Is rate parity good or bad for the industry?
 
Is rate parity good or bad for the industry?
26 JANUARY 2016 7:28 AM
To decide whether rate parity is good or bad for us at this time, we need to assess if the original objectives have changed.
Online travel agencies surged into power after 9/11. As they gained control and influence in the early 2000s, they began to offer lower rates than hotels. 
 
For example, a hotel might have a best available rate of $100 and give an OTA a 15% commission. The OTA then offers a $90 rate on its website to undercut the hotel and still makes a nice profit. The industry wised up quickly and began asking for rate parity where the OTAs were not allowed to undersell the hotels and vice versa. 
 
This is not a unique approach. Many prominent brands have price-parity requirements across their distribution channels. Rate parity gives consumers reassurance that they have the best available rate regardless of their preferred channel. 
 
For hoteliers, it was a good strategy to entice bookings through their channels and avoid commissions because they can guarantee the “best available rate” through their channels. For OTAs, they get the reassurance that hoteliers won’t undersell them and they can likewise market the best available rate. It seems like a win-win arrangement. Rate parity ultimately allows hoteliers to streamline how they manage inventory across multiple distribution channels for the benefit of hotels and consumers.
 
In 2014 and 2015, various antitrust or fair trade organizations in Europe began studying rate parity to determine if it is anticompetitive and akin to price fixing. In July 2015, France banned rate parity altogether. Recently, the German Competition Authority prohibited Booking.com from using narrow parity clauses. There have been serious discussions in more than 10 European countries, including Great Britain, Italy, Belgium, Hungary, Poland and Sweden, to consider similar bans. The European Commission is reviewing rate parity. Our industry needs to take note and establish a position because what happens in Europe will often happen in the United States and vice versa. 

Is it a good thing?
The move to ban rate parity has prompted renewed debate on the subject. We don’t live in a homogenized society, and certainly our industry is fragmented. There are many different perspectives as to whether rate parity is good or necessary.
 
Some in the industry feel that a rate-parity clause handcuffs them and they cannot effectively compete against the OTAs. They argue that customers are not alike. For example, they would like to offer better rates for someone wanting a longer length of stay or for someone who books far in advance. They also argue that technology advances and big data have made it far easier to customize and deliver offers that are relevant. The rate-parity clause takes away their autonomy to be relevant in their pricing and their marketing. 
 
Some also have argued that rate parity is totally in favor of the OTAs because it is all about rates. It is to the OTAs’ advantage that our industry becomes commoditized. OTAs have a tremendous advantage in allowing consumers to shop and compare rates. They argue that rate parity removes the differentiation that each hotel or brand can create and the special value they can give to their customers. Without rate parity, we can distinguish ourselves with a wider range of rate plans and product offerings (e.g. value-added experience).
 
In line with this idea, I have heard many industry pundits espouse the viewpoint that the most effective defense we have against OTAs or the likes of Airbnb is the experience we provide at our hotels. There are some hotels that offer a truly unique experience and are sought out by travelers. These hotels enjoy a great advantage.
 
However, let’s be realistic. How many hotels or brands provide a unique experience that is truly differentiating? Most of us can create a memorable experience, but not a distinguishable experience. So if the answer to the question is most of us likely cannot provide a truly unique and distinguishable experience such that we don’t need OTAs, then we need to be honest with ourselves. Perhaps we do need rate parity so the OTAs cannot take advantage of us.
 
To decide whether rate parity is good or bad for us at this time, we need to assess if the original objectives have changed. According to TravelClick, in the second quarter of 2015, OTA bookings increased by 9.7%, while bookings through hotel websites increased by only 5.8%. OTAs are significantly outpacing traditional brand distribution channels in terms of bookings.
 
OTAs have broadened their appeal to consumers, and because of their market share they are becoming much more powerful. Rate parity eliminates the threat of a hotel being undercut by an OTA or a “race to the bottom” with both sides constantly lowering rates to win market share. 
 
