NB: This is a guest article by Dorian Harris, founder of hotel booking site Skoosh.
It looks like the hotel industry’s trusty steed, rate parity, is lumbering towards the knackers yard, trash heap, call it what you like…
Hotel revenue managers and even industry consultants, both at one time stalwarts of the practice, are all seeing that rate parity is nigh on impossible to manage and often just plainly too restrictive.
Let’s presume for a moment that rate parity will end. That leaves us all with the two major questions – how will it unravel and what will life look like without it?
The first question is mind-boggling. Rate parity and, specifically its consumer arm, Best Available Rates (BAR), underpins our entire industry.
Most hotel chains and many independents proclaim to customers visiting their websites that they will not find a lower rate elsewhere. Without parity, hotels aren’t going to know other publicly available prices so are they going to risk it and still offer a guarantee regardless?
And it’s not just the front end that needs consideration. Major onlin travel agencies rely on rate parity and have shaped their businesses around it. Some also believed there was no need to negotiate rates automatically set at BAR, so let account handlers go.
In the event of a demise of rate parity, are they going to have to rapidly rehire or sit for a while with rates set by the hotel and perhaps eat into their margins to get back their competitive advantage?
For OTAs such as Booking.com, for which rate parity was a boon if not essential to its business model, there is no moving away from BAR. rates.
It stuck with them because the customer pays at the hotel. But how is the business going to be affected when it is no longer able to guarantee the best rates?
Even the relatively small opaque market also comes into question. There’s no need to hide prices when the market is wide open again. Lastminute.com should be able to transition away from its “Top Secret Hotels” if it makes up a relatively small proportion of its offering but, in the case of Hotwire, it’s the whole business.
Will this entire sector be scrapped? And what happens next? How will the industry reshape itself?
I’ll make the following predictions:
1. Leaders
The balance of power between Booking.com and Expedia will reverse. The former, tied to BAR rates, will have no room to manoeuvre whereas Expedia will, reluctantly perhaps, eat into its margins whilst it considers other purchasing avenue.
2. Up the revolution
When the free market returns to the industry so will all the entrepreneurs, excited by the prospect of entering a huge market in which the biggest hitters no longer control the playing field.
3. New methods
Hoteliers will wake up to the fact that they will need to be far more inventive in their attempts to capture direct customers and OTAs will also have to look for new ways to appeal to customers beyond price guarantees.
Above all, with rate parity on the scrap heap, there’s an opportunity for someone to create a new business model in which the hotels and OTAs are working in the same direction.
Magnuson Hotels, for example, look like it’s ahead of the game on that front, but there’s almost certainly room for more.
NB: This is a guest article by Dorian Harris, founder of hotel booking site Skoosh.
NB2: Parity image via Shutterstock.
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Well what happened before it, might be a good place to start. i remember only too well the day IHG threw out hotels.com ajd Expedia, i was involved in that process at local hotel level, and the challenge was to at worst replace the business until/in case these two giants ever crawled back, they increased returns, and they (OTC’s) did crawl back, and were handed a new set of T’s and C’s.
The huge global hotel brands in particular are as important to the OTC’s as the OTC’s are to them
- don’t be kidded otherwise. No airline commissions, and a rather volatile car hire market, makes this a no brainer.
In the first instance, hoteliers worldwide need to fight for and win the right to control their rates on their own direct website channel as they see fit, without interference, threats or fear of rate shopping.. The jury is out on this anyway, some think that they already can at present, but are railroaded into not doing so by OTC’s and merchants threatening them with all sorts of things.
I know of no hotel client of mine who would not accept direct website channel rate control as a first step in the process, and let rate parity prevail if they have to amongst the third parties, and see what happens from there. It is positively outrageous that hotels can’t or feel compelled not to manage their rates on their own website channel. The OTC’s have no value proposition to joe public, have entirely their own business agenda which doesn’t help either supplier or user, and the whole thing smacks of price fixing. Reams have been written and blogged over the years about ways round the rate parity issue, so what – it doesn’t happen. Revenue and channel management will be in a much better place when we restore rates and availability control of product to the hotels who can then confidently promote on their own channel and engage some healthy competition in the market for once. Remember OTC’s take absolutely no inventory risk, and the billboard effect often claimed as an advantage is purely accidental, if the OTC’s could find a way round this they would.
