We work every day to help tour, activity, and attraction companies drive more direct bookings. It’s a strong part of our value proposition as an agency, and it resonates with most of our prospective customers, who view OTAs (online travel agencies such as Tripadvisor and GetYourGuide) as enemies at worst, and frenemies at best. So why are we sometimes recommending that our clients use OTAs? Simple economics.
While context is important for your decision matrix, you can jump right to the OTA Allocation Matrix if you have a good handle on the nuances of OTAs.
Of course, you have to know your margin to determine whether you can afford OTA commissions, and in nearly all cases, our clients have already made that determination. But particularly for clients with high fixed costs and low variable costs (zipline and adventure park companies are classic examples, but it’s also true of many attractions and other tours), a 25+% acquisition cost—especially for incremental revenue—can still generate massive profits.
Lastly, before we jump in, it’s important to acknowledge that we are not OTA experts. We’re marketing experts who care deeply about our customers’ success, so we often get into the weeds of profits and margins. Our perspective continues to evolve, and we’d love to hear your input if we need to rethink any of this, so feel free to contact us at the bottom of this article.
Why Use OTAs?
This article is not primarily about the pros and cons of OTAs, but it’s worth a quick look at their merits.
In some cases, and at certain points in scaling your business, OTAs might actually be cheaper than your own marketing efforts. That point is the main focus of this article.
Your prospective customers are there. Some of them are only there. OTAs are a trusted path of least resistance for a lot of people. The sites/brands are UX experts with speedy, easy-to-use sites, a sea of (purportedly) brutally honest user feedback, and loads of alternatives if one option doesn’t meet their needs. Does this type of ‘shopping’ commoditize tours, activities, and attractions? To some degree, yes. Do the users care? Many of them do not. By refusing to give some inventory to OTAs, you’re cutting off a segment of the market that is not going to come back to you after they’ve visited a site like Tripadvisor, GetYourGuide, or Expedia.
Your own marketing efforts may hit a limit.
You can reach the limit of reach or cost-effectiveness of your own marketing efforts, in which case other channels—OTAs being only one of them—will be necessary for continued growth.
Why Limit OTAs at all?
If OTAs can consistently deliver revenue at a 25% acquisition rate, and if you’re at a point where your own marketing has an acquisition rate of 25% or higher, why not open the floodgates and take all the OTA revenue you can?
Protect revenue diversification. Like with any aspect of your business, you need diversification to mitigate risk. Ensure that you can survive a significant dip in revenue from any given OTA. The most likely cause of a rapid dip would be a change in your rank on their site, but they could also shift their advertising at any time.
Limit their leverage. The more dependent companies are on OTAs, the more leverage OTAs have in fee structures. Make sure you limit the power you’re giving them, by remaining capable of driving your own business if they decide to raise your commission rate higher than you’re willing to pay.
Key Questions For Your OTA Strategy
How much more valuable is a direct booking than an OTA booking for your business? This answer depends primarily on how well you’re able to drive revenue from prior guests. If you’re in a destination market with low repeat rates (such as a zipline on Maui, where you might see your average client once in a lifetime), the additional value of a direct booking is different than it is for a company drawing locals, who may often see repeat guests. The key metric here is Lifetime Customer Value for direct customers vs. OTA customers.
Also, because the direct relationship you can have with direct customers could result in a better customer experience and lower operational costs, you may find that a direct booking is more valuable than an OTA booking even without a high repeat rate.
Do you have the ability to limit OTA capacity? Some booking platforms such as Xola and Rezdy allow you to give OTAs only some of your capacity for a given tour, while others do not. If you don’t have that capability, but you’re considering using OTAs, determine whether you need to move to a booking engine with that feature. (We don’t say this lightly; changing booking engines is painful in the short term.)
How much is it costing you to acquire a new customer (or a dollar of new revenue)? This has multiple components to it, so we cover that next.
Calculating Your Cost of Acquisition
If you’re going to compare your acquisition costs to OTA commissions, you need to know your numbers.
