How Does Google Hotel Ads Work?
First there was Google search then Google maps, Google flights now Google's hotel search product is aiming to take on other hotel booking sites and disrupt the online travel agency model. With flights and core search Google is already a travel industry leader. Google already has tons of data on hotel prices, travel dates and guest ratings through its scrapers which is making it incredibly difficult for firms like Booking.com to compete (especially since Google is a key channel partner).
Spend just a couple of hours at any given industry conference and there are two topics bound to come up: Airbnb’s end-to-end platform ambitions and Google’s continued push into travel. When these conversations turn to Google Hotels, the emotions often oscillate between outrage (“biting the hand that feeds them”), capitulation (“it was bound to happen eventually”), and excitement (“someone that had to take on the Big OTAs”).
For hoteliers trying to understand what Google travel means for their business, there are two key questions: is the company going to be evil by further leveraging its dominant position to charge hotels more for customer acquisition? Or will it be good, by expanding the pie and giving hotels greater options for acquiring high-intent consumers? There’s no easy solution to the “good or evil” question -- but one thing is certain: more competition is a good thing for hotels, as it creates new ways to connect with customers outside of the OTA ecosystem.
As Google takes on the OTAs head-to-head, hotels benefit from a significant new distribution channel which (alongside Airbnb) is a major shift in industry dynamics. It’s a game-changer and hoteliers need to understand how Google works to adapt their distribution strategies accordingly. Here’s what you need to know about Google Travel, and what it means for your hotel’s business in the months ahead. Armed with this information, you’ll be more prepared to make your own assessment on Google’s impact on your own business.
How Google Hotels Makes Money
While it may not seem like it, a business model can be good or evil. A good business model incentivizes actions that create value and an evil one destroys it. The success of Google's business is predicated on delivering the best possible end-user experience (search) which is undeniably good; however, recent questions have come to light around whether monopolizing the results page with its own content could be perceived as evil.
Google has expanded its advertising pool from traditional AdWords to include hotels everywhere via its Hotel Ads product. The Hotel Ads product is an undeniably better experience than search was previously and we’d argue that it’s a significantly better product than slow loading and overly promotional/confusing OTA index pages.
Major OTAs are facing existential headwinds related to the staggering costs of driving demand from the Google advertising monopoly but the truth is that the problem isn’t that Google is flexing monopoly power, the problem for OTAs is that Google is delivering a better user experience.
When a user Googles a term like “New York Hotels” -- a term that 116,000 people search for each month -- advertisers place bids on the term in what’s known as a Dutch auction. That’s where the lowest winning bid is the price for all bids. For example, if the 4th place bid was $1.50, then the top 4 all pay that cost per click when their ad is clicked. The top bidders show up in the results (SERP), with the highest bidders appearing first and the winning bids determined by multiplying the bid’s price with the ad’s Quality Score. Google dominates every search query whether it's local or global terms like "best hotels", "best price hotels", or anything else. You probably even found this article on Google.
In order to make more money from the service it provides, Google only has 3 levers to pull. Here’s a brief overview; we’ll go into more detail later:
Display more ad units. Theoretically, each new ad increases the probability that a user will click the ad. Of course, there’s a tipping point when ad saturation pushes users to new platforms.
Introduce competition. This is harder for Google to control but in general, the rules of supply and demand state that more advertisers for the same number of ad slots results in higher bids.
Capture more of the value chain. Think of this like Amazon (or Wal-Mart or Target) introducing private label products to capture market share and increase its profits. For example, Google could start managing the entire hotel booking process and capture more of the value chain as an OTA.
Google Hotels: Good or Evil?
Google can certainly be seen as evil by monopolizing its status as the dominant player in search and prioritizing its own results but in reality, lots of other players do this. Think about private label products in major supermarkets like Kroger or Amazon’s foray into creating their private label brands. These platforms can parlay their control over access to the consumer and take market share from those that rely on the platforms for distributing and selling their products.
The reality of travel today is that consolidation has dramatically reduced the industry's distribution options. Hotels face a “take it or leave it” situation, where only the largest brand portfolios have enough leverage to negotiate favorable terms. That’s where Google is most definitely not evil: Google levels the playing field, especially for brands that do not have enormous marketing budgets to compete against the OTAs via traditional search ads.
