By Blake Ng — 18 Jan 2022
“Online travel agents are too expensive”. This is one of the most common phrases we’ve heard operators say. On the surface, 20-25% commission may seem significant. However, it’s important to look deeper into that. What makes up the 20-25% commission? How much would it cost you to do it yourself?
Most operators would already be familiar with this, but for those who aren’t, you pay a set percentage of a total booking that a reseller sends your way. For example, if an online travel agent charges a 25% commission rate and sends you a booking worth $100, the commission would be $25 for the booking.
It’s worth noting that there is no risk or commitment involved as you only pay when you get a booking.
There is a large variety of costs a reseller pays when acquiring customers that contribute to the commission; but more importantly, we’ll look into the costs you would need to pay if you were to acquire those customers yourself:
When you take any bookings online, you’ll generally need to pay a payment processing fee(credit card processing fee, international transaction fee, etc.). These are typically 1.75% for domestic transactions and 2.9% for international transactions.
The easiest way to do this is to imagine you’re running your own advertising on Google or Facebook. To calculate the cost of your bookings through paid advertising, you’ll need:
For this example, we’ll use the industry average for Facebook and Google Ads:
Using the industry average from Wordstream, you can see the average cost per booking (Cost per click divided by conversion rate) above.
As demonstrated with an average booking value of $100, your cost per booking on a percentage basis translates to 22.34% for Facebook, 39% for Google Search and 86% for Google Display. If you include the transaction fees mentioned above, your costs add up to approximately 25% in the best case, the same as an OTA commission rate of 25%.
Of course, this also depends on your average booking/ activity price and the advertising cost specific to your activity. If you charge $200 for your activity and still manage to keep your Facebook ads cost per booking at $22.34, then your cost as a percentage would be 11.15%.
So as mentioned earlier, it all depends on your activity prices and the costs of advertising specific to your activity. However, based on industry averages, OTA’s are not charging that much.
Also, keep in mind that digital advertising costs happen regardless of whether or not you get the booking. While it’s possible to improve your average cost per booking, it does rely on consistent management to maximize efficiencies that are not guaranteed.
Bonus:As your advertising becomes more targeted, it also becomes more expensive. For example, if you wanted to target specific niches, the costs would rise significantly. Specialized resellers such as RedBalloon who target the gifting market, or Pelago who has a large base in Singapore, would likely result in cheaper costs per booking.
Setting up marketing and advertising campaigns takes up a lot of time (especially if you want to target specific customers/ niches), which has not been taken into account above.
Just some of the tasks that need to be done:
These all take at least 10+ hours a week to be completed.
Many operators opt to use a marketing agency to manage these activities/ tasks, which again incurs an additional cost.
Marketing agencies typically charge a fixed retainer of $2000 to $8000 and a media management fee of 9% to 19% of your total advertising spend. This would add an additional 10-15% to your total cost per booking; which could potentially take your cost per booking up to 35% of your booking revenue.
Travel agents and resellers also handle the customer inquiries(calls and emails) and support of the bookings that they send over to you.
At larger volumes, this could be the equivalent of hiring more admin staff and the maintenance of more workspaces for the staff.
Again, increasing your cost per booking.
In summary, if the reseller does a good job advertising, managing campaigns and getting your product out there, the 20-25% commission rate is probably fair.
If you were to run the marketing yourself or through a marketing agency, you could end up spending less, but you may also end up spending more. As a reminder, spending on marketing campaigns does not guarantee bookings, so if a campaign is not set up right, you could be spending money without increasing your bookings.
Do both of them. Don’t limit yourself to any single channel. Try running your own marketing campaigns; and as you’re building those out, partner with a few agents/ resellers. There are no risks involved as you only pay when they send you a booking.
At the end of the day, maximizing your visibility across platforms and resellers is an effective way to generate additional bookings and capture new potential customers.