The true cost of OTA commission (rarely drawn to the attention of the hotel!)

 To many this may be obvious, but my experience tells me it isn’t. It came to my attention again most recently on a daily deals issue very topical these days). Here’s the scenario:-

Intermediairs such as OTA’as, daily deals sites, GDS  &c charge commission on the AT inclusive value of a booking. That effectively means they are charging commission on VAT.

Lets look at an example (assuming a 25% commission and a £99 gross booking value, or deal value):-

If a hotel sells a room via say Booking.com at £99, Booking.com calculates the 25% commission on the gross which is £24.75 and adds VAT. The hotel pays this £29.70 and claims back the VAT. The nett commission cost is £24.75

The hotel then receives £99 form the customer, on which it pays VAT of £16.50, so it receives £82.50 nett of VAT, taking the commission cost off as above, the hotel receives a nett sum of £57.75

Were the commission calculated on the nett sale value, i.e. £82.50, the commission would be £20.63+ VAT i.e.£24.75. The hotel reclaims that VAT so the cost is £20.63

The hotel then receives the same £99 as above from the customer, accounts for the VAT as above and so receives £82.50 nett of VAT. Take off the commission at £20 63 and the hotel receives £61.87 which is £4.12 more than the example above.

So with a daily deal valued at £99, where 25% commission rate on gross is commonplace, and even higher commissions are often experienced , for every voucher sold, the hotel is £4.12 worse off because of this.

So your effective rate of commission in these examples is in fact 30% not 25%

I always make clients aware of this before he makes these third party commission decisions. It is a rather unfortunate truth of travel commissions that they are not always what hotel clients think they are, and no explanation is every given by the intermediary, just another reason why many hotels hate them!