And Google definitely does not have a monopoly on user experience. It has successfully incentivized the best search and booking experience while also increasing ad inventory. Google’s Hotel Ad module innovation is evidence that Google continues to provide real value to the ecosystem. This ability to steadily monetize its real estate, without substantially alienating users, is what makes the company valuable.
The only way for OTAs to compete is to get users coming to them directly. And the only way to get them to do that is by providing the best possible search experience -- or at least better than Google’s, which is something that Booking Holdings’ CEO Glenn Fogel recognized in his Q4 2019 earnings call:
“What’s most important for us to get customers to come to us directly. For us to have our own future is to create a service that is so wonderful, so good that people just naturally will come back to us directly. And we will not be as dependent on other sources of traffic.”
Ultimately, Google today is amoral. It’s neither good nor evil. It makes a lot of money from delivering the best possible search experience; as long as users reward it with their attention, it will continue to sell that attention. We’ll know that Google is more evil than good if they stop innovating on the search experience and growth attempts begin to alienate end users (searchers).
Google Hotels vs. the OTAs: What Is Google Likely to Do?
Between organic SEO and paid advertising, Google is responsible for much of OTA’s inbound demand. This vulnerability was laid bare in Q4 2019 earnings calls, where TripAdvisor and Expedia CEOs both lamented dips in organic visibility and rising advertising costs.
Ultimately, this is a high stakes chess game with billions of dollars at play -- $10.6 billion in 2018. With so much money at stake, for both Google and OTAs, Google has 3 potential moves to make -- none that will make everyone happy, especially as it walks the tightrope between its own products and those of its advertisers.
MOVE #1: EXPAND AD INVENTORY
One of the fastest ways to grow revenues is to expand overall ad inventory. It's always a trade-off between revenue and user experience.
Where we’re at: Google has already done this, increasing from three standard ads to four. Ben Thompson from Stratechery calls this The Google Squeeze. The consequence here is that organic results are pushed further down, reducing organic reach. As a simple example, let’s say the search engine results page (SERP) used to be 30% ads and now it’s 40%. Once you add the Google Hotel Ads module, that pushes ad inventory to 50% -- making paid placements as prominent as organic results. And, as Google adds more featured snippets, “zero-click searches” are now the majority. No clicks, whether paid or organic!
Even so, Google maintains a tight focus on the user experience; if users stop coming, there’s nothing to sell. So far, Google has avoided the point where users turn to new platforms. The Hotels module is easy to browse and it's convenient, two things consumers prioritize.
“[Google] has the dominant position largely by providing a better product. Search was better to start, but Google didn’t rest on its laurels: it made search better on mobile in particular with these sorts of modules. While users could download another app or go to a different URL, they simply don’t want to.”
-Ben Thompson, Stratechery
Will Google do more of this? Yes, Google continuously innovates around better user experiences, as well as finding ways to monetize that innovation. While we don’t expect more of the organic rankings to be taken up as a percentage of results, we absolutely expect more innovation. And that should worry the OTAs, even as they simultaneously benefit from the growing velocity of Google Hotel Ads. Expedia CEO Mark Okerstrom said on Expedia’s Q4 2019 earnings call:
“We are able to pick up some of that volume and that resulted in spending more on sales and marketing than we otherwise would have. We are happy with the returns, but ultimately, not as good returns as we would see from the SEO channel.”
MOVE #2: INTRODUCE COMPETITION
More companies competing for limited space is generally good for an intermediary that makes money by selling access to its users. The competitive auction-based system ensures that the company always optimizes the value for its inventory.
Where we’re at: Google’s Hotel Ads is exactly that: a product that turns advertisers into suppliers and offers hotels an end-round around other gatekeepers. Google built a new channel to compete for bookings -- and then used its competitive advantage to prioritize that channel above organic search results.
Ironically, Google’s demand engine helped Booking and Expedia create a duopoly -- which is bad for business -- so Google made tools to make it easier for hotels to bid for bookings. Whereas the OTAs were arbitraging their expertise in demand generation, Google closed that gap and gave hotels a new way to compete head-to-head with OTAs. Remember that, even if it's somewhat cannibalizes search ads, more competition for limited inventory is great for Google’s top line.
