Booking.com is the largest Online Travel business as well as the largest travel business by market cap. They create value by helping users on their selection and booking process of hotels (and other accommodations) and monetising on commissions (between 15-25%) of the booking value. They are a gigantic demand aggregator that is present on all digital channels through which travellers look for accommodations.
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Travel is a $1.3 trillion industry. This is gigantic. And the biggest player by market capitalisation in this huge pond is the Booking.com’s parent, the Priceline Group. Priceline owns a number of brands that are all running a platform business model (the most promising business model right now).
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Booking.com and Expedia are the biggest Online Travel Agencies (OTAs). We have compared their business models here. But this space is becoming more interesting by the day with an increasing amount of players moving into this space, including TripAdvisor and Google.
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What makes Booking.com so successful despite the enormous competition by similar and other business models and a strong pushback by the major hotel chains? That is what we will be looking at today.
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Online travel, dining, events & attractions are demand-aggregating channels to help on the customer decision making journey. Approaches include booking apps, planning apps, price comparisons, deals, specialisation on selected geographies, activities / hobbies / events, car rental, user-generated review platforms and more.
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Value Proposition
Value proposition to travellers
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Cheap(est) prices: Booking.com has contracts in place with the hotels that it lists. One of the clauses, called rate parity, is that the hotels can’t offer the same (type of) room at a cheaper rate on the hotel’s web pages. And if they do so they have to match it on Booking.com. Without such a rule, users could choose a hotel on Booking.com but then complete the booking on the hotel’s pages. Despite some changes in this space, Booking.com is still able to offer the cheapest prices on those hotels it most prominently features.
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Amount of choice: Booking.com has now over 1 million places to stay in their database and a large amount of filtering options that make it easier for the user to find what they are after. Moreover, Booking.com helps consumers to make value choices.
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Reduction of risk: the star rating and reviews generated (over 100m reviews to date) by other users reduce the risk of being disappointed. Booking.com features reviews only from those who have booked through them. This system effectively prevents manipulation, a problem well known on many other platforms.
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Call centres: Many people still want to talk to a human prior committing to a considerable amount of money. Two-Thirds of Booking.com’s employees are in the customer service areas for this reason.
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Useful app: the traveller’s journey does not end with the booking. Booking.com’s app has useful content prior to the booking but increasingly also travel guide functionality in their app. Also, bookings through apps have multiplied from 2015 onward and are expected to stay in the double-digit growth space.
Value proposition to hotels
Hotels have a love-hate relationship with the OTAs. While a majority of their bookings come through other channels, OTAs remain crucial to get as close to being fully booked as possible*.
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Incremental revenue: the key value proposition is that Booking.com helps to fill otherwise empty-staying rooms. Hotel rooms are like perishable goods. If they are not booked on a night the revenue for that room that night is irrecoverably gone. With hotels being high fixed cost assets, this loses the room’s contribution to the high fixed cost base.
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Ability to react: Booking.com allows hotels to implement their revenue management strategy by providing the ability to flexibly decide/change which rooms they offer through Booking.com on which nights and its rates. This allows hotels to drive additional business on a short fuse, to put up special promotions, and dynamically adjust commission for soft periods to rank higher.
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Global reach: Booking.com helps hotels to reach global markets and potential customers that by themselves they would not reach. Achieving global reach in a meaningful way (i.e. high conversion rates) requires investments that may be underestimated. Booking.com have localised content, payment options, apps, etc. They also translate the hotel content into the local language (~40 languages done by a localisation team) and are present on the relevant advertising channels. The Priceline Group have acquired local online travel agencies who have captured a meaningful local market share and built a recognised brand. They have offices in many countries, an online presence in over 220 countries, feed their mobile apps and keep all the content consistent.
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Risk reduction: Fees are structured in a way that there is no upfront payment and no payment whatsoever unless there is a booking. Unlike in online marketing, there is no risk of paying money for advertising for no return. Cost-per-click models that I have described previously come with the risk of no or low returns.
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Drive additional traffic to the hotel’s website (“billboard effect”): One prominent study came to the conclusion that there are is a considerable amount of travellers who research on the OTAs, like Booking.com, but then book on the respective hotel’s website. Thus, the OTA pays for the customer acquisition cost (CAC) but generates no revenue for themselves. This effect is called “billboard effect.” More recently, other studies have questioned that this effect (still) exists. It is ultimately hard to measure due to the hundreds of micro moments over which the customer journey unfolds. But there are two things I am very certain of:
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Being present on an OTA with good ratings will have positive effects.
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Bookings will take place where the customer gets additional benefits (loyalty benefits, perks, freebies) – at the same price, be it on the hotel page or on the OTA pages.
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Market intelligence: Booking.com shares market intelligence, booking forecasts for given locations as well as how the hotel is performing on the Booking.com platform in relation to competition.
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* Some of the most important KPIs in the hotel industry are Average Daily Rates (ADR) and Revenue Per Available Room (RevPAR). For the purposes of this article, note that “fully booked” means maximising these KPIs.
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Biz Model Canvas Booking.com
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