Margin

To understand margins in travel, one has to understand the two main tiers of pricing that are used in B2B distribution:

• Net Rate: The greatly discounted, non-commissionable wholesale rate that a supplier (such as a hotel) offers for a contracted distributor. For instance, a hotel may give a wholesaler a $100 room for a $75 net rate.
• Gross Rate (Retail Rate): The ultimate public price charged to and received by the traveler.

The intermediary’s margin is made in the space between these two rates.

Intermediaries capture their travel margins from two different financial models:

• Commission Model (Agency Model): The hotel determines the final selling price. An OTA sells the room for $100 and distributes it to the hotel. The hotel collects the $100 from the guest and pays a predefined percentage (e.g., 15%, or $15) back to the OTA as a commission. The OTA’s margin is the commission.
• Merchant Model (Markup Model): The middleman purchases the inventory at the net rate (e.g., $75). They then add a markup — the profit margin they want — and sell it to the traveler at whatever price the market will bear (e.g., $110). In this case, the intermediary is the merchant of record; he receives the 110 dollars, pays the hotel 75 dollars, and ends up with a margin of 35 dollars.

For the actual providers of the travel experience (airlines and hotels), distribution costs are the biggest threat to their operating margins.

Every time a third party touches a booking, the margin of the supplier shrinks. A hotel might be paying a fee to the Channel Manager, a fee to the GDS, and a 20% commission to an OTA, all on one booking. This dynamic is the main reason for the industry-wide push for direct bookings. When a traveler books directly on a hotel’s website or an airline’s app, the supplier avoids the intermediary fees and gets a much higher profit margin.