In addition, imagine a day without rate parity. Because OTAs book so much business, they are in a position to dictate terms to a lot of hoteliers. If hoteliers don’t allow OTAs to undersell them, the OTA can simply relegate the hotel to the last page. That’s the kind of leverage OTAs have at this time. 
 
Closed user group
It seems the rationale for rate parity has not diminished. Some would argue we need rate parity more than ever. So how can we remove the handcuffs and be relevant to our guests while still be protected by rate parity? 
 
The idea of a “closed user group” is becoming more mainstream. When negotiating an agreement with OTAs, we can have a reciprocal “closed user group” clause. This clause allows the OTAs and the hotels to each have a closed user group (e.g. loyalty program members). We can each market special offers to our closed user group. 
 
On the surface, this approach seems to be a natural evolution of the win-win arrangement from which rate parity first came into effect. However, some people may suggest that the “closed user group” will allow OTAs to build further loyalty in their user base. Already, more and more travelers are flocking to OTA websites or mobile sites for bookings than brand sites. Will this further erode the “value of the brand” for hotels and hotel brands? 
 
Consider the industry is fragmented. Even if one brand may not allow special “closed user group” pricing, others may; and the OTAs will gain greater user loyalty regardless. It might be more productive for us to focus on driving value through our “closed user group.” Beefing up our own channels is our best defense against OTAs. 
 
It’s surprising to me that the hotel associations in France and Germany hailed the decision to ban rate parity. I hope our industry considers the following:
  • Consumer products such as Apple iPhone or Dyson vacuum cleaners have the same price across distribution channels. This price parity protects the image and integrity of the product. Likewise, we wouldn’t want our product to be diluted with different prices on different channels. We need to provide confidence and reassurance to consumers and not cast doubts on our own product.
  • It’s wishful thinking that we can market our rooms at a more attractive price than the OTAs. In North America, we have an OTA duopoly. The Priceline and Expedia companies have 75% market share of OTA bookings. Any hotelier giving Priceline or Expedia a higher price will likely end up on the last page of their consumer hotel search results. 
  • Without rate parity, what will prevent the OTAs from exercising their leverage and demanding concessions (in rate and commission) more from us?
  • Without rate parity, what will prevent the OTAs from giving up some of their margin in order to offer lower price to travelers? They can undercut us any time because their expense structure is much lower than ours. Wouldn’t that make our business unviable to the ultimate detriment of consumers?

David Kong is president & CEO of Best Western International and has served as the global hotel brand's top executive since 2004. Kong has also held leadership positions with KPMG Consulting, Hyatt Hotels, Omni International and the American Hotel & Lodging Association, and served for three years on the United States Department of Commerce Travel and Tourism Advisory Board. More insight from Kong is available through his LinkedIn channel and the new Best Western Executive Blog “It’s Personal."
 
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5 Comments

  • robertkcole January 26, 2016 8:01 AM

    Well said. The hoteliers that have touted rate parity (technically resale price maintenance - in order to avoid confusion with most favored nations clauses) are simply naive in believing that they can be more clever than the OTAs in marketing and pricing their properties. The OTAs have the hotel groups, even the largest ones, desperately outgunned in the most important weapon - data. OTAs have deep cross-brand, cross-destination, cross-platform, cross-sector traveler behavioral data that not only drives their pricing and sort order, but their bidding strategies for advertising across myriad distribution channels. OTAs are focused on the user experience (both pre-arrival and increasingly, post-arrival,) experience engagement, personalization, conversion and customer lifetime value. Sadly, many hoteliers are bogged down trying to accurately assign and track frequent guest numbers or figure out the technology to allow a smartphone to open a guest room door, without founding these initiatives with clear strategic vision regarding the end-to-end travel experience, product differentiation or value creation. When it comes to data and strategy, many hoteliers are armed with a soup spoon when venturing into battle with an adversary that has military-grade automatic weaponry. The can of works has already been opened when it comes to rate parity. For the hoteliers that contributed to its demise of one of the few tools that allowed hotel owners to simplify and control their retail pricing structure, there is an old saying: "When you open a can of worms, the only way to get them back in is to get a bigger can." As a result, we are seeing massive consolidation on the supply side of the business, but still very little defensive, let alone offensive strategies being deployed to effectively compete with travel intermediaries on the demand side - that is where the battle will truly be won or lost.

