If ever there were varying shades of grey in the hotel business, it is around the sensitive issue of rate parity. But could rate parity be coming full circle as independent hotels begin to fight back. Pamela Whitby investigates with additional reporting by Ritesh Gupta.

Some can’t live without it, others hate it. Some call it a ‘sensitive issue’, others argue that it could soon be illegal. Whichever way you look at it the issue of rate parity against a backdrop of recent allegations of price fixing in the hotel business is increasingly in the spotlight. 

For some hotel chains, regardless of the problems, rate parity seems to make sense. This is certainly the view of Chetan Patel, Vice-President Strategic Marketing & E-Commerce at Onyx Hospitality Group, who argues that any alternative could be a lot worse (see Rate Parity: A necessary evil?). Indeed for the chains, the growing prevalence of third-party booking sites means that hotels must first and foremost protect their brand, but also their revenues. To this end they must ensure the same rates appear, regardless of the booking engine.

When it comes to negotiating rates and commercial agreements with the OTAs, however, it is fair to say that the chains have more clout. Liz Uber, VP of revenue management, Pillar Hotels & Resorts agrees and admits: “For a lot of the third party websites unless they can offer an option to pull rates directly from the hotel system we generally won’t participate due to a revenue manager’s inability to update multiple systems with each rate change. In addition, there are so many third party websites that the ROI is very small because it takes time and money to get real traction on the marketing front.”

A different shade of grey

For many independent hotels, the issue of rate parity is, well, a very different shade of grey. Many rely heavily on OTAs to deliver room bookings, and must pay heftier commissions than the chains to boot. Although Pillar is a chain, even it cannot refute the power wielded by the big OTAs. According to Uber the marketing dollars that are spent to ensure guests are exposed to third-party sites makes it difficult for an individual hotel to compete, and sometimes even a big brand.

According to Paulo Salvador, executive vice-president, EMEA at WorldHotels, who was speaking at the Travel Distribution Summit, Europe in London in May, many independent hotels don’t know who to trust, or who to work with, in order to drive new bookings. Yet he admits that nobody can survive alone today. “We live in a world of clusters and we need to work with these in order to remain competitive,” he says. And admittedly the OTAs can drive business that hotels would otherwise never have received.

The problem arises, however, when independent hotels, which are paying very high commissions to guarantee that they remain on the first page, are unable to control pricing in their own market.

Not just a headache for hotels

This has become a problem not only for hotels but also for smaller OTAs like Skoosh and Moscow-based Ostrovuk. Dorian Harris, chief executive of discount site Skoosh, is the person who first sparked the UK Office of Fair Trading investigation into issues around rate parity back in 2010. His view is that rate parity agreements may even be illegal. “It is a scam, a scandal and embarrassment to the hotel industry. It precludes new entrants, shackles hotels to OTAs and is disingenuous and unhelpful to the consumer. There is absolutely nothing transparent in everybody selling everything at the same price.”

Andrew Pyner Chief Revenue Office at Ostrovuk, a small OTA targeting the Russian market agrees.  “In my view it is grossly unfair that two massive companies which are in cahoots with the likes of Google and Yandex are forcing independent hotels to do business on terms that lead to lower than optimal occupancies and unreasonable revenues because they are forced to pay so much commission on rates that are pegged to skewed market economics,” he says. 

Those two massive companies are, of course, Expedia and booking.com and Pyner believes that hotels “are being stitched up like a kipper”. The Moscow hotel industry is a good example of this. Here there are plenty of foreign corporates coming in on a Tuesday, Wednesday and Thursday but on weekends, however, those same hotels cannot market effectively to Russians as they are hamstrung by considerations of the international market set by the big OTAs. “I am not saying hotels should be dumping rates the closer you get to arrival dates but they should be able to manage their revenue based on their own market. When they are forced to set prices they can’t do that.”

Sea change

While booking.com and Expedia may be in the driving seat today, the reality is that much of their revenue still comes from independent hotels. In other words they need the business of independent hotels. And increasingly hotels are seeing the light. In December last year, several Scandinavian chains decided not to renew contracts with Expedia over issues of rate parity and commissions. In addition hotels are beginning to warm to the potential for rate parity legislation that would effectively weaken the negotiating power of the OTAs, which would no longer be able to demand the cheapest rate.

So it could be that rate parity is coming full circle. In the past hotels would sign different rates for different markets based on the conditions in that country. “We can go back to that model as today it is technologically possible. It makes the revenue landscape much more sophisticated and in the end it improves the bottom line for hotels and reduces the cost of customer acquisition,” says Pyner.

So here are few tips to help independent hotels regain control and reduce their dependency on OTAs. 

1.  Have a clear distribution strategy and drive a harder deal 

While Salvador is certainly not opposed to working with OTAs he says the trick is to avoid dependency. This may sound easier said than done but hotels should remember that nobody is forcing them to sign agreements that reduce their control over pricing.  Remember that while hotels certainly depend on OTAs for some business, the OTAs also depend very much on independents, which deliver the bulk of their revenues. So while it is fine to agree that rates match that of a global competitor, ensure that you retain power over pricing in your home market. Hotels don’t have to agree to everything. Use OTAs, but use them wisely.

2. Diversify your supplier base

Increasingly independent hotels are waking up to the fact that they need to diversify their distribution channels. In markets like Istanbul, for example, one or two OTAs can deliver up to 60% of a hotel’s business. “That’s too much,” says Pyner. It is increasingly possible to negotiate with smaller OTAs, which may not charge as much commission and can acquire the customer more cheaply for hotels.

3. Manage inventory

This is about creating a balance in segmentation. Hotels must assess what sort of guests each channel, be it direct or indirect, brings to the table and ensure the right product mix is offered at the right time – and via the channel that is likely to yield most.

4. Pay greater attention to the direct channel

Salvador says hotels shouldn’t forget that over 60% of guests – if they find what they are looking for - still prefer to book via the supplier’s own website. Yet in most cities, online travel agents are winning the perception that they are selling the room at a lower price than hotels – that has to change. To achieve this an integrated website approach is essential as is a quick and efficient pricing strategy. For Des O’Mahony chief executive of mobile technology firm BookAssist, a hotel’s website strategy must be an end-to-end solution and should be designed for customers to buy – not for hotels to sell. There is a subtle difference and hooks back to what customers are searching for. If a customer is searching for ‘family holidays with a pool’ then they should be taken straight to the page that has the relevant offer rather than just to main page. OTAs tend to serve up generic adverts, but hotels can really differentiate and impact the bottom line by investing in adverts that use deep linking and site links, says O’Mahony. If by doing so hotels can succeed in moving just one booking a day from an OTA to the direct channel then the impact on the bottom line can be significant.

Even chains recognise that as guests – particularly those that are brand agnostic - become more savvy and increasingly use third-party sites to shop markets, it is very important to have good representation, not only in the rates that are offered but also the content and pictures of the hotel. 

5. Consider using an e-channel manager: Traditionally – and understandably – hotels did not want to work with countless extranets because it was costly to manage. For this reason they stuck to working with just a few OTAs. While they are still a bit expensive, says Pyner, e-channel managers increasingly understand their role as consolidators in the market and can ensure that all OTAs have access to a hotel’s property management system, rates and availability. This means they can work with a broader range of suppliers and have different prices, which are automated for different markets by, for example, IP address.