Hotels are being asked to build mobile sites and apps, to spend £’000′s on social media and reputation management, and to further technologise at massive costs of systems built for the giant rather than the minnow with no appreciation of scale and basic economics, and the concept of scarce financial resources. it seems like everyone and their granny thinks they can make a buck out of the hotel business, or tell them what to do, how to run their business &c – the fact is that 2 into 1 doesn’t go, and the massive chunks OTA’s and merchants take out of the sale/purchase funnel ensure that the funds are just not there for hotel reinvestment and enhancement of product, service and reputation. Couple that with zero bank lending to the industry, in the UK at any rate, and the resulting prediction that 20% of hotels currently trading will be bust by the end of next year.
And – it goes without saying, the hotel industry has a massive celebration, after years of torture!!
Robert, the day for celebration may be around the corner. But what then? Will hotels take the opportunity to undercut their OTC partners and, if they do, will it really stimulate more direct hotel bookings?
yes, and yes
Some of my clients have a 25-30% cost of sale with OTC’s when you consider that they charge commission on VAT which is a despicable practice, so its a no brainer.
Robert, I’m struggling to see how that’s going to happen in practice.
If you remove rate parity, both hoteliers and OTC’s (or at least OTC’s with merchant rates like Expedia) will have the freedom to price independently.
After that, if OTC’s still guarantee the best prices on their sites, the customer still won’t have the incentive to jump over to the hotels’ sites to book directly.
The hotels currently provide rates and availability to the OTC’s and merchants. What the OTC’s then do amongst themselves is up to them. (why do you think eg Trivago advertises it has to check over 100 websites for best rates – its a total nonsense) What I’m arguing for in the first stage is that hotels have total and independent control of the rates displayed on their own websites,. ie these are removed from the rate parity equation.
Are you suggesting that the OTC’s can ignore the prices the hotels give them and charge what they like? Then expect mass disintermediation by hotels. Also that process would just be practically unworkable.
The aim here is to get rid of rate parity in two stages
1 to acknowledge the fact that the hotel can offer a lowest rate guarantee on their own website, because they can independently control their own rates on their own website, which after all fundamentally belong to them
2 to, ipso facto, remove the ability of OTC’s and third parties to offer a lowest rate guarantee for a product they don’t own, and take no inventory risk for., the OTC’s must accept and honour the wholesale rate the hotel offers, as they do currently anyway, but the hotel has the ability to properly channel and revenue manage the OTC’s with complete freedom from threats and bullying.
I still don’t understand how hoteliers are going to get customers to their sites in the first place…just by guaranteeing the best prices? Most already do that.
They can’t guarantee the best prices at present, that’s part of the point. What they can guarantee with rate parity is a price equal to the best prices out there – because although in n principle they have the freedom to undercut the OTC’s, the threats and bullying of the OTC’s ensure that doesn’t happen.
Currently Innfinite, my company, has 202 UK hotel clients collectively receiving over 280000 unique visitors per week – and we have a very high direct web sales/third party online sales ratio because we work closely with them continuously on channel shift – so i am not at all fearful of the comments in your last post.
Hotels aren’t guaranteeing rate parity now. They’re guaranteeing the best rate:
http://hiltonworldwide.hilton.com/en/ww/ourbestrates/guarantee.jhtml
So, there won’t be any change there.
Booking.com will always be able to guarantee the best rate on their site – that’s their model. So no change there either.
Expedia could take the risk and guarantee the same.
What’s new?
No sorry i don’t agree.
