So the big news in the (Online) Travel space over the past couple of days has been the resignations of the CEO and CFO of Expedia, one of the largest online travel companies (OTAs). The ostensible reason for their departure seems to be a disagreement with the Board over strategy. But did a little deeper, and it turns out that there could be another big reason – and that is the rapidly increasing cost of Customer Acquisition.
Now, this is definitely not a problem only for the Travel industry, but in this post, I want to talk about a few reasons why Travel seems to be one of the most significantly impacted sectors by this trend.
Travel was one of the first industries to embrace the ‘Internet’ in a big way. And that is no surprise for people old enough to remember what it was like to book a ticket pre-Internet. I still remember the time we had to write letters to the hotels, send them Bank Drafts and await confirmation of booking, again by post! Booking a train or plane ticket involved waiting hours in a hot and crowded queue, with no guarantee that you would even get a ticket! So when the first online travel companies provided customers the opportunity to book their flight and accommodation options from the comfort of their home or office, customers lapped it up.
Unfortunately, that seems to have been the biggest innovation in this sector in the past couple of decades, while the customer value proposition has drifted away from convenience to the dreaded ‘price’. Yes, we can now compare across multiple options, view high quality photos (and videos) and read hundreds of reviews across multiple platforms before deciding to book a hotel room. But why should I book the hotel room (or flight ticket) from one OTA (Online Travel Aggregator) compared to another? I don’t have any data, but I would argue that 80% of users would respond with ‘whichever provides me the cheaper option‘ if asked this question.
This lack of brand differentiation has led to the OTAs having to spend significant amounts of money on Customer Acquisition. And this biggest recipient of this money is the world’s largest search engine. Customers typically begin their travel booking process with a search, and OTAs have no choice but compete with each other to get as many of these potential customers on to their sites as possible. This has led to steeply increasing cost per clicks. Users also users typically make multiple visits before booking, as well as compare prices across multiple websites, which means that OTAs have to keep spending money to drive subsequent visits to their website, with low conversion rates. All of these add up to the Customer Acquisition Cost (CAC) going up all the while.
So how can OTAs tackle this problem? Unfortunately, I do not have a magic bullet that can solve this problem. The core of the issue is really lack of brand differentiation and a value proposition that is largely predicated on providing the cheapest price. Brands will constantly have to ask themselves if they can provide value to their customers that can engender brand loyalty. Brands like Amazon have managed to do this but a big part of the reason for this is that they operate in a sector where customers typically make frequent and regular purchases. The problem is more severe in Travel because users typically make only one or two transactions a year, but the ticket sizes are high enough that they will spend sufficient time and effort in doing research to get the best value.
One option that I am sure all the large travel companies are exploring would be to leverage ‘Big Data’ and ‘Machine Learning’ to provide a more personalised solution to users. Booking flights, and especially hotels, has, I would argue, actually become more difficult these days due to the plethora of choices. If an OTA is able to understand my requirements (based on my digital and other signals) and narrow down the options they present me while I am doing my research, I might be more inclined to book with them and do it faster, thereby improving their Conversion Rates and lower CACs. If they are then able to offer ancillary products and services that are also tailored to my specific requirements as well as send smart reminders for me to plan my next holiday, then Customer Lifetime Value can also be driven up.
Yes, I know this is easy to state from the outside and there are, I am sure, numerous reasons why true 1:1 personalisation might be difficult to achieve, but I would really like to see some companies try.
Links to further reading on the Expedia Leadership Change: