Is Rate Parity Obsolete?
16 experts shared their view
The discussion around the pros and cons of rate parity has been around for almost a decade now. Regulations on the issue are, at best, patchy, with some countries where RP clauses are strictly prohibited (such as France, Austria, Italy, and Belgium), partially prohibited (Germany and Sweden), announced (Switzerland), or still unregulated (US and Latin America). With lower volumes of booking coming from OTAs during the pandemic, moreover, the debate about rate parity became even more heated: some properties decided to work in wide rate parity to avoid OTAs' dimming and improve their online visibility at the expenses of direct revenue, while other ones preferred to openly break rate parity on their top-performing channels. Both the OTAs and major hotel brands complicated the issue even further when they began offering out of parity “member only” rates, hidden behind an easily obtained loyalty program password. With so many different approaches and fragmented regulations, how should hotels deal with rate parity, especially after the whole industry has been severely hit by COVID-19?
The Revenuemanager series - episode #3
Rate Parity in itself was a flawed and BS concept from the get go, only putting more powers on OTA's and tech vendors making money of selling parity data to hotels. If we look at other industries: buy a TV in shop 1, same TV in shop 2 cheaper. Petrol same thing....even strawberries from the same brand in 2 different shops having a 25% variance in price?
so the question is not, is it obsolete? the question should be: how are we getting out of this mess?
What we forget mostly is that OTA's and Hotels both want the same thing: increase revenues. OTA's do that by competing against other OTA's with the same products (lie supermarkets), hotels do that by competing on value and price (like a variety of strawberry brands on the shelve). It is in no ones interest to sell cheap rates because it will drive down commission cost and revenue for the hotels. OTA's use member rates to undercut other OTA's....Hotels undercut their competition to steal business from them.
What we need to sort is how we set up our distribution landscape and what rates we actually deem as a rate that we are accepting (e.g. if you are accepting offline wholesale, why would you complain if you get an online booking at member rate that is still 15% higher than a wholesale?). One way could be done via sending net rates that can be market up by OTA's (similar to how ceiling and floor rates are being used) and letting the OTA's decide on a rate (having much more data then most hotels in the decision making process)
Whatever your opinion might be on the abolition of the rate parity, one thing is certain: the outcome was incremental costs for all parties due to the price dumping and price war that followed through promotions, discounts, member-only deals, commission cut, de-ranking, and dimming just to name a few. There are big contradictions right now:
- Even though rate parity was abolished, all parties (OTAs and Hotels) demand rate parity all the time.
- The reality is that nobody has any genuine intention to level the playing field on pricing.
- The rate parity concept evolves around “pricing” but many are neglecting the cost of distribution when it comes to inventory management.
To further explain, whether you are applying rate parity or not, the hotel rooms are usually sold on a first-come-first-serve basis without considering the costs of distribution per single channel. This was critical in "golden times" but it is critical even now as long as we agree that our focus must be on profit.
Hoteliers should accept and embrace the change in the distribution world and start moving in unison along the same strategic direction to get back control of online distribution, revenue, and profit margins without falling into the rate dumping trap for the short and long term profitability.
Focus on inventory management and value, by starting to apply selective distribution per channel, to elevate the revenue management application towards a profit management approach.
In my brightest dreams, the future holds no price and inventory constraints: total personalization, different prices and values, distinctive inventory, and profit management across various channels. No-Strings-Attached distribution management is the natural evolution and future of Revenue management. We are not there yet but step by step I see great opportunities for change ahead.
Rate parity is not obsolete – it's still a major concern for hoteliers since many travelers still consider price as a main factor in their booking decisions. The third parties continue to dip into their margins to entice travelers with slightly lower rates, and the increasing prevalence of metasearch sites, particularly Google, highlight these slightly discounted rates now more so than ever. While major brands or chains may have the leverage and alternate sources of business to attack this head on by shutting down entire channels, most smaller and independent hotels should keep the 80/20 principle in mind when it comes to how they address this question.
Hoteliers must do two things:
First, focus on your own marketing efforts and put together the best offers for their various segments of travelers. Use data, segmentation and personalization to get to know your guests better and put the right offers in front of them. Fenced-rate strategies are successful, so rely on your membership programs to tailor packages to known guests and encourage direct bookings. Offer more flexible cancellation and refundable policies for customers who book direct. Communicate your COVID protocols front and center on your website so consumers feel more comfortable when they visit your website.
Second, consider the resources needed to fight OTAs on their out-of-parity rates and whether your time and money is better spent on refining your own marketing and pricing strategies to convert more direct business. For flagrant issues, yes, you should flag them, research them and follow up with your market manager. There are several technology providers that you can partner with to monitor your publicly available rates and assist in automating your management of parity issues, so that you find them before your potential guest does.
