Is rate parity a necessary evil in the battle for market share?

The subject of rate parity has become a heated topic in recent years – and understandably so. However, in this exclusive interview, Chetan Patel, Vice President, Strategic Marketing & E-Commerce at Onyx Hospitality Group tells Ritesh Gupta that while rate parity arrangements today may not be ideal, the industry would be worse off without them.

Rate parity, as reported earlier today (Lost in Distribution: What independent hotels can do to regain control), is a very grey area. On the one hand questions are raised about the nature of commercial agreements signed by the players in the industry. On the other there is an argument that everyone – travellers, travel suppliers and intermediaries – could suffer in its absence. While Onyx Hospitality’s Patel believes rate parity arrangements could be improved, he finds himself sitting more comfortably in the second category. hears why.

EFT: What do you make of the whole debate around rate parity in the hotel distribution arena today? 

CP: Many people compare selling hotels to consumer goods or commodities. The similarities are minimal. People are more accepting of higher price at a shopping mall they love or is closer to their home. If you are booking on your computer how could you justify a price difference between one website to the other? On the face of it, I think it is a necessity. It is in everyone’s interest that you create confidence among consumers that this is the rate you will find regardless of what website you are going to book.

In practice though things are quite different.

There are hotels that do not care about maintaining parity and give preferential rates to OTAs, which drive the bulk of their business. At the same time OTAs, as well as hotels, are finding other ways to discount through fenced groups, loyalty programmes, mobile apps, specific credit cards and so on. Will abandoning rate parity alleviate all the issues associated with it? I find it hard to answer that question affirmatively. 

EFT: What are the reasons for having rate parity across all direct and indirect channels? Is it to ensure that direct business and brand equity doesn't suffer if OTAs are undercutting? 

CP: Consumer confidence, brand equity and protecting the direct channel would be the main reasons. If we do away with the rate parity will it come to not selling below cost? Where does it end? Regardless of problems associated with this model, the alternatives are worse, in our opinion. 

EFT: How does rate parity affect hotels, OTAs and travellers respectively? 

CP: From a hotels’ perspective, not being able to charge different prices based on the cost of doing business with a certain channel is a disadvantage.

From OTAs’ perspective, differentiating their service when the rates are the same is a challenge. Many of them use reward programmes, aggressive discounts to ‘fenced’ groups, limited time flash deals and so on to differentiate. This one-upmanship is palpable in the new strategies that we see among OTAs now.

From the travellers’ perspective, it is harder to get great deals from hotels that observe strict rate parity. 

EFT: Should the industry go ahead with rate parity? If not, then why? 

CP: In my opinion, yes, the alternative will have bigger set of challenges. Those who argue against are the upstarts who want to break into the market but can’t differentiate enough. They contend that once they bought a product they should be free to sell it at whatever price they want. This is questionable. They do not pay hotels in advance, nor even if the rooms remain unsold. Once again, comparing a hotel room with another commodity is not accurate. If it is harder for consumers to find the best rate among multitude of sites, the meta-search sites will become king. You will be fighting over getting listings there and in the end pay similar costs to get the business or lose it altogether. 

EFT: So, in the absence of rate parity, the challenges would be even bigger for hotels? And it would be tough for consumers too if rate parity didn’t exist?

CP: Yes, that is what I mean. 

Let us examine what could happen in the absence of rate parity. One scenario is that OTAs are allowed to sell at whatever rate they want. What would stop them from undercutting the brand site and other OTAs? Some may go so far as to sell below their cost to build market share and stave off the competition. How do you maintain a price positioning in that case?

Another scenario, a brand site is selling cheaper than OTAs. A brand could get away with this if it is a very strong one and does not need OTAs to fill its rooms. In such a case, it would be a matter of prestige for OTAs to carry that brand on their site. But how many brands exist today? If they are so strong the whole equation between brand site and OTAs does not matter to them even now. For the rest, why should an OTA support a brand that continuously undercuts them? They would focus on those which either gives them rate parity or preferential rates. Can the brand or hotel survive without the OTAs?

A guest can never be sure of whether they are getting the best rates. All online channels will have to get rid of their best-rate guarantee policy. Services offering to find the cheapest rates may flourish but everyone will find more ingenious ways to get more discounted rates out to consumers. Rate discrimination might go rampant affecting credibility of brands.

EFT: What could be improved as far as the practice of rate parity is concerned? 

CP: We would like to be able to circumvent the restrictions from time to time when we do special campaigns which have more to do with promoting the brand. We want to be able to use some kind of discrimination among channels to minimise our distribution costs. Lastly, hotels should not be forced on the issue of product parity. If I have higher profitability on a certain channel, I want to sell through that over others.

Next week we talk to Alex Dietz, Principal Industry Consultant at SAS Institute who argues that from a revenue management standpoint, rate parity does not serve the best interests of a hotel property.

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