The more Big Data an OTA has, the more it can expect higher conversions or higher margins, says Steve Endacott

Back in 2003, when we launched the On Holiday Group to exploit the changes dynamic packaging would drive in the beach holiday sector, our primary focus was growing passenger volumes fast.

Our logic was that when operating in a commodity market with low barriers to entry where most players can source exactly the same flights and hotels for the same price as you the key differentiator was how efficiently you operated.

In other words, you have to drive the highest possible volume through the lowest overhead.

Basically, the bigger you get the lower your overhead per passenger and the cheaper you can sell holidays for, whilst still making a profit.

In general, this point still applies, however very quickly Google advertising costs became the biggest business overhead and slightly different rules apply.

Google’s paid bidding algorithms (Paid Per Click) favours bigger companies, because a key element of what companies pay is their CTR – how many times customers click on an advert compared to being shown it.

Obviously, companies at the top of the listings get the highest levels of clicks, thus favouring bigger companies, with large budgets, who have been around for a while.

However, the key online marketing metric is mix of direct brand traffic, measured by how many customers type your brand name into Google or, ideally, type in your URL.

The better known a brand is, the more people come direct at a fraction of the cost of generic destination or resort-based advertising within Google.

The virtuous cycle is where increasing brand traffic reduces Google advertising costs, which in turn allows the OTA to sell at lower prices to drive higher passenger volumes, which drives more brand traffic.

Obviously, customers also only return to a brand if it has a good customer service experience and delivers the promised holidays seamlessly.

Direct traffic is also influenced by the ability to afford large scale brand building TV advertising.

The UK’s largest beach OTA, On the Beach, markedly boosted its direct traffic in January via a very successful above the line TV campaign which increased its market share.

However, market share has to come from somewhere and Travel Republic’s recent financial accounts, showing dropping passenger volumes and heavy losses, seems to indicate that they are in the opposite negative cycle.

Hence, my view that the bigger are getting bigger and the rest maybe losing out.

Of course, this does not apply across all sectors and many specialist businesses with have high satisfaction levels also have high levels of repeat business and can also avoid the Google-created “death zone”.

For instance, homeworking networks like Travel Counsellors completely avoid Google, relying on personal contact and customer loyalty to drive ongoing relationships.

The other area where being big matters, is so-called Big Data.

Travel companies have millions of data points, created while customers travel through the holiday booking journey and understanding these is key to modern yield management.

In the early days of dynamic packaging, simplistic margins models where deployed, based on competitor pricing analysis.

Hotels where marked by a flat percentage across a destination or resort, with a pounds amount added by airline to flight prices.

However, now competitors prices are often ignored, in favour of Big Data analysis of an OTA’s own customer journeys.

Whether prices are increased or decreased, is triggered by comparing a resort’s average conversion level to that of the site as a whole or historic conversion levels.

This automatically allows for competitor pricing, since uncompetitive pricing drops conversion which drops prices.

More importantly, pricing based on internal traffic allows for the right pricing to be applied based on traffic source or purchasing indicators.

Pricing by source of traffic is now very common, with the highest prices being charged to loyal customers coming straight to the brand and lowest prices to customers coming from price comparison sites, which by definition are the more price sensitive.

Hot spotting pages, to identify the flights and hotels being reviewed for the longest period is just as important to pricing as reviewing the final hotel or flights booked.

This is because it gives you a much bigger volume of data, earlier in the booking path and allows you to adjust pricing on a prior-to-sale basis.

OTA’s also recognise how important it is to appear cheap at the early stages of the booking process in order to drag people further down the booking funnel.

This is why OTA’s always try to get customers to widen their departure airport choice to London Any and automatically return the cheapest flights within a week of a customer’s chosen data, rather than just the day they asked for.

Combine this with mixing and matching airlines and OTA’s can appear to offer cheaper prices than the airlines themselves, whilst still actually making some healthy mark ups.

Within the hotel results, everybody has moved away from a cheapest first price order, to a merchandised list, based on the highest converting hotels.

This allows the OTA to focus demand into a smaller range of hotels and use the higher volumes within these hotels to secure bigger margins.

Simplistically, the bigger an OTA the more Big Data it has and the more it can expect to turn this data into either higher conversions or higher margins through right pricing for customers based on where they have come to the site from and their purchasing indicators while on site.

Sophistication costs money and hence in my view the big will get bigger and the rest need to differentiate themselves from these companies to survive. Do you agree and if so what’s your strategy?