If is rate parity obsolete? I would rather and provocatively say that rate parity has never really existed, at least since the rise of metasearch and the phenomenon of B2B rates distributed in B2C platforms.
But now rate parity is not mandatory anymore, though OTA's still demand for it, what a paradox! And the risk is visibility penalization and deranking. But interestingly, on the same time third parties distribute lower rate by undercutting their commission, or using members-only and package/opaque rates to different targets with a consequent price dumping.
What is really important is not whether or not parity rate is obsolete, but how to distribute in this critical and messy landscape.
So, first of all OTAs have their members only or genius program (just to mention the main ones) and what does the hotel have? Even if a hotel built a loyalty program, how big its reach can be in comparison with the millions and millions of OTAs subscriber?
Let's try to reset and start from the basics:
- Work on the value of your product and communicate it
- Personalize your offer
- Choose carefully each channel (online and offline) and the kind of offer (rate plan, policies, discounts) for each of them
- Distribute in a healthy way by considering channel cost distributions and focusing on profit instead of fighting a war with the different channels.
The concept of Rate Parity was invented by hospitality companies whose business model revolves around generating revenues through commissions, margins or fees on hotel bookings without actually owning or operating hotels (such as OTA's, franchisors, etc.) to prevent hotels from limiting their ability to sell hotel rooms and thus, generate revenues.
While Rate Parity in itself does not financially benefit hotel operations, as those companies grew bigger and stronger, hoteliers became dependent on them and had to start playing by the rules and complying with rate parity clauses in fear of losing a big chunk of their booking flow as a form of punishment for those parity violations.
It is definitely unhealthy for hotel operators to be dependent on those players so much that they have to operate in a manner that results in profit losses. From the perspective of optimal revenue and profit management, hotels need to have full control over how to operate their business, including channel management (limiting availability, setting stay restrictions on certain channels or charging a different price) based on the profitability of those channels that would maximize their bottom line.
With that said, whether Rate Parity is good or bad is a separate question from whether it's going away. I believe it will be lingering around for a while because OTA's are still very strong and franchise companies still own a very large share of the market.
Rate Integrity should be the focus, not rate parity. With so many different distribution channels, programmes and closed user groups, making sure the correct rate is getting to the right audience is very challenging. Importantly, at the core of any pricing architecture, a clear understanding of how rates relate to each other, should drive client/customer value taking into account contractual obligations, holistic customer value as well as the contribution to profit of each rate/channel of distribution.
Only when you truly understand your distribution costs and the associated contribution to profit each makes, can you optimise your revenue and profitability with robust distribution and pricing strategies.
Oh boy! Are we tired of the game of whack-a-mole yet? Maintaining rate parity is a major effort and somehow OTA "partners" find a way to skirt the rule by offering member-only rates (with very few qualifications), bundling with air, or grabbing a wholesale rate and unbundling it. I think we, as an industry, have proven it is very difficult to achieve ultimate parity with all channels.
Who benefits from this? I would contend the beneficiaries are channel partners and those who are monitoring parity. When you look at cost models between OTA/GDS models one could argue rate parity and last room availability reduce profit for hotels and sustain profits of channel partners.
Now for the downside. The reality is most hotels are very dependent on OTA business and transitioning to a model that encourages discounting or higher commissions for volume and placement is a very real concern. It will take a strong discipline on understanding the risk of continued discounting and incentivizing OTA partners to drive more volume. If undisciplined, you will run into a situation where you are competing against your own direct channels.
Rate Parity is not a new pricing strategy nor is it a hospitality industry-specific invention. It has been used in retail for many decades: fashion clothing, perfumes, appliances, golf equipment, smartphones, automobiles, etc. Today there are thousands and thousands of products in the marketplace where the manufacturers of the goods/services control the retail prices paid by consumers.
In hospitality, if 100% of your guests book directly with your property - through your website or reservation center - and they do not shop around before they make the booking, then you don't have to maintain rate parity. Why would you?
The issue is that travel consumers shop around like crazy - in 2019, the last “normal” year before the pandemic, hotel bookers visited on average 45 times various websites via various devices before making a hotel booking (Google). These are 45 touch points throughout the Digital Customer Journey i.e. 45 potential exposures to different pricing for the same hotel stay if your hotel is out of parity.
And guess who dominates these 45 touch points? Who invests heavily to engage, acquire and retain the traveler throughout the Dreaming, Planning, Booking, Experiencing and Sharing Phases of the Customer Journey? Hoteliers who are systematically underinvesting in technology and marketing and spending on average a measly 2.5% of net room revenue on marketing? Or the OTAs who are spending lavishly in each of the 5 phases of the Customer Journey? Ex. In 2019 Expedia spent 41% and Booking 33% on direct marketing expense as percentage of their revenue.
