Business models in the OTA industry
The online travel agency (or OTA) industry has seen the development of various business models that have changed the way it has historically worked. The model used mostly depends on the market in which the agency is operating and the negotiation between the hotels and OTAs.
The two most popular business models in the OTA industry are the merchant model and the agency model.
Merchant Model: In this model, hotels sell rooms to OTAs in bulk at discounted or wholesale prices. The OTAs then sell them to customers at a markup price. This is the most commonly used model, and it benefits both parties.
Agency Model: This is a commission-based model wherein hotels give OTAs commissions based on business bought. In this model, the hotels list their services, and the OTAs don’t have to buy anything up front. This is beneficial for hotels, as it gives them the freedom to price their rooms as per the demand scenario.
Expedia’s business model
Expedia (EXPE) uses both the merchant model and the agency model. Historically, the company has followed the merchant model, but with the agency model being more popular in countries like Europe, the Middle East, and Africa, the company has adopted it as well.
The company has an Expedia Traveler Preference program, which allows guests to decide how they would like to book each property, whether that is to pre-pay (as in the merchant model) or to pay at the hotel (as in the agency model).
The merchant model is generally more profitable for OTAs, as it garners higher commission, but the agency model has the ability to drive huge volumes, as it is much easier for larger as well as smaller hotels.
The company also runs a program called the Expedia Affiliate Program, which allows affiliates to earn part of the commission for business bought. This way the company establishes a system in which everyone benefits.
Expedia competes with major online travel companies such as Priceline Group (PCLN), Ctrip (CTRP), Orbitz (OWW), Travelzoo (TZOO), and TripAdvisor (TRIP). Expedia makes up 0.52% of the Consumer Discretionary Select Sector SPDR (XLY).