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Does rate parity limit revenue managers?
June 25 2012

The role of “rate parity police” has shifted from franchisors to third-party intermediaries, and hoteliers who disobey the rules can be slapped with detrimental consequences.

Highlights
  • If there is a public rate out there that doesn’t jibe with the rate made available to all other channels, there will be consequences to be paid.
  • The insistence for rate parity has shifted over the years from franchisors to OTAs.
  • Does rate parity mean the individual hotelier is losing out on an opportunity to maximize his or her revenue?
By Jason Q. Freed
Contributing Editor, Tech Impact Report

REPORT FROM THE U.S.—If you ask any revenue manager whether they practice rate parity or any pricing consultant whether they advise their clients to practice rate parity, the answer is without-a-doubt “yes.”

Why? Because if there is a public rate out there that doesn’t jibe with the rate made available to all other channels, there will be consequences to be paid. Online-travel agencies and franchisors today monitor closely a hotel’s rates across all channels, and if a preferential rate was given to one over the other that hotel could face dire penalties.

“If you’re out of rate parity the franchisor will fine you $75 to $150. On the second offense they take you off of the (central reservations system),” said Max Starkov, president and CEO at Hospitality eBusiness Strategies. “They take you off the CRS and send lawyers after you. After you acknowledge you’ve been wrong, they will reinstate you for $5,000.

“That’s how the franchisors are enforcing rate parity.”

OTAs have similar and oftentimes stricter policies, employing market managers who crack down on hotels that don’t have rates in parity, often resulting in lower listings within search results or delistings altogether.

Several sources said the insistence for rate parity has shifted over the years. As hotel demand began building in 2003 it was the franchisors who first insisted online rate parity to prevent third parties from blatantly undercutting their rates. Later, as hoteliers got savvier and began introducing tiered pricing for different room types, OTAs began demanding rate parity in negotiations to ensure they were getting a fair shake.

“Hilton, for example, is promoting like crazy to get the customer to book direct. ‘Book with us and get 500 extra points or free Internet,’” Starkov said. “That’s where the OTAs were forced to become big proponents of rate parity.”

“The smaller OTAs—they want rate parity to get the same rates the big guys did. The bigger guys want rate parity with the supplier so the supplier can’t undercut them. That’s what’s happening now,” said Robert Cole, founder of RockCheetah, a travel industry marketing strategy and technology consultancy.

Today, most hotel brands offer on their website what they advertise as a “best rate guarantee.” The key wording in the fine print is that consumers will not find a “lower” rate anywhere on the Internet. They may find the same rate but not a lower rate.

Detrimental in the long run?
But with all the bickering between brands and third-party wholesalers to ensure rate parity, are hoteliers losing out on an opportunity to maximize their revenues? If one particular channel is easiest to connect, works the hardest to promote a hotel and offers a lower commission price, should a hotelier be able to offer that channel a discounted room rate?

“It’s tricky because my personal perspective is it should be equitable pricing,” Cole said. “If you’re giving me a lot of business, maybe your discount should be a little better. On the corporate side, if you’re giving me a lot of group business, you should get a better rate.”

However, Cole said, hoteliers have been “beaten up” by all the online players and the easier strategy is to offer one rate to all of them.

“The hoteliers have made their beds, and now they’re lying in it,” Cole said.

The result of the back-and-forth over rate parity is channel management today, where revenue managers set a “best available rate” and offer discounts off that rack rate. They are careful to offer each of the online distributors the same discounted rates. However, they have myriad room categories and price all those categories differently. In high-demand periods, revenue managers will close out the heavily discounted categories more quickly. In low-demand periods, revenue managers will make more of the discounted room inventory available.

It’s sort of a workaround, but revenue managers say it keeps the room distributors happy, which is of utmost importance.

“Ultimately these rules are enacted to protect the weakest link. You don’t want individual hotels prostituting themselves for hotels.com or whoever the hottest (third-party intermediary is) because it erodes your franchise fees, and it also gives up brand equity,” said Stephen Field, president of Synergy Hospitality, an owner-operator of five branded hotels. “We’ve paid dearly to be a part of these brands … it seems foolish for us to be part of a brand and then compromise that relationship.”

Difficult to stay in-line?
So, with the countless channels on which to offer inventory and the various room-rate structures, how difficult is it for today’s revenue manager to ensure parity across all channels? Depends on who you ask.

Starkov said technology allows hoteliers to set their prices one time and those prices are pushed to all the different distribution channels.

“If you accept a strict policy for rate parity then it’s not as hard as you might think,” he said. “When you see deviations it’s because a hotel either does not have a policy in place or doesn’t know what they’re doing. A lack of knowledge leads to a lack of rate parity.”

Paul Wood, VP of revenue management for Greenwood Hospitality Group, said it’s not quite that simple. He said new technology upgrades by brands often take a little bit of time to sync with outside distributors and can lead to hiccups. Also, some brands might not have direct connections with all of the OTAs, which means continuously updating various extranets.

A recent deployment by Marriott International, for example, is leaving one of Greenwood’s hotels out of parity and sending Wood “notifications left and right.” He said everyone on his team is constantly monitoring their hotels’ rates—even the front-desk clerks—to ensure they are in parity across nearly 150 channels.

“Having the high-tech stuff sometimes can be a little bit challenging,” Wood said. “It’s harder to map yourself. If you wanted to do a specific promotion just on one OTA, for example, that’s kind of a challenge.”

Whether hotels fall out of rate parity intentionally or by accident, the immediate repercussions will be the same. However, for rogue hoteliers who might try a different strategy and cut one channel a better deal than another, the long-term consequences will be painful.

“Hotels eventually have to figure out equitable pricing, but that’s going to be very difficult,” Cole said. “Because if you don’t have rate parity people start taking their trucks and going home.”

Cole said rate parity “keeps equilibrium,” but that because merchant models lead to much lower profits for the hotels, “that equilibrium is not really sustainable.”

COMMENTS   Show All
Anonymous
9/5/2012 11:02:00 AM
Can someone confirm Max Starkov's comment above? Do franchises really do this and if so, which ones? “If you’re out of rate parity the franchisor will fine you $75 to $150. On the second offense they take you off of the (central reservations system),” said Max Starkov, president and CEO at Hospitality eBusiness Strategies. “They take you off the CRS and send lawyers after you. After you acknowledge you’ve been wrong, they will reinstate you for $5,000. “That’s how the franchisors are enforcing rate parity.”?
Sean
6/27/2012 10:45:00 AM
Rate parity is the concept (and subsequent enforcement) that all 3rd party channels should sell rooms at the same rate. For example, a room on this Thursday at Hotel ABC sells for the same rate on every online travel agency as well as the hotel's own website. Think of it as having retail outlets sell products on behalf of a manufacturer at the same price, except the retail outlet doesn't own the inventory, they're just a channel that the manufacturers use to sell their products.
Jack
6/25/2012 7:37:00 PM
Can someone explain what rate parity means?
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