Merchant model vs. agency model: A guide for business success

The traditional agency model in the travel industry has been used for years to connect travelers to travel services and accommodations.

These days, the merchant model is becoming ever-popular as it generally allows for more freedom and flexibility for online travel agencies (OTAs), as well as greater profit margins when compared to the agency model.  

But what are the core attributes of each, how do they compare, and how can you take advantage of the merchant model framework with WEX?

Merchant model overview

The merchant model, particularly regarding OTAs, refers to a business model where a company takes ownership of travel-related inventory — hotel rooms, airline tickets, or other travel services — and sells them directly to customers. In this model, the OTA acts as a travel service provider rather than an intermediary between travel products and services and the end customer.

For example, hotels may sell rooms to OTAs in bulk at discounted or wholesale prices. Then the OTA, who now effectively owns the rights to those rooms for a specified period, will resell those rooms to their customers at a markup. Using this model, the OTA itself is responsible for processing customer payments and making separate outbound payments to each supplier in follow-up.

Here are some of the most common characteristics of the merchant model in the travel industry:

• Purchase and resell: With this model, a merchant purchases travel services in bulk at a wholesale or negotiated rate from service providers.
• Pricing control: Merchants have more control over pricing using this model since they have acquired the inventory at a fixed cost. Afterward, they can set their own prices for the end consumer, allowing for flexibility in marketing strategies and promotions.
• Profit margins: The merchant model allows for the potential of higher profit margins, as the company can sell travel services at a markup. This contrasts with the commission-based earnings of the agency model, but more on that later.
• Potential risk: There are potential risks with the merchant model. For example, if an OTA cannot sell the inventory it has acquired, the company may incur a loss.

Agency model overview

When OTAs operate on the agency model, they act as intermediaries between travelers and service providers such as airlines, hotels, and car rental companies, kind of like a matchmaker.

Essentially, OTAs serve as the middlemen that connect travelers to various travel services. While they provide a one-stop shop for booking flights, accommodations, and other travel-related services, they do not outright own the inventory they’re selling and therefore do not process consumer payments directly. Instead, each supplier still owns their respective inventory and is responsible for processing payments.

Here are a few common characteristics of how the agency model works in the travel industry:

• Commission-based revenue: Using this traditional model, travel agencies earn commissions from service providers for each booking made through them. For example, an airline might pay an OTA a percentage of the ticket price for every flight booked through their website.
• Package deals: Many agency-model OTAs offer package deals that bundle together flights and accommodations to provide cost savings and convenience for travelers. However, they are held to prices set by service providers themselves.
• Technology integration: Modern travel agencies leverage various types of technology for booking and managing reservations. This often includes online platforms, mobile apps, and automation tools to streamline the booking process.
• Customer service: The responsibility of servicing customer inquiries and problems related to booking, cancellations, or other changes does not fall on OTAs using the agency model. Instead, it’s up to suppliers to handle these issues since they’re the ones processing the payment.

OTAs, such as Booking.com, operated by Booking Holdings, have become prominent. In fact, Booking.com is the largest OTA in the world and built its success on the agency model; however, the tides are changing.

An imminent shift to the merchant model is necessary to achieve continued growth, as it allows for more control over bookings and enables OTAs like Booking.com to implement loyalty and rewards programs independent of service providers.

Why the merchant model is growing in popularity

The merchant model offers myriad benefits for both OTAs and end consumers — but it’s also important to look at potential challenges as well.

First, some business benefits for OTAs using the merchant model include:

• Less risk of fraud: Due to indirect distribution and safer payment options, like virtual cards, the merchant model offers greater fraud protection for travel suppliers.
• More opportunities: Using the merchant model, OTAs have more control and can cross-sell and up-sell products and services and develop deeper customer relationships.
• Greater reach: Small-to-medium-sized OTAs can use the marketing of their supplier partners to garner more business.
• Brand loyalty: Establishing a direct relationship with customers can lead to increased brand loyalty, as travelers may prefer booking through a trusted merchant.

With these in mind, the merchant model comes with some caveats, too, that are essential to consider when transitioning:

• Competition: The travel industry is highly competitive, and merchants may face challenges in differentiating themselves from other sellers, especially in the online marketplace.
• Dependency on suppliers: Since merchants rely on suppliers for inventory using this model, and any issues with suppliers, such as cancellations or changes in pricing, can directly impact the merchant’s business.
• Customer service responsibility: Merchants are responsible for handling customer service, including issues related to booking, cancellations, or changes. Providing excellent customer service is crucial, but it can also be resource-intensive and challenging.

Now, in terms of the end consumers, some notable benefits of the merchant model are:

• Cost savings: OTAs can bundle products and services at discounted rates since they purchase them outright. This leads to better cost savings for customers.
• Convenience: Dynamic packaging and bundled deals make it convenient for consumers to book multiple travel services, such as flights, accommodations, and car rentals, in a single transaction.
• Brand loyalty programs: Some merchants who operate using the merchant model offer loyalty programs that reward repeat customers with discounts, upgrades, or other perks. This can increase customer retention and loyalty.
• Seamless shopping experience: The merchant model allows OTAs to sell a variety of goods and accept multiple payment options for a more seamless customer experience.

Virtual payments for merchant model success

While the merchant model is on the rise in popularity, and for good reason, it cannot deliver its full roster of benefits across the travel value chain without the proper support structures in place. The solution? A well-implemented B2B payment strategy that helps limit the risks and costs common in online travel agency businesses. In most cases when talking about the merchant model, integrating a B2B payments strategy is just as important as having a robust B2C strategy.

Acting as the merchant of record on all travel-related purchases is a byproduct of adopting the merchant model. As such, it makes sense that taking advantage of virtual cards is one of the first steps to success. Plus, being responsible for processing transactions, while a large task to take on, gives OTAs access to top-value data and insights they can use to understand consumer behavior and preferences. Armed with that information, these businesses can optimize their offerings, marketing strategies, and pricing models to best align with their customers.

Digital payment solutions also provide OTAs with more authority over payments, with features such as range limit controls to help protect them from misuse while, at the same time, delivering operational efficiencies across the organization. Without these options, these factors can impact not only your OTA business but the end consumer, too.

Moreover, traditional methods for obtaining credit to pay suppliers, such as credit limits and bonding, can be expensive and constrain sales while placing all direct costs on the OTA. There are better, smoother ways to transition to a merchant model framework.

As the travel industry continues to shift toward this preference, discover how WEX can provide virtual payment solutions for the best protection and efficiency using the merchant model.