Rate parity: should it stay or should it go?

It is a question that is very much on the travel industry’s lips and while few will dispute that rate parity as it stands today is flawed, improving the way it can best serve various stakeholders is not straightforward. Ritesh Gupta takes an in depth look.

Rate parity remains a controversial and complicated topic. Discussions regarding rate parity - which calls for base unqualified rates to be set equally across a broad set of distribution outlets with different cost structures - typically hinges on one of three points:

1.    Is it good for the hotel property?

2.    Is it good for the consumer?

3.    Is it legal?

What works against it?

Alex Dietz, Principal Industry Consultant, SAS Institute is able to address the first two points and believes that from a revenue management standpoint, rate parity does not serve the best interests of a hotel property. 

“This is because rate parity, by its very definition, is restricting the property from managing price – reducing prices to attract price-sensitive segments, while leaving pricing higher for price-insensitive segments,” he says. And, while some hotels prefer to maintain rate parity as their own strategy, many hotels run into rate parity as a consequence of dealing with the larger online travel agencies (OTA), who require it as part of their distribution agreements. Overall, OTAs produce a small portion of overall hotel rooms demand[1], so for this channel to be effectively dictating pricing actions in channels that impact a much larger portion of bookings and revenue is, Dietz believes, a bit like the “tail wagging the dog”. 

Furthermore, since OTAs don’t always have system capabilities that match those of the hotel, hotel revenue managers often complain they spend too much time “chasing their tail” to make rates match in disparate systems with unequal capabilities. “While I have heard arguments that rate parity serves the consumer by reducing shopping complexity and confusion, I also do not believe that rate parity serves their best interests, either,” stresses Dietz, adding that in the long run, the consumer is best served by efficiency. By this he means, lowering the costs of services over time, and rewarding the most effective provider of services.

According to Dietz, rate parity distorts both of these effects in the distribution market, distorting competition (by eliminating the ability to differentiate on price) and thereby reducing the effectiveness of the market to drive efficiency.

An hotelier’s perspective

“My take on the debate surrounding retail price parity is that it stems from the whole direct vs. indirect (OTA) discontentment felt by some - or rather, many - hotel companies,” says Ricky Ang, vice president - sales and marketing, Hotel Equatorial Group.

If we go back to the pre-OTA era, it was pretty commonplace for hotels to include a standard 10% commission in their retail offers for bona fide travel agents (TA). This was done to expand distribution using a third party retail channel (TA) and to ensure that the retail pricing remained consistent. Ergo: the genesis of retail price parity. What has changed? For one, commission levels; and second - and not necessarily in order of impact - the power and effectiveness of the third party retail channels (OTAs).

“With commission levels from the aforementioned 10% having been, in many cases, doubled, and hotels losing market share to OTAs, hotels are faced with a compounded threat,” says Ang. “For many, what stings most is the inability to compete from a pricing platform due to the 'regulated' pricing parity rule. As such price parity became the consequential poster boy vehicle for discontentment. The true discontentment is the high commission and the hotels’ inability to prevent market share erosion to the OTAs.”

Why does it exist?

Dietz says it is important to remember that there are at least three different players represented in discussions involving rate parity: hotel properties (and their ownership), hotel brands and OTAs. While these three cooperate in the hospitality industry to service traveller needs, their interests are not necessarily perfectly aligned on any given topic – and such is the case with the issue of rate parity.

According to Dietz, rate parity arguably serves OTAs most, by restricting the ability of new entrants to the distribution market to differentiate on price – and thereby effectively discouraging such entrants. “It can also be argued that the hotel property is also served by ensuring that their lowest-cost distribution outlet is always competitive with the market. And it can be argued that rate parity helps the brands by helping to ensure that brand equity does not suffer from cheaper rates being made available on different markets,” says Dietz, who finds the latter two arguments (regarding the benefits to the hotel and brand) less convincing. “They effectively assume that a hotel property would make choices, such as setting rates higher in their lowest-cost distribution point, which are not actually in their best interests.”

For Ang, however, retail price parity is necessary in order to manage the rate matrix and structure of a hotel. It ensures easy and logical manageability of pricing across retail distribution platforms, as well as pricing extended to corporate contracts and other closed user groups. He adds that without a foundation of retail price parity, it will be extremely difficult to manage pricing to the players sitting on the various levels of distribution. In addition, he believes that retail price parity also results in consumer confidence; if random price levels are allowed to proliferate, it will generate purchase hesitation and paralysis among consumers. “Retail price parity brings structure to the industry and, in many instances, will help to prevent gross undercutting among competitors in the retail distribution arena,” he says. “Last and certainly not least, retail price parity provides a foundation for effective revenue management.”

Everybody hurts

On what doesn’t work for various stakeholders, Ang says for a hotel company it would obviously be disparity between the high cost of third-party distribution versus the flat parity pricing structure. “There is discontentment with regard to the high commissions and consequent inability for the hotels to compete using direct pricing tactics against these high-cost channels,” he says.

“From the consumer’s perspective, especially the savvy ones, it makes no sense to them that they have to pay the same amount when they book directly to a hotel versus when they book via a third-party retail source. The consumers know that hotels pay commissions to these third-party players and cannot logically fathom why these `commission savings’ are not passed down to them,” he says.

“From the OTAs’ perspective, of course, is that the parity rules, if obsessively enforced by hotels, renders it impossible to secure short-term market penetrating exclusive offers from hotels. This will make them (the OTAs) indistinguishable from their competitors from a pricing point of view and ironically prevents price-centric competitive actions to be taken to gain market share,” explains Ang.

Rethinking the rules

For Ang there is room for improvement and he has these recommendations:

1. It would be great if OTAs observe pricing parity rules themselves instead of consistently encouraging hotels to participate in 'short-term' exclusive offers which are invariably designed to break the parity principle.

2. OTAs must also understand that pricing parity cannot equate to inventory parity. Due to the high disparity of actual yield between direct and in-direct distribution costs, hotels must be given the option to limit inventory in high-cost channels.

3. Lastly, OTAs must strictly enforce the parity rule and impose penalty of de-listing hotels that don’t observe the rule.

Dietz suggests that for those revenue managers that voluntarily practice rate parity, they should consider the potential benefits both on revenue and costs from discontinuing this practice – at least in moderation. With regards to contracted rate parity, he believes that hotel properties and brands would be better served by negotiating conditional rate parity agreements – ie. rate parity will be maintained only for those channels that maintain certain goals in terms of costs and volume.

So should rate parity stay or should it go?

For Dietz rate parity as it stands is not in the best long-term interests of hotels, hotel brands, or travellers. “In addition, enforcement of this rule often requires significant time investment by revenue managers – time that I believe could be better invested in revenue-producing activities. For this reason, I expect hotel properties and brands to continue to push for changes to rate parity requirements, or changes to the current practices,” he says, adding that doing away with rate parity does have the potential to create significant disruption in the short term. In particular, the potential exists for the elimination of rate parity to create a ‘price war’ between OTAs and brand sites that could (at least potentially) lead to a worst-case scenario for hotels – a situation where their highest-cost distribution outlets are charging the lowest price.”

Ang has this short and decisive response to the question: “Yes to retail price parity but no to real-time inventory parity”.

The rate parity debate, it seems, continues.

[1]Estis Green, Cindy and Lomanno, Mark V. 2012. Distribution Channel Analysis: a Guide for Hotels, An AH &LA and STR Special Report.  HSMAI Foundation  Link

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