opaque selling university of victoria

Opaque Selling University of Victoria

Opaque Selling in the Hospitality Industry:

Hotwire’s Hot Rates1

According to Wikipedia, opaque selling is the practice of selling distressed travel inventory, such

as hotel rooms, airline tickets, or car rental, at discounted prices while hiding key characteristics

of the good. Consumers do not know the specific supplier until after the purchase has been

completed. The purchase is non‐refundable, non‐changeable and non‐transferable. The two

main models of opaque selling are Priceline’s ‘name your own price’® and Hotwire’s ‘hot rates’.

The distinction is that Hotwire has posted prices while Prieline’s consumers make bids and

Priceline decides whether to accept or reject within 15 minutes.

Figure 1 shows that the opaque section on Hotwire displays partial information on hot rate

hotel offers, such as the general area in a city, the star level and some amenities. It does not

reveal the hotel’s exact location and name. The prices of opaque offers are much lower than

the prices of regular offer; up to 50% discount rate according to Hotwire. Hotwire lists some

hotel suppliers on its website but claims that “Hotel brands are provided as examples only;

Hotwire does not guarantee you will stay in one of the hotels listed above.”

Opaque selling is offered by online travel agency (OTA). OTA is a growing distribution segment

for the hospitality industry. The North American OTA market is highly concentrated, as four

companies, along with their subsidiaries, collectively hold more than 97% market share:

Expedia (expedia.com, hotwire.com), Sabre Holdings (Travelocity.com, Lastminute.com), Orbitz

Worldwide (orbitz.com, cheaptickets.com) and Priceline. OTAs offer hotel rooms around the

world, airline tickets, car rental, and travel packages that include 2 or three of these items.

OTAs have successfully developed opaque selling in North America and also worldwide. Hotwire,

for example, has opaque offers for a wide range of cities, areas, star levels and days including

peak seasons such as the Christmas holidays. TravelClick reports that the opaque segment

represents 6% of hotel reservations for major hotel brands. Non‐opaque OTA reservations

represent 13%, and Internet reservations 53%, of all reservations (Table 1).

OTAs typically work under a merchant model. An OTA receives a commission once a booking is

made but it makes no commitment on inventory and takes no risk. OTAs charge substantial fees

for their services. According to the HSMAI foundation, OTA commissions in 2011 were

approximately 17% for regular hotel rooms, 25% for travel packages and 40% for opaque

This case is written by Wenyu Liu under the supervision of Pascal Courty at the University of Victoria. It is intended only to help teaching and facilitating class discussions. Copyright © 2012.


bookings.2 For opaque selling, a hotel enters the rate at which it wants to offer a room and the

inventory available at that rate. The rate the consumer pays has to be at least 30% off the hotel

retail rate.3

Hotwire rates hotels’ star levels by averaging the ratings on other travel sites and then making

adjustments based on customer feedback. According to MarketMetrix, Hotwire is ranked the

highest in customer satisfaction on hotel travel websites from 2006 to 2010. Ibidlow is a

‘decoder’ website that helps travelers make the right bookings on Hotwire through previous

user feedback, analytics of hotel databases and market pricing data. Small sample observation

suggests that the number of regular hotels on Hotwire that match a given opaque offer (fixed

area and star level) varies from 1 to 10 with an average around 4.

Opaque selling helps getting rid in the last minute of distressed inventories without exposing

the brand as would be the case under discounted ‘naked rates’. It is also used to target price

sensitive consumers who are less concerned about the specifics of their travel plans. Hotwire

advertizes to hotels that they “can safely discount rooms that would otherwise go unsold, and

generate incremental revenue ‐‐‐ without scarifying brand or rate integrity.” Best rate

guaranteed does not apply to opaque rates.4

In practice, it is debatable whether opaque selling interferes with regular distribution channels.

A hotel manager states that “Do you want to encourage the consumer to wait (until the last

minute), therefore hurting your own revenue streams? And some of the clientele that books

through that segment – not all of them – there’s a portion that don’t mesh well (with our

regular guests).”5

2 http://www.owners.org/Portals/1/Documents/NDP/DCA%20Full_Part7.pdf 3 http://www.hotwire.com/enrollmentBrochure.jsp 4 According to best rate guaranteed, hotels match any rate for the same room and conditions a guest finds on a different distribution channel. 5 Ottawa Business Journal, July 31 2012.


Figure 1: Hotwire’s Hot Rates

Figure 2: Decomposition of hotel bookings by distribution segments in 2011

Note: (1) Source Travelclick at www.travelclick.com/infomation‐center/bookings‐by‐channel.cfm (2) GDS stands for global distribution system such as Sabre and Galileo that were initially developed to help airline bookings and are used in particular by travel agents.

22%

25%34%

13%

6%

GDS Travel Agent Voice Brand Sites

OTA Non‐Opaque Sites OTA Opaque Sites

Map of areas

Opaque offers

in New York Possible brands