How Expedia works... What they don't want you to know

After spending 3 years working in the hotel business, I'd like to share the secrets of one of the biggest rackets in the business: discount travel websites like Expedia.

For the sake of simplicity, I'm just going to refer to these sites as Expedia even though there are a million of them now... Orbitz, Priceline, Lodging.com, Travelocity, etc.

These sites are able to miraculously offer lower rates on their sites than the hotels themselves. It's not very complicated, and in fact it is brilliant.

Here's how it works:

A hotel decides that it needs to sell unsold rooms or increase their occupancy on low volume periods of time. For corporate hotels this could mean weekends, for more leisure based hotels, this could me slow weekends or weekdays. They agree to allot a certain amount of inventory to Expedia for these said days. For each room that is booked by a traveler online, the hotel "sells" this room to Expedia at an absurdly low rate.

Let's say "Hotel A" has a rack rate of $149 for a particular day. Well, when someone books one of these unsold rooms, Expedia has basically agreed to compensate the hotel for that room. Guess how much they pay the hotel...

They pay the hotel sometimes 50% of the rack rate, but generally the price falls between 55% and 70% depending on the agreement.

Then Expedia takes this $149 room, pays the hotel $90 for it, then marks it up to the travel consumer on the website to $120 or $130. In addition, for utilizing these Expedia-type websites, Hotel A will kick back a monthly commission based on booking usage or a flat fee.

(Check out the difference in the Expedia and Fairmont SF website rates)

Why, you ask, would a hotel do this?

The main reason is marketing. Smaller properties or properties that are not part of large chains do this to draw in people that would ordinarily not book at their hotel. The consumers see another option and possibly a very low price to match. More established properties just do it to keep up with the Joneses. If their property isn't up there with the rest of them, the discount-minded consumer will simply book at another hotel. Many properties reluctantly participate with these sites.

There are drawbacks to this for both hotels and consumers though.

Hotels basically break even when it comes to these room bookings. There's a certain amount of money a room must sell for to break even for renting it. Every time someone stays in a room, the cost of cleaning it, replenishing supplies, and providing other services adds up. Throw in the extra commissions that hotels kick back to the website, and it is nothing more than a marketing tool.

In addition, properties have target demographics upset when random internet cheap asses get a great deal online. Think about the white trash couple who ends up staying next to the CEO and his wife in town for a charity golf tournament and some R&R. Inevitably it seems, the hillbillies misbehave, upset the classy people who paid full price, and the front office manager is forced to comp the room for the CEO and his wife. All too common scenario.

Consumers get screwed far more often though. With Expedia, Travelocity, or Priceline, you are required to prepay for your room. You go through all the steps, "request" your room type, and then get your credit card charged immediately after.

So... what if:

1) You have an emergency and need to cancel your room the day of?
2) You have a bad experience and demand a room credit from the front desk?
3) You need to shorten your multi-day stay once you've checked in?
4) What if you requested a King non-smoking and the hotel claims they don't have any?

Basically you're screwed, unless you're dealing with a really friendly hotel.

By prepaying through these websites, you have signed your life away. The only way to get any sort of refund (Priceline and Hotwire don't allow refunds) is to get the hotel to communicate directly with Expedia and agree to waive the charges... that of course is after you spend 45 minutes on the phone during your vacation with Expedia. Many of the lowest rates at 3 and 4 star properties are non-refundable, even on Expedia. They state it up front.

Hotels are basically powerless to give you any kind of discount. If you have a bad experience, there's nothing they can do. You paid Expedia the money, and Expedia pays the hotel up to a month later. The hotel can't simply open the cash drawer and give you money...

Furthermore, many hotels sell "Run of the house" rooms to these websites, which you really have no control of. The dirt cheap sites like Hotwire and Priceline basically are selling you the worst rooms possible. This means you're likely going to end up in a double smoking room on the freeway. If the hotel is nice and a non-smoking room is available, they can choose to accommodate you, but are under no obligation to give you your preference. And no, they can't give you a discount.

Specifically with Expedia/Hotels.com, you can request a King or Double room. You will get whichever one you booked. However, you can only choose a preference for smoking or non, you are not guaranteed it. This happens constantly. People get to their room, say "I requested a non-smoking room, this isn't going to work," and receive the explanation that they weren't guaranteed one. And no, they can't give you a discount.

This invariably leads to scathing online reviews that hurt the hotel, but Expedia gets away scot free.

And God help you if something goes wrong with your plans when you book a flight through these sites. I've heard some real nightmare stories. Like this one here.

Or this one.

Alternatives:

Look up the price on these sites, then call the hotel directly. Many times they are more than happy to check with their manager, confirm the online rate, and match it or come within $10 of it. In this case, you have more control over your stay, room type and preferences. If the first hotel doesn't accept your proposition, call their competition.

If you are a carefree traveler just looking for the best deal, by all means these sites can save you money. But if you are a complainer who wants a Cadillac for the price of a Kia, you're going to be upset.

You are officially a smarter consumer.