The Rate Parity Myth: The Good, The Bad and The Ugly!

Writing this piece about rate parity made me think of all the possible expressions and euphemisms you can imagine.

It is like ‘back to the future’ and a ‘blast from the past’ because I have been in the industry for 22 years in Europe and Australia and we are still talking about this. ‘The truth of the matter’ is that you could argue that it took that long for rate parity to come under the radar and become a hot topic for industry associations and governments in Australia. To me, it is the ‘elephant that have been in the room’ forever and will remain there. 

Talks about rate parity makes me think of ’the pot calling the kettle black’ when hoteliers are condemning OTAs and wholesalers’ practices. This because hoteliers are the one distributing rates to what they call rate parity ‘offenders’, and they are at the same time the worst rate parity offenders. I can illustrate my point with a situation many can relate to…………………’Book Direct’ discount and value add anyone? Come on, just give me an email address and I will roll the red carpet, I will give you 10% off and you can even become a loyalty member for a while. To which the consumer replies: ‘By the way, in addition to all that, please can you throw in breakfast because I am looking at Expedia on my mobile app right now and they also giving me a member’s discount! Great, you can give me a large discount and breakfast to book direct, thank you for taking my (very expensive) booking direct.’

Now, the consumer got a good ‘book direct’ deal, which will take the booking cost of acquisition higher than a Booking.com commission but who cares. This is a booking direct and a ‘loyal’ member can be counted as part of a ‘quality’ database. I just must point out that rate parity has just been broken 2 times to get that direct booking. such scenario happens daily in hotel reservation departments and such deals are displayed on most hotel websites across Australia.

If you feel offended and you think I digress on the topic of rate parity, just keep reading because this is the status quo unfortunately. I am not here to tell people what they want to hear because it does not help change anything. What I am trying to explain is that a world without rate parity is already occurring and it is a losing battle; this because anyone these days can get a ‘10% discount if they book direct or join our loyalty program’ in exchange of an email address. It is almost as if distribution is 90% closed user groups vs 10% full price public pricing, especially when you take into account corporate deals, loyalty deals, government deals, wholesale, member’s discounts, opaque offers, etc,….

My anecdotal example is backed by a study commissioned by the European parliament, which was conducted 2 years following the ban of rate parity clauses in many European countries. The study involved 16,000 hotels in the 10 Member States, 20 online travel agents, 11 metasearch websites and 19 large hotel chains (https://ec.europa.eu/competition/ecn/hotel_monitoring_report_en.pdf). The study highlighted that pricing and distribution practices did not really change following rate parity bans. The study explained that only brands were able to change their pricing practices and the sad things is that 47% of hotel respondents (7,500 hotels) were not even aware rate parity clauses were removed from their contract by Booking.com and Expedia. These findings are not surprising as Europe has the largest concentration of independent hotels in the world, often very small ‘mum’s and dad’s’ run properties, who have very little time to keep up to date with distribution trends. In the US, hotel chains did not see any issue with rate parity clauses and embraced them when questioned by the fair commissions, arguing it protected them also (https://www.hotelnewsnow.com/Articles/29511/Is-rate-parity-good-or-bad-for-the-industry).

Do not get me wrong, I am for the proposed regulations to ban rate parity, even though they are simply useless as explained above. I am supporting them because I stand to benefit from them. It is just that the proposed move from the hotel associations and Australian government to push a ban on rate parity does not really change much in the bigger scheme of things in the short term. It is a toothless tiger, however, we may have just given carte blanche for hotel brands and large OTAs to get bigger. Let me explain:

You could argue that the main reason for these rate parity bans not having an impact is that they simply do not address the root causes of the rate parity conundrum:

1.     The influence of the OTA ranking algorithm on pricing. In other words, a hotel’s ability to gain or lose exposure on contracted OTAs like Booking.com and Expedia, when the best price is offered or not offered to them. Unfortunately, not much can be done on this by competition bodies as it promotes the lowest pricing to consumers. Indeed, if you were an OTA, looking to convert consumers into bookers, would you put your worst partners forward? The one that continuously undercut you direct and offer the highest price……..the answer is no you would not.

2.     The influence of the wholesalers in the online distribution sphere when it comes to redistributing a hotel’s net contracted rates online. It is illegal for a hotel to coerce and try to control price parity on these net rates, once they are distributed to a third party distributor. It should not come as a surprise that net rates discounted at 25%, distributed with last room inventory via a channel manager, end up online lower than the ‘direct price’, on a so called ‘rogue’ OTA. To me, it is a hotel choice to offer deeply discounted net rates, so they need to deal with consequences as opposed to blaming the online distributor who is accessing the room in good faith via a wholesaler, and is just trying to compete with Booking.com and Expedia. they can only compete with a lower price. I understand the commercial reasons of 10 years ago to choose to work with a wholesaler, when it was difficult to reach travel agents on the other side of the world. However, time has changed. My 4-year-old son is dancing in my living room in the front of his proud grandmother who is based in France and has learned to use Skype. Is it so hard to work directly with a travel agent in Germany these days? That travel agent has access to the GDS, OTAs, Your Website. Why are we so fond of Wholesalers?

In the short term, therefore, government will ban rate parity clauses on the proviso that it will provide a lower price, and also let hotels compete as they wish on their website, even though European studies on rate parity and current OTA ranking practices suggest that such scenario may not happen.

Step forward to the longer-term future, and a rate parity ban opens a pandora box when large OTAs (Expedia, Booking, AirBnB) will become larger because rate parity bans will impact wholesalers, which will somewhat have to change their business model when hoteliers will restrain inventory, or stop working with them altogether; this in order to make them stop to be able to provide inventory to rogue OTAs, which at the moment are the main competitors to Booking.com and Expedia. Wild guess however, this is already happening and when the wholesale source of inventory dries up for smaller ‘rogue’ OTAs, who cannot afford to connect to channel manager nor sign individual hotels directly, the big triopoly (Expedia, Booking, AirBnB) will have ‘carte blanche’ to get bigger. As a result, you could argue that cost of distribution will further increase. Large hotel chains will start offering their services to smaller independent hoteliers to help them counteract growing cost of distribution and help them perform. Their value proposition will become more palatable. Large chains’ brand portfolios already cater for different type of independent hotels. In other words, we will have hotel chains becoming bigger with the ratio of branded hotels in Europe and Australia increasing to level seen in the US where most hotels are part of a brand in order to compete with expensive OTAs.

The irony is all that? I already mentioned that hotel brands in the US such as Best Western, Hyatt, Marriott and Hilton did not see any issues with rate parity clauses. They argued that rate parity clauses protect them as much as it protects OTAs and a judge defined that rate parity clause should remain. In Australia we will realise too late that we promoted the sugar instead of the fat. I am looking forward to time when brands will promote rate parity clauses to protect their member hotels. In the meantime, I would hope it would have help us grow our hotel management company, Nuvho Hotels, from helping only 15 independent hotels, who are already growing revenue and reducing their cost of distribution, to assisting many more.