The budget paradox: Why do hotels cap direct booking budgets but give OTAs unlimited spend?

Most hotels fund their distribution channels in a way that doesn't add up

They cap annual budgets for direct bookings — their most profitable channel. Meanwhile, they give Online Travel Agencies (OTAs) Online Travel Agencies (OTAs an unlimited budget through commission-based payments.

Juanjo Rodriguez, founder of The Hotels Network and now a Lighthouse executive, believes it's time to rethink this approach. Drawing on decades of hospitality technology experience, he argues that hotels should adopt flexible, performance-based budgeting, one that reinvests revenue and removes growth caps on direct bookings.

Hotels are, in effect, placing an artificial ceiling on the growth potential of their most financially rewarding channel while giving a blank check to their most expensive reservations.

Drawing on insights from attribution challenges, short-term thinking, and deep-seated tradition, the following article challenges hoteliers to rethink this established model.

Read Juanjo's perspective below to see why uncapped, performance-based investment makes more sense than the status quo.

Unlimited budget for expensive reservations

Hotels fund their distribution channels in two very different ways.

For direct bookings, they set annual budgets that cover team costs, marketing, and technology. For OTAs, they negotiate commissions on each booking. The commission model sounds simple enough, but it creates an odd dynamic.

Your most profitable channel (direct bookings) operates with a fixed spending cap, regardless of performance. Your least profitable channel (OTAs) has no spending limit at all.

Put simply: you have an unlimited budget for your most expensive reservations.

The root of the problem

Several factors contribute to this discrepancy. Indirect bookings on commission appear risk-free and are fully trackable. Direct bookings, on the other hand, involve a combination of fixed costs (such as people, technology, and brand marketing) and variable costs (such as performance marketing and paid media).

Attribution is also more complex, a single booking often results from multiple initiatives.

Consequently, we find direct teams continually having to prove their work is profitable, whereas the profitability of indirect teams is taken for granted.

Additionally, short-term focus drives hotels to rely more on OTAs when there’s an immediate need, as direct channels cannot drive demand as quickly. This issue is compounded by siloed teams: marketing has its own budget, and revenue managers typically control OTAs, leading to a lack of collaboration.

The specific expertise required for effective marketing also makes it easier for hotels to collaborate with OTAs than to build and train an in-house team.

It is also worth noting that commission isn’t the only cost associated with OTAs. There are additional expenses for placement, ads, and visibility, similar to paying for Google Ads. This makes the overall cost for indirect bookings even higher, with marketing budgets often being utilized to cover these expenses.

The main reason, however, largely stems from tradition—it’s simply how things have always been done since the advent of OTAs and metasearch platforms.

Two key questions when weighing up the cost of direct bookings

Cost efficiency of direct vs. indirect bookings:

Research indicates that indirect bookings are about twice as expensive as direct ones (16% vs. 8%).

Even if you doubled your investment in direct bookings, you would still achieve a better ROI.

So why do many hotels target a single-digit cost, like 8%? The logical answer might be that the target audience for OTAs is different, potentially including guests who would not book directly. But is this really the case?

Marginal cost of additional direct bookings:

If your hotel already secures a certain number of direct bookings, the focus should shift from the cost of existing bookings to the cost of acquiring additional ones.

With most direct costs being fixed, it makes sense to fight for each marginal reservation and invest up to 16% of the booking value.

So, why not adopt a model that allows for paying for these additional bookings without budget constraints?

Uncapped growth opportunities at your hotel

Let’s take a page from other avenues in the tech world. Successful tech companies build products that offer them opportunities for uncapped growth.

For example, business credit cards generate more revenue as users make more purchases with them; you sell the credit card once, but it produces more and more revenue over time (like Ramp).

Or the Product Led Growth model (PLG), where a first set of users buy a product for themselves, and over time more and more team members sign up too (Slack or Dropbox are classic examples).

In fact, hotels are already doing this with their OTA distribution: the commission model means that an OTA could bring as many bookings as they possibly can, and the hotel is happy to accommodate those guests. However, on the direct side, a fixed budget for direct bookings implies a cap on growth in your most profitable channel.

Hoteliers should consider abandoning the traditional budget model in favor of one that allows for uncapped upside in the direct channel.

How would this work in practice at your hotel?

We should be creative in coming up with new techniques to grow the direct channel.

Consider adopting a "per booking" budget rather than a fixed one. For example, allocate an additional 5% spend on any booking after the first 100 bookings.

Another effective approach is to reinvest a percentage of direct booking revenue back into targeted marketing efforts for the direct channel, creating an uncapped growth loop.

Automatically allocate a fixed percentage of incremental revenue from direct bookings into the marketing budget; for instance, for every $1,000 earned from direct bookings, set aside $100 for marketing initiatives.

Assigning a specific budget for high-end rooms, such as suites that are both high-margin and high-value, can also be beneficial. Spending more on marketing these rooms can lead to higher profitability.

You can also dedicate a portion of revenue from upsells and cross-sells to customers who booked directly, channeling it back into the marketing budget.

Consider performance-based partnerships with complementary businesses. Split revenue from direct bookings driven through these partnerships, then reinvest a portion into marketing and technology that drives more growth.

You can also implement a direct booking commission system for your team. When staff success ties directly to direct channel performance, they have a clear incentive to prioritize profitable bookings. This approach works well as a bridge to more flexible budget models.

A new approach for forward-thinking hotels

Progressive hotel brands are rethinking how they allocate budgets, and unlocking significant growth in their most profitable channel as a result.

The shift is straightforward: move toward uncapped investment in direct bookings, similar to how OTA spend works today. This approach creates a more balanced, efficient distribution strategy that rewards performance instead of limiting it.

Get in touch with our team to find out more.

About Juanjo Rodriguez

Juanjo, a marketing and tech-savvy entrepreneur, embarked on his digital journey over 20 years ago as founder of Duplex, a popular marketing agency in Spain. However, driven by his keen observation of a significant technology gap between major online hospitality players and hotels, he took on a new mission to bridge this divide.

Today, through The Hotels Network, a Lighthouse company, Juanjo empowers hotel brands worldwide to grow their direct booking channel using cutting-edge technology like AI and machine learning. He is passionate about educating hoteliers on the opportunities offered by innovative solutions such as predictive personalization, frequently sharing his wisdom as a speaker at hospitality events and educational institutions.