The coming of the internet has led to one round of disintermediation in the travel market, and I hypothesize that review websites such as TripAdvisor are going to lead to another. Let me explain.
In the “good old days” if you wanted to travel there was no option but to reach out to the neighbourhood travel agent who would give you options of a few airlines and hotels. The best you could do to figure out if you were being taken for a ride was to check across multiple agents, but even then the only thing you could compare was price. It was impossible to compare hotels in terms of quality and you would take the word of the travel agent.
And then the internet happened.
Now, with sites such as Expedia or Travelocity, you got more transparency in pricing – especially when it came to airline ticketing. The travel agent could no longer take you for a ride when it came to the air fares – you could cross check online and bypass the agent if he wasn’t offering you a good deal (of course some things such as flexible schedules were best booked via agents, and they continue to hold sway in the corporate segment for that reason). Simultaneously airlines started selling tickets direct, via their own websites (this was led in part by “low cost carriers” who saw this as a good way of saving cost by cutting out agent fees).
This was the first round of disintermediation in the travel industry. Airlines selling tickets direct and customers being able to book directly online meant the overall business of travel agents reduced. Some of them were cut out completely while others were replaced by large-scale technology enabled agents such as Expedia or Travelocity. Those that survived either have corporate clients (who need flexible schedules and have little time to book online) or have resorted to packages – where they arrange for flights, accommodation and cars, and quote you a consolidated fee – in which there are margins to be made.
The move to large-scale technology-enabled agents meant that some of these agents were now large-scale aggregators. This gave them significant bargaining power vis-a-vis hotels and this allowed them to bargain for deep discounts. While earlier conventional wisdom was that “travel agents” could get you “good deals”, now these large online aggregators were the ones providing the “best deals”. Thus it made eminent sense to book via these aggregators.
Simultaneously most hotels also started direct booking on their own websites. However, the problem was that the hotels themselves did not have the technological capability to implement good revenue management practices on their own websites. They also did not have the technological capability to offer a seamless and smooth booking experience. Thus, large online agents such as booking.com and Agoda prospered.
There are two functions that a travel agent performs – helping customers discover hotels and then actually executing the booking. In the traditional model, agents don’t charge for the discovery process. That service is instead cross-subsidized by the fees they make on the actual booking process. The first level of disintermediation in the travel agency (which we’ve seen above) has chipped away at this model, however. What do I, a travel agent, have to gain if I put in painstaking research and find you a hotel, only for you to find that you can book it for a lower price online? Agents, however, have not figured out a way to charge for the discovery process.
However, it is unlikely that they need to. For you now have websites such as TripAdvisor which have user-generated reviews and ratings for a large number of hotels, and which rank hotels in each city by type and user ratings. TripAdvisor has become so ubiquitous for user-generated ratings for hotels that nowadays travel agents add links to TripAdvisor profiles of hotels that they are recommending. Thus, we can see that the hotel discovery process can exist independently of travel agents.
What of the bookings itself? Don’t we need travel agents for that? Note that irrespective of whether a travel agent is online or offline, the hotel has to pay them a commission for selling their inventory. In the past given their size, hotels (unlike airlines) were unable to effectively sell rooms on their own websites and thus resorted to paying travel agents. However, advances in technology now mean that it is easy for a hotel to adopt a third-party software to effectively manage their inventory and sell tickets on their own website, and at a fraction of the cost they need to pay travel agents.
So, if TripAdvisor helps you discover hotels and then you can book hotels directly through their own websites, who needs travel agents? For now, most large online aggregators have a price matching policy and thus match the prices that hotels quote on their own websites. However, in order to save booking fees (rumoured to be of the order of 17% of the total booking value) hotels are trying to innovate and add freebies to their offering.
For example, a hotel in Cambodia I stayed in last week offered a free massage to guests who had booked through their own website (unfortunately I booked via Agoda and couldn’t avail of this offer). The Bangkok hotel I stayed in last week offered a 10% discount on payments made via American Express on their own website (again we discovered this after we had booked on Agoda, using an AmEx. To their credit, Agoda gave us a refund to the extent of the discount we would have got on the hotel website).
Essentially hotels have figured that with the growing popularity of platforms such as TripAdvisor, they don’t really need travel agents, small or large. As TripAdvisor gets more popular and third party hotel booking softwares gain traction, we are likely to see the decline of large travel aggregators such as Expedia, Travelocity and Agoda.
In essence, the growth of TripAdvisor is going to lead to the partial downfall of its erstwhile parent Expedia.