Will Google do more of this? Yes, Google will absolutely continue to innovate making it easier for hotels to compete against the major OTAs. The competition will ultimately increase bid prices. After all, Google's leverage (and pricing power) rises alongside usage; whether OTA, meta or hotel direct, the more advertisers the better. Google is a brand-agnostic gatekeeper; it just wants everyone to pay its toll.
MOVE #3: CAPTURE MORE OF THE VALUE CHAIN
Google Hotels is a way to capture more of the value chain by shortening it. Rather than hotels distributing to OTAs, who charge commissions for capturing demand from Google (almost like advertising arbitrage), hotels can advertise directly on Google. This shortens the value chain and somewhat balances the distribution power dynamic in hotels’ favor.
Ben Thompson from Stratechery sketches how Google inserted Hotel Ads into its flow.
Where we’re at: But will Google become an OTA? Absolutely NOT. Google never has and will never want to deal with customer support, inventory onboarding, contracts, etc. It’s a huge hassle that doesn't align with any existing core competencies.
The media is blowing this out of proportion, saying that Google wants to disrupt travel by capturing more of the value chain, but they’re wrong. I think the seller of record for travel it's a tough business, with low margins, that Google doesn’t want to be in. It wouldn't really add much to its bottom line or its competitive positioning. Why pay for all that overhead when you can just skim from the top?
Will Google do more of this? Yes -- as long as it aligns with its objective to offer the most comprehensive search platform for travel. Most recently, Google expanded its reach into vacation rentals, trying to capture more of that demand from OTAs. This is simply an effort to give consumers access to 100% of all inventory across all categories. To be the most useful to users -- and to make as much money as possible selling access to those users -- Google needs access to all of the inventory. And, in a tie-up of the two Headless Horsemen of the travel apocalypse, Airbnb is running a pilot to distribute its inventory on Google.
One final thing on OTAs versus Google: There's still a fair bit of regulatory uncertainty, with government hearings leading industry pundits suggesting a forthcoming “regulatory comeuppance.” And the OTAs certainly aren't taking this lying down, using their visibility and market power to agitate publicly for a level playing field in search results. There’s growing mainstream awareness around the potentially monopolistic characteristics of Google's position as the place where the majority of the world start their online searches.
What Does Google's Strategy Mean for Your Hotel?
Really, all this is business as usual. The mainstream media is always going to hype new developments. You shouldn't change direction with each breathless opinion piece or buzzy article. The competitive dynamics of distribution is ever-shifting, and it will always remain in flux.
For your hotel, the same strategies apply today that applied five years ago. First, focus your energy on the direct channel, as organic direct bookings are always the most profitable. To achieve direct booking success, use a guest acquisition tool like SiteMinder Canvas to create a high-converting website. According to Google, an easy-to-use website is more important for high-value travelers than reviews or loyalty programs. A modern website will build trust with potential guests, giving them the confidence to book direct.
To enable those direct bookings, that website must also have a fast loading, intuitive and mobile friendly Booking Engine, like SiteMinder Booking Button. Consumers want a self-service option to book direct, so give them what they want -- and to capture those bookings with zero commissions. Furthermore, Google’s quality score uses conversion rates as a rating factor so if your hotel website and booking software don’t convert guests you’ll end up paying more for ads. Few hoteliers really understand this.
A modern look and feel, coupled with a “Book Now” button, will transform your hotel’s online experience and get your hotel more commission-free bookings.
Next, once you’ve fortified your direct channel, you must implement a balanced distribution plan that doesn't rely too much on any single channel or third-party. You’ll want to use a channel manager like SiteMinder to easily distribute to as many OTAs as possible who give you reasonable terms...then let the OTAs fight it out in search bidding since you’re paying the same commission regardless.
Your distribution plan should also include paid channels, such as metasearch, Google Hotel Ads, and possibly even OTA ads. Be sure to balance Google Hotel Ads along with metasearch bidding and carefully analyze profitability trends over time. For many hotels, it's advisable to use a digital marketing agency for hotels and/or metasearch management tools that can optimize your bidding and ensure that you are optimizing every marketing dollar.
Finally, keep your head up and stay aware of the ever-shifting distribution dynamics. Keep a careful eye on earnings reports from metasearch, the latest product updates from the OTAs and HotelTechReport’s hotel industry blog to stay on the cutting edge. Google certainly isn’t going anywhere -- and neither are the OTAs -- so it's up to you to stay informed and ride the waves the best you can!