The answer is obvious. The situation has worsened even more: due to the pandemic, in 2020 hoteliers slashed their marketing spending by 51.5% and technology spending by 50% compared to 2019 (STR, 2021). Unfortunately, many hoteliers are continuing with similar shortsighted budgeting decisions in 2021, without considering the long-term implications.
So until that time when hoteliers will start spending on marketing and technology on par with the OTAs and achieve at least an equal exposure to them in each of the phases of the Digital Customer Journey, my recommendation is for hoteliers to maintain strict rate parity for all publicly available rates.
All discounts or promotions you provide to the OTAs should also be promoted in the direct channel: Hotel website, content marketing, SEM, online media, social media, CRM and loyalty marketing. Travel consumers are shopping around and omni-channel marketing gives the hotel an equal to the OTAs chance to engage the travelers throughout the Digital Customer Journey and its five phases (Dreaming, Planning, Booking, Experiencing and Sharing Phases), and eventually acquire and retain them.
Fenced rate parity is getting too little attention in this discussion. While a lot of effort is made to ensure public rate parity, hotels are handing out member or loyalty discounts left and right to programs such as Expedia Rewards or Booking.com Genius. There is a false sense of security among hotels since these member rates are 'fenced' and only goes out to the most loyal customer groups, when in fact bookers are able to unlock member discounts and become a silver tier member the first time they book. The ease of access to these rates has also lead to an explosion of volume in last years and it is not uncommon that every second booking from the OTA is a member booking for hotels that participate. Not only do hotels that don't focus on fenced rate parity risk a significant direct booking leakage but there is also an enormous (hidden) cost of discounting at play.
Answering the main question .. parity has never been obsolete because it has never existed ... simple like that ...
You can have some kind of control to that, but having rate parity in the market is almost impossible nowadays and it will take you a lot time and money (technology + workforce).
What just has happened ?? The hotelier has lost their patient and two /three years ago instead of fighting against that they start to do the same ... you know if you can't beat them, join them ... so the party started ... so now there are disparities caused by the distribution channels and also caused by hoteliers ... when is going to finish?
During the covid direct sales from the industry has emerged in almost the whole industry so the hoteliers want to maintain that share in the coming years so I think they are going to be more aggressive in the coming months so we can forget it about the rate parity .... OTAs are going to defend their positions so a disparity war is coming.
I think next steps of OTAs are going to be aligned with the experiences and not so focus on price so the mayor OTAs are starting to offer taxis pic up, excursion and so on ...
So grab your popcorn and enjoy the show.
Not only is rate parity not obsolete, but it is more important than ever for hotels to prevent revenue leakages and ensure rate integrity across all online channels, including mobile web and mobile apps.
Here are the 8 reasons why:
- The percentage of travelers searching and booking online has increased dramatically, with Google searches for resorts and hotels at their highest levels in nearly a decade. (see fortune.com article)
- 70% of all travel searches are now conducted on mobile devices, with the majority taking place in-app.
- The pandemic has resulted in the collapse of revenue from B2B (business travel, corporates, and groups) and MICE (meetings, incentives, conferences, and exhibitions). With those segments taking longer to recover, the leisure market will be key to any hotel's success (or in some cases survival) in 2021.
- Faced with an unprecedented tsunami of cancelations at the start of the pandemic, OTAs were very slow to reimburse thousands of online bookings, which resulted in many consumers losing trust in those platforms.
- The extended lockdowns and travel restrictions resulted in increasing numbers of travelers switching booking channels in favor of hotels' brand.com websites, regarded as a trusted source of Covid-related information on cancelation policies, testing regimes, etc.
- Price is by far the most important factor affecting customers' decisions on hotel selection and booking.
- The most popular online channels (Booking.com and Expedia, along with the metasearch engines they own or control) will push a hotel further down in their ranking when they identify that the property has offered lower rates on smaller competing OTAs, severely affecting visibility and traffic.
- Hotel marketing budgets have been slashed at a time when the OTAs are now starting again to ramp up their advertising spend. Very soon, the major OTAs will once again dominate almost all travel-related queries on search engines and the only affordable way to generate traffic for a hotel's brand.com website will be the Google's free hotel booking links – where ranking is determined by the value offered to users and the historical accuracy of the prices provided to Google as measured in their Price Accuracy Policy, (see article)
As the pace of recovery is ramping up, hotels that do not defend rate parity will lose out to the OTAs, because guests will fail to find the hotel's direct booking link (buried on page 3 of search results) in the first place, or - even if they initiate their search by looking up content on the brand.com – they will not be impressed when they subsequently find cheaper rates on metasearch or on the OTA app.
Losing out on price and watching OTAs take over the online market once again is entirely preventable if only hotels deploy a rate intelligence platform to monitor, manage and improve their digital distribution across all contracted, uncontracted OTA and metasearch websites and apps.