Booking.com won’t be able to guarantee the best rate for hotel abc, post rate parity. Look, hotels don’t give a damn frankly about booking.com ‘s model, which is, as a typical intermediary, geared for booking.com’s financial benefit and no one else, far less hotel or user, make no mistake about that
And currently hotels in practice can’t make a best rate guarantee promise as the OTC’s won’t allow it, that’s the problem. Two businesses can’t give a best rate guarantee for one of the businesses, that’s impossible.
Do you work with OTC/hotel relationships? What’s your experience of OTC’s told you? Are you in favour of rate parity?
Another point worth making in this context is that there are a host of other benefits by booking direct with a hotel, its not just all about rate. it is also well documented that travellers on the whole are pretty dissatisfied with the whole experience offered by the OTC’s
We gave Booking.com (then Active Hotels) its first 20 Scottish hotels in 1999, at a time when it was all about ‘come in’ we’ll work with you to help you develop your business – all the courting of the day, now they’ve totally turned the screw on these same hotels, and thousands more.
And while I’m at it – best of luck t both Google (Hotel Finder) – and RoomKey
I checked that Hilton site, that’s a MATCH, not a best rate guarantee
In fact, we promise that if you find a lower rate through any other booking channel, we’ll match that rate you found plus: – - – -
Am I in favour of rate parity? No-one has ever asked me that. No – it’s a scam.
From a consumer’s perspective, hotels all offer best rate guarantees. Sure, the fine print says price match perhaps but that will be lost on the traveling public.
So, let me understand how hotels will work with Booking.com. Without rate parity, are you suggesting that hotels will give Booking.com higher prices to sell than available on the hotel’s on website even though the customer is settling with the hotel directly? I like the sound of it but it but that would mean undermining one of the 2 biggest retailers in the market – frankly, Booking.com would probably go bust on that basis – it’s their entire business model.
Look, OTC’s have undermined hotels for years by their greed, agressive behaviour and tactics so i won’t be shedding any tears – - – -
The choices hotels will make will be based on their own rate reputation. Those selling on Member-Only websites, or through Secret Deals are seeing better revenues without actually affecting their OTA channels. OTAs are becoming their Billboard and while volume is producing, their better rates are with more sophisticated sales channels – while maybe more complex in explanation do offer better revenues.
Rate parity only exists today because of channel managers, otherwise hotels will never be able to manage it. Hotels are cleverly using the technology even throughout promotions and packages to adhere to contract policy. It will only be when the Big Boy OTAs start to see less than double % figure growth that they will make a change
Rate parity exists today because OTC’s demand it, or the hotel is penalised for non conformity.. For sure, channel management tools make it easy to manage, but lets be clear, you are managing OTA relationships, not revenue per se. Hotels also fence, deep link and play around with rate plans and combis to try to fool the OTC’s there’s no getting away from that too. Who wouldn’t, but all this adds to the complexity rather than the simplicity of optimal rates and revenue management.
Customers, and reputation management and guest satisfaction fanatics and gurus are constantly drumming it into us that hotels are not meeting guest expectations – well there’s a great priority use of moneys saved in exhorbitant commissions (if the hotel’s bankers will let them, and don’t get it first)
Great pamflet, Dorian!
And nice to follow the dialogue that comes after, although I miss the antagonist’s view.
I believe this will make metasearchers like Hotelfinder even more useful, as long as they include the OTA’s that will drop rates, as well as hotels directly or via a CRS or CM. Finally some real rate shopping for travelers.
I doubt that big OTA’s on postpay will loose volume. Unless all hotels abandon parity at once, risk a ban from their trafficdrivers and not seeing it compensated through other channels. And even then I’m sure a few smart guys will think a way to yield the rates and reconcile this is the monthly bill with the hotel.
Don’t you expect a race to the bottom?
Thank you, Wouter.
I forget to mention about the O.T.A.s but of course, yes, they will be beneficiaries of the change along with the deal-hunters who use them.
No, I don’t foresee a race to the bottom although I imagine hoteliers might. From what I’ve seen over the years, you get the odd maverick new entrant to the business slashing prices and profits whilst the rest of the old guard wait on the guidelines for them to go out of business which typically happens quite quickly. Most sensible companies – i.e., the ones which survive – sell as high as possible, not as low.
