I began working as an offline travel agent to learn that it was not true. Many calls will come in from clients who have found “a great deal” on the web. With very few exceptions it is the exact same “great deal” that I can book the same trip for in our GDS (global distribution system, or travel agent booking engine). Often I can get clients the same price they see on the internet but with added perks or amenities they can’t get on the web. So what we almost all assume to be cheap can in reality be more costly.
There is no magic in the Internet that brings lower prices for travel automatically. The truth about travel pricing is that the vendors control the prices. The only way any distributor of travel can offer a lower price than any other is by negotiating a special deal with a vendor. Although the OTAs have gotten quite large, they compete with travel agency consortiums that are often larger. An individual travel agent is usually part of one of these consortiums which then negotiate prices with the vendors on their behalf. I belong to Virtuoso which is the largest luxury travel consortium in the world. Virtuoso travel agent bookings represent a much larger share of the business of high end travel vendors than the OTAs. Why would these vendors give them a better price?
Despite the seeming meteoric growth of the online travel business, as a whole they still make up less than half of the overall market. Conventional travel agencies have survived the onslaught and the advertising blitzkrieg. A closer look at how the market is now spit up between the two travel selling intermediaries is even more revealing. The internet travel companies have managed to grab most of the air travel market. They have made big inroads in hotel bookings, particularly at the lower end of the market. Conventional offline travel agents continue to make the vast majority of cruise, tour package, and luxury hotel bookings. In the war for the travel consumer the traditional travel agents have held the high ground. The OTAs have been engaged in a very costly race to the bottom.
Margins in the travel business are very thin. The travel agency business has survived on those thin margins for years. A typical travel agency spends very little on advertising compared to their internet competitors. Last year we spent several thousand dollars on all our marketing efforts but generated around one million dollars in travel bookings. More importantly the vast majority of our business comes from repeat clients. The next largest segment of our business comes from referrals from our existing clients. Business brought in from our diverse marketing efforts comes in third. For us marketing is a way to grow the business. For the travel web sites advertising is needed to survive. This addiction to advertising spending is the Achilles heal of the OTAs. With such thin margins it will be hard to sustain the level of ad buys they currently do. It seems unlikely that much new investment money can be raised now that the market has matured. I have read articles predicting a shakeout or consolidation coming soon. With such an unsustainable business model it had to come eventually.