The question of whether to deal with rate parity, or not, would be secondary if a hotel is not overly reliant on OTAs in the first place. Therefore, the priority for a hotel is to drive and convert as much direct business as possible. Focus on strong and up to date online content, a visible and relevant social media presence/strategy, a well thought out conversion strategy (backed by a leading web booking capabilities) and a thorough guest retention strategy during and post stay. Especially in current times, where guests are struggling to find up to date information about hotel services (and as a result call volumes to hotels have gone up), the depth and amount of information which can be made available through your own website (or other channels) can provide a competitive advantage over any OTA.
Be careful what you wish for! It's important to remember that it was hoteliers, not the OTA's, that insisted on incorporating rate parity clauses in OTA contracts in the first place.
While appealing at first blush, for hoteliers, the elimination of rate parity would undoubtedly mean increases associated with marketing and advertising budgets, increased investment in CRM technologies. It would require operators to beef up call center support. Even worse for consumers, elimination of rate parity will contribute to marketplace confusion - placing additional burdens on them during the shopping and booking (and rebooking) process.
I wrote an article on this topic two years ago... https://revenuematters.com/rate-parity-is-dead-whats-next-for-hoteliers/ . It's interesting that we are still faced with the same challenges today.
When OTAs started to undermine rate parity on their end, the question of how to deal with rate parity became somewhat irrelevant. Of course, hotels need to respond in kind.
- Offer the best rate guarantee. Meaning, any lower price on third-party channels should not only be matched unbureaucratically but bookers should have a real incentive to book directly with the hotel.
- Assess whether your wholesale channels offer incremental value. If not, question if it still makes sense to keep them. However you contract, wholesale rates will end up on B2C channels (and so will OTA affiliate network rates!).
- Improve your direct booking experience.
Focusing on adding value, both in product as well as in the overall bookings experience is the best thing you can do to ensure people book directly with you.
Similar to asking a chef to grill a steak “well done”, I'd argue that it's not because you can do something that you should. I recommend looking at the rate parity issue with a customer-centric perspective. On Google Travel the different rates offered on all platforms are visible for the world to see. From a guest's point of view a big difference between rates on various platforms gives a bizarre first impression. We all know the hotel experience starts well before arrival at the looking/booking stage so let's make it a good one from the get-go!
Being professionally focused on Meetings & Events Revenue Management, I'd like to emphasise the crucial times we are in with hotel function space distribution. More and more we see OTA-like platforms arise for function space bookings. The OTA's took off by a storm but knowing what you know now you have the opportunity to think strategically about the approach you like to take this time around. The evolution will be rather similar. Do you put your inventory online? If so, will it be the full inventory? Will you work with third parties, your own website or a mix? You are in full control.
At first, offering a lower rate on the hotel's website sounds like a great idea. Guest looks for the hotel, sees various rates in Google search results, finds the lowest rate, and proceeds to the hotel's direct channel to book a room. In reality, most of the guests do not search for a specific property and instead look for all available hotels in a particular destination. OTAs appear first in search results and conveniently offer different hotel options. Moreover, OTAs built a large customer base through loyalty programs and partnerships (credit card points redeemable on Expedia, for example). Also, OTAs can help drive customers to the hotel's website. The "billboard effect" suggests that hotels can receive a boost in reservations through their website due to being listed on the OTAs. These are some clear benefits for hotels to partner with OTAs. Rate parity is either a requirement or desirable best practice for such a partnership to be successful.
What if the hotel sends OTAs higher rates? OTAs monitor rates in real-time, and once the lower rate is discovered, either cut off the property from its platforms or place the hotel very low in search results. Consequently, hotels risk missing out on revenue opportunities by being out of parity with OTAs.
What about OTAs? Do they always display rates the hotel sends them correctly? Not at all. Suppose the hotel offers the same rate for all channels. In that case, it does not automatically ensure rate parity as OTAs always try to find creative ways to provide lower rates and undercut the hotel's direct channel. One example is offering a discounted rate on the OTA mobile app (this way, the disparity is not visible in Google search) by sacrificing the portion of a commission. Hotels need to monitor rates on OTA channels constantly (invest in a rate shopping BI). Rate parity is a two-way street.
Rate parity ensures a consistent brand image for the hotel and its products in the consumer's eyes through pricing. It allows hotels to benefit from OTAs' marketing efforts and customer base. On the other hand, price transparency shifts focus from value to price and constrains effective revenue management. The balanced approach would be maintaining rate parity across all channels and creating value-focused channel-specific bundled packages to drive revenue and shift share from OTAs to direct channels.
Did hotels become less reliant on OTAs due to the COVID19 pandemic? OTAs consistently outspend hotels on marketing and technology. I expect OTAs to continue playing an essential role in hotel distribution.