  • JoanSanz January 27, 2016 3:50 AM

    Robert, Great Comment. Mr. David Kong, Great reading.

  • MartinSoler January 27, 2016 8:28 PM

    I think we're going to have a year or two of "anarchy" with rates going in many directions and then it will most likely pan out back to rate parity. Who wants to go back to negotiated rates. As you said, I think rate parity however will give hoteliers some negotiation power to the OTAs where hotels can leverage more from the OTAs by guaranteeing them rate parity. For example email addresses and so forth. Plus the point with the rate parity was also to allow smaller or newer OTAs to come in and reduce their margins in order to gain market share by lowering the prices through less markup. If that works or not I don't know.

  • greencountryinn@gmail.com January 30, 2016 1:57 PM

    First Hotel have to transparent about their rate practice . stop doing double stander practice . when demand is low want to rent room with any possible price. when demand is high want to charge guest highest rate is possible. does hotel survive or make all the profit by few event or in few days of an year. why hotel should offer lower rate to guest who booking in advance , instead of guest who wait until last minute. Guest who book in advance is loyal to hotel that is why he or she making booking in advance, this type of guest is not driven by price of hotel ,they choose to book a hotel because they like to have piece of mind and connivance . The group who wait until last minute is driven by price so they will be not loyal to hotel and hotel give them lower rate then guest who have booked in advance. when guest driven by price then they will go wherever they finding lower rate or rate they want to pay. so why we should compromise or lower rate who will be not loyal to hotel. when Hilton Hotel change cancelation policy last year. they provide reason why they made change because they can offer more inventory to hoteltonight.com . Move was required it was good move but the reason behind it was not good. because online world people start taking advantage of arrival day cancellation policy. because guest was finding lower rate in last minute with other hotel and canceling original reservation. so move was required to protect hotel owner. but the reason they give was not the correct. One person mistake all peoples get punish. so if the hotel have worked as a partner instead of throat cutting competition with mind set of run off competitor . but this practice causing more harm then good. Example: Mike have booked the room in advance with Hampton Inn and have paid $200 because of hotel service ,location and Etc. Nathan who booked the hotel room with same hotel which Mike have booked ,but Nathan booked it at last minute and he paid only $100 because hotel lower rate at last Minute App. Now hotel have put both of them in same floor and they both are neighbor .Nathan book the hotel room because they want to hold party or any other reason he may not have booked the room if the price is $200 but he booked since he can afford to pay $100. now Nathan can create distribution To mike. Now mike is not happy and if the hotel try to stop Nathan he will be not happy. now hotel making both person unhappy. so what hotel have earn by renting the room by lowering rate in last minute and get guest which would not have come if the price is same as mike or higher then mike. now hotel have to decide what we want to do.

  • Yogeesh Chandra February 2, 2016 6:26 AM

    RateParity is the fundamental guideline in online distribution. No seller, whether direct or third party will advertise or like to merchandise an accommodation option unless it's confident of backing it up with the most competitive rates. If it does, it is not likely to sell. RateParity thus is not a contractual clause, but a business necessity which is easier said than achieved. The entire meta search model is based on comparison of hotel rates. One of the most effective ways to monitor this though is through automated tools like PriceGain that helps you stay competitive and confident that your visitor is not compromised. Large hotel companies have dedicated teams installed to watch this closely to build loyalty and add efficiency to their marketing. The idea of closed group is appealing but in the absence of powerful personalisation capabilities, its very high level and begs sophistication to prevent revenue leakage.

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