What Does It Cost to Build an Online Travel Agency? Part 2: Welcome to Hospitality Industry

Daryna Tkachenko

Want to set up an online travel startup but feel hesitant where to start? Novices in hospitality field are often overwhelmed and puzzled with the variety of industry-specific terms and possible workflows. Here’s a crash course and a brief picture of how things work in hotel-n-OTA world. We’ll use an online room-rentals agency as an example to illustrate key terms and approaches in hospitality industry.

6 min read

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Hotel - OTA Distribution Chain

As we discussed in our previous article, hotels seek diverse sales channels (apart from official website), so they partner with online travel agencies (OTAs). In most general terms, a hotel’s distribution chain looks as follows.

Hotel OTA Distribution Chain Schema

OTA is the final link in the chain bridging hotel with its end-customer, tourist. The agency aggregates deals from multiple hotels and offers bargains to the tourists. This way, hotels - literally and figuratively - hold the key of their rooms and earn more, tourists get hot deals, and OTAs make money in the middle of the transactions. Now let’s have a closer looks at each link in the chain and define the key industry terms.

Key Terms in Hospitality

To manage their rooms availability and payments, some hotels still use a manual or semi-automated process. However, most large hotels and chains use dedicated software, known as property management systems or central reservation systems.

Property Management Systems (PMS) - a hotel’s software application used to manage property, equipment, legalities and personnel. It releases hotel of paperwork and creates a centralized repository of tools and information for day-to-day operations. PMS are usually deployed locally, with client/server configuration, though newer PMS tend to be SaaS-distributed. Some hotels integrate their PMS with financial applications and/or POS to manage payments.

Central Reservation Systems (CRS) - a multi-tenant and complex PMS where multiple hotels or chains manage their inventory, rates, reservations and process. In terms of features and functionality, CRS are usually more sophisticated than PMS. They are, as a rule, hosted in a cloud and could be integrated with third-party apps.

Unlike PMS, which are used to cover solely hotel’s internal processes, CRS take care of integration with external sales channels. These help hotels sell their services to tourists via multiple platforms on a global scale instead of limiting them to website bookings only.

An intermediate link between CRS and a sales channel is called channel management systems.

Channel Management System (CMS) - a software application mediating a hotel and its sales channels, like OTAs. On the one hand, it connects to a hotel’s CRS with the inventory availability & rates and, on the other hand, to the OTA to populate this data for tourists.

Hotels benefit from integration with a CMS as it automatically syncs their inventory availability for multiple sales channels and helps to avoid overbooking. However, since channel management systems live on commissions, it is usually added on top of a regular room price, thus increasing the final one for the tourist.

Some hotels opt to override CMS integration when connecting to their sale channels, i.e. online travel agency. In this case, they usually input rooms availability and rates manually, via an OTA-provided interface called extranet.

Extranet - a web interface availed by OTA for its vendors, partners, and providers to view and manage their inventory. Hotel staff usually access extranet via login and password and update room information: their types, images and description, rates and availability. OTA administers extranet, aggregates all deals, and displays them to tourists via official website.

The whole point of OTA is to gather information from multiple hotels on a single platform and let tourists compare available options in quest of the best deal.

Approaches to OTA-Hotel Cooperation

To set the business up, OTA owner should first partner with hotels and make them sell their rooms via OTA website. Be ready that most hotels will be reluctant to do this - they already manage numerous third-party integrations and OTA relationships.

Here are two cooperation models you could offer for your partners-to-be: use your extranet to manually enter data about their rooms or select your OTA as a sales channel via their CMS (if any). Both approaches have pros and cons, so these days most OTAs go with a third option, which is a combination of two models discussed below.

OTA - Hotel Cooperation Approach #1

Hotel OTA Distribution Chain with Extranet

Hotels that do not have any software to manage their inventory or lack a digital integration with your OTA should manually update their room information, rates and availability via extranet.

Thumb Up for Pros

  • Such a distribution chain is short (hotel - OTA), so there is no added cost for the rooms. This results in a more competitive price for tourists, hence higher profit for both hotel and OTA.
  • It is relatively easy to manage limited inventory for the hotel (provided the OTA extranet is user-friendly and bug-free).

Thumb Down for Cons

  • OTA should design and develop the extranet out of own pocket. Any software integration with hotels’ PMS/CRS should be also performed by OTA, which is time-, money-, and resource-consuming.
  • The inventory management process is manual, and the person in charge should constantly monitor the availability of rooms and sync it with OTA. Also, this person should be paid.
  • As the process is manual, human factor is a risk. Err is human; there could potentially happen mistakes and overbookings.
  • This is too complicated and time-consuming for a hotel to manually manage inventory for multiple OTAs.

OTA - Hotel Cooperation Approach #2

Hotel OTA Distribution Chain with CMS

Alternatively, your OTA could get to hotels’ rooms via a channel management system. Many hotels are already integrated with a CMS, which serves as a mediator between the property and OTA softwares for room management. Though this approach is seemingly easier, it has pros and cons too.

Thumb Up for Pros

  • Though each CMS has own peculiarities, integration with one is usually not overcomplicated. Besides, this is something done just a single time.
  • CMS automatically syncs rooms’ availability and rates between every hotel and OTA, thus decreasing the changes for overbooking.
  • Once integrated with a CMS, your OTA is available as a potential sales channel to multiple hotels.

Thumb Down for Cons

  • The distribution chain becomes longer (hotel - CMS - OTA), and CMS takes commission for its services. This means a hotel would either pay it out of own pocket or impose it on the tourist. In either case, the final room price would not look that much of a hot deal on the OTA website.
  • Once integrated with a CMS, your OTA competes with other agencies already connected to the same CMS.

Combined Approach

As both approaches discussed above have pros and cons, most modern OTAs use a combination of two to get a large partner base and earn more. Such OTAs do have an extranet for hotels to manually enter their room data and an integration with one or more CMS. A combined approach is usually a prerogative of larger OTAs, not startups. Large OTAs also benefit from other distribution channels - large hotel chains, wholesalers, etc. So, on early stages, you could consider the combined approach as a potential growth strategy for your OTA.

However, you should not necessarily place quantity of rooms at the head of your OTA business model. Rather, you should select an appropriate revenue strategy that would bring more profit in the long run and scale your OTA in small, manageable steps. Would your OTA live on commission from suppliers, or a flat fee? Would renting hotel rooms be the only service you’ll offer to clients? If so, figure out if you’ll go with a few expensive high-margin rooms or many low-margin ones. This decision eventually revolves around your market niche and wise growth strategy. When carefully thought-out and coupled with right software solution, they would not let your OTA go bankrupt.

Now that you know where to start with your online travel agency and understand the key terms and workflows in the hospitality industry, we’ll move further. In the next article, we’ll describe a basic features set and timing to build an OTA. Stay tuned!

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