The Rate Parity Problem in Hospitality

April 30, 2020
The Rate Parity Problem in Hospitality

The rate parity problem is a significant one in today's hospitality landscape. Online travel agents (OTAs) have significantly morphed the hospitality industry in the last quarter century. As consumers, visiting sites like Expedia, or Agoda is a one-stop shop to get everything we need to make an informed decision on where to stay while traveling. It is a consumer’s natural instinct to prioritize finding the cheapest price and that’s where rate parity starts creating issues for hotels. For hotels, it’s almost unthinkable not to be doing business with OTAs because of their immense marketing budgets and consumer reach. However, doing business comes with a cost with OTAs as rate parity creates challenges for hotels of all sizes.

What is rate parity?

Hotel rate parity is the legal agreement between a hotel and an OTA wherein the hotel maintains consistent room prices across all distribution channels, direct or indirect (OTA), regardless of commission. The hotel agrees directly with the OTA that they will not undercut pricing on their website.

Rate parity is an umbrella term and depending on region and parties involved, rate parity can be more specifically defined into two buckets: wide rate parity and narrow rate parity.

Wide rate parity is the original rate parity agreement with more restrictive terms. This agreement states that the hotel is prohibited from undercutting their room prices from the OTA. This is applied to all distribution channels including OTAs and the hotel website.

Narrow rate parity evolved as a response from European industry regulators to make it more fair for hotels that need the help of OTAs. The narrow rate parity clause does allow hotels to offer lower prices to their customers, but not publicly on their websites. For example, the hotel can offer discounted rates to guests on their email list, telephone bookings, or through their loyalty programs.

Why is it a problem in hospitality?

In today’s hospitality landscape, rate parity has become a constant challenge for hoteliers. For example, one night at your hotel costs $100 on your website. On an OTA website, it is also $100, but if a customer books on the OTA, the hotel is making less revenue because the OTA takes a cut of revenue earned.

On the flip side, OTAs are allowed to reduce their commissions earned on a property and slash prices on their websites. A consumer sees a lower rate, and books with that OTA. As bookings increase through that OTA, hotels lose out on huge revenue over time. Here, you can see how rate parity challenges arise.

There are some obvious marketing strategies that come to mind when thinking about how hotels can generate more direct bookings. For example, why don’t hotels just offer promotions and discounts? Rate parity clauses state that hotels are required to inform their OTA about any promotions they run.

Rate parity is especially tough for small hotels. On one hand, they don’t have a marketing budget even merely close to an OTA to achieve the kind of reach that their OTA partners have. But on the other hand, OTAs taking a commission off the top of your already lowest rate cuts into the revenue you would have earned if your customer had chosen to book with you directly. This creates tremendous stress on smaller and newer hotels as they constantly have to monitor these OTAs and play a reactive game.

hotel group sales ebook
5 tips on responding to rate parity challenges

1. Create more value for your customers

One thing you have control over that OTAs don’t is create more value in your price. Things like, free wi-fi, a complimentary breakfast or drinks, event tickets, free parking and flexible bookings are a few things that every traveller loves that comes at little cost to you to offer. OTAs may sometimes get you on price, but they can’t beat you on experience.

2. Make it easy to book with you

Consumer habits and behaviours have changed with the revolution of the hospitality industry. Consumers want what they want when they want it right at their fingertips. Their travel experiences mimic these behaviours and that starts with the booking process. Make sure your booking process is easy, if not easier, than an OTA website.

3. Use a channel manager

With all the OTAs out there, using a channel manager will let you use one point of contact to manage all your distribution channels and update your room rates all at once in real time.

4. Think ‘long-term marketing’

Digital marketing exclusive promotions directly to your limited audiences such as your twitter or facebook audiences, email lists and loyalty program members is a great way to get guests to book directly with you. For new and smaller hotels, this may be difficult to start. Thinking long-term is the trick here as these audiences and lists will grow over-time so taking the time today to start on it will yield long-term gain.

5. Use meta search engines

Meta search engines like TripAdvisor are a great way for smaller hotels to compete against OTAs. Meta search engines use a pay per click ad bidding model to get your hotel ranking at the top. These models come at a cost but are lower than commission paid to an OTA. Sites like TripAdvisor have become increasingly popular for consumers as they can conduct their research there and compare different hotels but they also get to choose on what channel to book on, increasing your chances for a direct booking.

Facing rate parity challenges is the reality for most hotels day to day. The cost of doing business with OTAs is high but the cost of not doing business with OTAs can be even more detrimental. OTAs are not going anywhere anytime soon so it is up to hotel’s to control what they can and find creative solutions to work around these clauses, innovate and develop long-term, sustainable solutions. OTAs, you can’t live with them, but can’t live without em’.

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