Booking.com new prepayment policies - What implications for hotels?

Question

Booking.com has started discontinuing prepayment policies for some partners in various countries. In short: No more pre-paid rates except if booking.com charges the customer. Looking at it, it has many implications on revenue management as prepayment coupled with no refund / no cancel has been part of the revenue managers' toolkit to attract price-sensitive customers and open up segments. The added benefit was cash flow and secured reservations. It just made it easier for the business. Now, this has changed. Booking.com will benefit from holding the cash and gaining interest on this cash. More importantly, a minefield has opened of potential impact, and for hotels, there is very little benefit to this, it seems. For the OTA on the other hand it seems more control.

What are the implications for hotels and, specifically, revenue managers? And more importantly, what's next?

Thibault Catala · Answer

I don't think this is a good move from Booking.com as indeed advance purchase rates (with no refunds or cancellations) have been a useful tool to attract budget-conscious guests and ensure steady cash flow for hotels. Nowadays, guests are even more price sensitive so by removing completely prepaid rates at a discount, we (they) may lose some customers directly. Hotels may now see more cancellations and less predictability. Understanding that B.com is one of the largest channel for most of the hotels in Europe, that will have massive consequences for both parties. Some guests will shift towards other channels (Expedia, Direct Channels, ...) but some of them won't book and will choose cheaper hotels instead Now it's even more important to invest in technology, have a strong direct booking strategy and focus on diversifying your distribution.

Mark Fancourt · Answer

In some ways it appers much like the old model of travel agent relationships and vouchers, where the hotel received the funds from the agent after the guest had stayed and submitted their voucher for payment through the accounts receivable process. Although, in relation to prepaid rates it looks to be an option to offer this pricing model through brand.com only. In this way prepaid rates remains a differentiator for the price sensitve customer and channels the relationship back to a direct model. Likely, this results in a lower cost of booking, which in this case is opportune for the property given the discount nature of a prepaid offer. Some of the more recent developments in OTA space including the earlier EU topic are going to present interesting times for price competition between various channels. At the end of the day the hoteliers focus is to shift relationships with the customer to a direct one, and these types of challenges present catalysts to be more intentional about that process moving forwards.

Max Starkov · Answer

Hotel advanced booking/pre-paid rates are typically 10%-20% below BAR (Best Available Rate). These rates have always been an important strategy to put as much business on the books and to decrease cancellation rates plaguing the industry for years, reaching as high as 50% in some destinations. Booking.com has been shifting its business model from agency to merchant for years. Booking began its operations 100% in the agency model (commission-based, similar to traditional travel agencies). It provided this OTA with competitive advantage over Expedia, which operated 100% in the merchant model (prepayment of all reservations at time of booking). Over the years, Booking embraced the merchant model, especially after acquiring Agoda in Asia Pacific. In Q1 2024, more than 57.5% of Booking,com's reservation revenue came from merchant revenue, an increase of 16.2% YoY (Year-over-year); agency revenue decreased to 42.5% from 51,5% a year ago. Now, Booking.com wants to get their hands on the lucrative hotel pre-pad rates. It is as simple as that. Can revenue managers do anything about it? Yes, start promoting aggressively Advanced Booking Rates (prepaid rates) at 15%-20% discount to BAR on the property website and via digital marketing to bring price-conscious customers.

Harald Bindeus · Answer

There is really no benefit for hotels in this latest step by BDC. The OTA will benefit from holding the float from time of booking until day of arrival - generating millions of interest in the process If the guest cancels a non-refundable reservation, the hotel is entitled to collect; however, how many hotels have the appropriate procedures in place to track cancellations and charge VCCs on the future arrival date? Continued use of non-refundable rates forces the hotel to globally accept BDC payment by VCC. Processing of VCCs is usually more expensive than CCs presented at the POS Independent hotels are being caught between the proverbial rock and hard place. One one hand, they probably can not afford to remove their non-refundable rates from BDC - on the other hand, they will lose control of the payment process from the channel My biggest concern is that BDC will use the system to offer rates below parity Overall, not much will change for hotels and RM. We will still offer non-refundable rates and while we will grumble, not many will have the courage to remove their rates from BDC Maybe some hotels will start investing more into tech and direct distribution

Silvia Cantarella · Answer

Booking.com is playing smart by doing nothing different from what its competitor number one, Expedia, has been doing forever: charging customers via channel collect as part of their contract. So far, Booking gave the Hotel partners the possibility to choose to allow the channel collect via the virtual cards' activation. By removing this option, Booking.com will hold the cash and manage the payment on behalf of the Hotel and it will have the chance to undercut the Hotel rates (not possible otherwise). We expected this, Booking was already moving in this direction. Besides the cash flow issue for the Hotels, I only see the rate integrity to worsen as the price cut can only get fiercer. An opportunity for the Hotels to maybe rethink their parity strategy and allow prepaid rates only via direct channel or getting more creative in their rates distribution.

Simone Puorto · Answer

Five years ago, I published an article ("The Science Of Fear: A Politically Incorrect Reflection On Strong Customer Authentication," see article) that predicted: It is not so far-fetched [...] that OTAs will eventually jump in the merchant game, gathering guest authentications on hotels' behalf. With this premise, virtual cards' adoption by OTAs takes a whole new (sinister) meaning. [...] hotels will be locked up for good in a vicious circle of dependency. [...] travelers will very likely prefer to pay directly on OTAs rather than brand.com: OTAs users' accounts are often already associated with the user's personal devices, making the whole checkout experience not only secure but completely frictionless. Eventually, it happened, and this is not a prediction that I am happy I got right.

Booking.com new prepayment policies - What implications for hotels?

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