For our cost of acquisition, we’re going to talk about the cost of acquiring a dollar of revenue, rather than the cost of acquiring a customer, since it lines up well with standard marketing ROI metrics.
There are several ways you could calculate the cost of acquiring a customer through marketing. Here’s one conservative way:
That equation will give you a percentage—likely between 5% and 20%, but possibly higher. This is the percentage that you can line up against OTA commissions.
Example:
| Direct Revenue COA | My Average OTA Commission |
| 20% | 25% |
One Level Deeper: Incremental Cost of Acquisition
Your first marketing dollars will often have an unusually high ROI. We see this all the time in advertising. Almost anyone will be able to get you a strong 6x-10x return (10%-15% acquisition cost) on your first advertising dollars. The question is, how does that change as you scale?
If you scale from $5000 in marketing costs per month to $20,000, you don’t want to only know that your COA has gone from 10% to 15%; you also want to know how much it’s going to cost you to generate that next dollar of revenue. The OTAs can generate it at ~25%. Can you?
This is a nuanced metric that we’re still thinking through ourselves, but on a simple level, you can calculate it like this:
Compare June to July, or this June to last June. If you spent an additional $10,000 in marketing expenses and saw your revenue increase by $30,000, your incremental COA is 30%.
Armed with your COA of direct revenue, as well as your perspective on the extra value of a direct booking, you’re ready to make an informed decision about your OTA allocation.
OTA Allocation Matrix
This is a rough guide, and your OTA inventory allocation decision may change month by month or season by season, as costs and capacity fluctuate.
| Incremental Direct COA | Your Current Tour/Activity Capacity | Destination Market How much capacity to give to OTAs | Local Market How much capacity to give to OTAs |
| Up to 25% | Full or nearly full | None OTAs cost more than this per customer, so save your money and stick with direct marketing. | None OTAs cost more than this per customer, so save your money and stick with direct marketing. |
| Up to 25% | Not Full | Low OTAs will cost more than your direct bookings. Try scaling your direct advertising first, but if you’ve hit your limit of the bookings you can drive direct, open some OTA capacity. | Low OTAs will cost more than your direct bookings. Try scaling your direct advertising first, but if you’ve hit your limit of the bookings you can drive direct, and open some OTA capacity. |
| 25-28% | Full or nearly full | Low As you begin opening up capacity for OTAs, you can afford to start with your lowest-commission OTAs first, because you’re almost full, and you can continue pushing up your marketing efforts to help close the gap. Stay away from the 25-30% rates. | None While it’s true that OTAs are going to be able to drive first-time customers at the same cost as your direct marketing, there’s still value in maintaining the direct relationship with the customer, not only for better customer relations but also because of the opportunity to convince them to book again in the future. |
| 25-28% | Not Full | Low-Medium At this stage, OTA bookings and direct bookings are costing nearly the same. If you happen to be able to drive repeat guests, ramp up those efforts; but if not, take the assistance from OTAs, but watch their share of your bookings carefully so it doesn’t grow too much. | Low In this scenario, you’ll likely still favor direct bookings due to the relationship with the customer, so keep OTA availability very limited. |
| Above 28% | Full or nearly full | Medium OTAs may be able to drive revenue at a lower cost, and you may have limited ability to generate repeat visits. But be careful to not cede high a percentage of your revenue to OTAs. | Low You’re at a point where OTAs may be able to close the capacity gap at a lower cost than direct marketing. However, if you have marketing in place to generate repeat business, consider acquisition costs against a customer’s lifetime value rather than a single purchase. |
| Above 28% | Not Full | High Your direct marketing isn’t filling all the seats, so you need additional channels, and the OTA costs may be equal to or lower than your direct acquisition costs. | Medium-High If you generate repeat business with your guest list, consider keeping OTA capacity at medium; but the higher your incremental direct COA and the lower your customer repeat rate, the higher capacity to allow OTAs. |
