Is Rate Parity good or bad for the hotel industry?

By David Kong

Wednesday January 27, 2016

OTAs surged into power after 9/11. As they gained control and influence in the early 2000’s, they began to offer lower rates than hotels. For example, a hotel might have a Best Available Rate (BAR) of $100 and give an OTA a 15% commission. The OTA turns around and offers a $90 rate on their 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 such as Webber Grill 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 hotels, 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 hotels won’t undersell them and they can likewise market the “best available rate”. It seems like a win-win arrangement. Rate parity ultimately allows hotels to streamline how they manage inventory across multiple distribution channels for the benefit of hotels and consumers.

In 2014 and 2015, various anti-trust or fair trade organizations in Europe began studying rate parity to determine if it is anti-competitive and akin to price fixing. In July 2015, France banned rate parity altogether. Recently, the German Competition Authority prohibited 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 here and vice versa.

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 very 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 have also raised the point 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 takes away the differentiation that each hotel or brand can create for themselves 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 point, 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 they 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 percent, while bookings through hotel websites increased by only 5.8 percent. 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. Since OTAs book so much business, they are in a position to dictate terms to a lot of hotels. If a hotel doesn’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.

It seems the rationale for rate parity has not diminished. In fact, 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 main stream. 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 very 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 may 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 bastardized 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. According to Phocuswright, OTA bookings now account for almost 18% of total bookings and have been going up dramatically every year. Any hotel 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?