Saturday , July 4 2020
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Sharing risk

Summary:
In general, if one party is less risk averse than another, contracts can create wealth by moving risk from a lower-value use to a higher-value one.  The classic example is insurance which moves a lottery from consumers willing to pay to get rid of it, to an insurance company willing to assume it for a fee.Now Google sharing cancellation risk with hotels through its pay-per-stay program that charges hotels for advertising only after a guest has finished a stay.  If guests cancel, e.g., due to a pandemic, then the hotel does not have to pay for Google for the ad that lead to the booking. Among the other benefits:It guarantees a certain profit, which had been impossible so far because of the reign of the cost-per-click model (CPC).   It is good for your cash flow (using the Commission per

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In general, if one party is less risk averse than another, contracts can create wealth by moving risk from a lower-value use to a higher-value one.  The classic example is insurance which moves a lottery from consumers willing to pay to get rid of it, to an insurance company willing to assume it for a fee.

Now Google sharing cancellation risk with hotels through its pay-per-stay program that charges hotels for advertising only after a guest has finished a stay.  If guests cancel, e.g., due to a pandemic, then the hotel does not have to pay for Google for the ad that lead to the booking. Among the other benefits:

  • It guarantees a certain profit, which had been impossible so far because of the reign of the cost-per-click model (CPC). 
  •  It is good for your cash flow (using the Commission per Stay) model, a crucial point for many hotels, especially seasonal ones. [because Hotels pay later]
  •  It solves traditional budgeting problems that arose from the use of CPC campaigns. The more you sell with a guaranteed profit, the better. 
  •  It is a perfect match for hotels’ commission-per-stay philosophy, so you do not need permission from your sales manager or finance manager to kick off campaigns. For most hotels, a commission is a commercialization expense and a CPC is a marketing expense (this idea is wrong, but it happens quite often).

I would add that it solves a potential moral hazard problem due to incentives for Advertisers (web pages that host ads) to click on the link to earn money.

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