Where I do expect a shift is in advertising. The Big Two have been caning Adwords, confidently claiming that they have the best prices. Once they lose the comfortable protection of rate parity they’ll most likely be scared off their exorbitantly high ad-spend.
What about opaque / groupon etc.? Will there still be room for them or will all discounting be channeled by hotels through their more traditional channels?
What i’d love to hear as extra ammo for this topic is from revenue managers and hoteliers who have actually managed relationships first hand between hotels and OTC’s, especially Expedia, Booking.com, and Laterooms
I’m very happy to share my own experiences, most of which I can say have been fraught with difficulties and challenges. Seeing is believing!!!
Well Dorian, as you probably remember from our last discussion I firmly disagree with most of your statements.
What remains unanswered is how we (as hoteliers) can secure that websites (such as yours) do not sell CHEAPER than we sell on our direct channels.
One should not forget that WE introduced Rate Parity when we all had the issue that online prices were undercutting direct pricing on brand.com……
Wilko, fair enough.
I’m kind of talked out on the relative merits / dis-merits of rate parity. Everything leads me to believe that it won’t be around much longer anyway so I’m more interested to consider how things will continue without it.
True Dorian, what happens “after” rate parity is definitely a very intersting question.
…and i guess we will experience this, soon….
What will happen? Its interesting, why does everyone assume that the model with change? The power of the IMMs is the capability to direct the consumer to the product they want, and to influence the consumer to buy. Based on visibility, rankings etc..etc.. They use a delta to determine the best margin vs. price point, and do what all of use do, optimize their profit. There are other methodologies for directing this attention to product other than price. They still hold a market, how they retain that market will be in how they deliver their services. They will no longer be able to simply throw up rates based on superfluous rankings, with heavy emphasis to the consumer on price. They will end up negotiating hard for wholesaler style rates, and with their tremendous economy of scale, likely end up where they are now. The interesting portion of this will be the intensity of competition between themselves will grow, meaning even harder negotiation with properties that rely on their bookings and have no stable distribution strategem. It will actually get harder for the little guys, while the big “desireable” brands will be able better position themselves. Its called market consolidation, it will be about hits and consumer influence and almost guaranteed it will the the quickest to adapt. All this means is intensification of rate shopping for the property to ensure that they are not being out priced by the IMMs. Lol.
Darren, very interesting thoughts.
I totally agree with you that the overall power balance will remain with the O.T.A.s. but I still foresee some significant changes.
To start with, one of the two biggest players, Booking.com, works on an agency model. I don’t see how they can stay on that if their biggest competitor, Expedia, is on a merchant model and able to undercut Booking.com.
Yes, most likely if they can’t squeeze hotels on the commission the next move by the bigger O.T.A.s will be to push down the net buying rate and make it more equivalent to a wholesale rate.
You’re also right that neither of these moves constitute a model change but there are some big opportunities out there post parity. The hotels and O.T.A.s will both have the chance to consider a distribution model which isn’t adversarial. That must be possible…surely service providers and their distributors don’t inhibit each other in every industry do they?
The rate parity issues will only end when all distribution channels (Not the hotel’s rate distribution) and all the Ota’s databases work with the same standards. Meaning that the currency database system runs on one and the same currency, before converting the values for the different booking area’s and national or language pages. Also the updates databases and websites are making to stay current all have to run at the same time and with the same coordination. And last but not least, stop rounding off prices.
This, however, is only based on rates presented everywhere, not on availability issues which is the other part of rate parity where hotels can be victimized by the Ota’s. In the research of HRP it is already clear that when hotels give their rates and availability to Ota’s, the Ota’s do not always give the same availability to their affiliates. For example, Agoda is a big local player on the asian market, good enough to be bought by Booking.com. But hen Booking.com does not give Agoda the availability as they received themselves, it is like saying to the hotel ‘sorry but your hotel is not good enough to be promoted on the asian market’.
With this result, hotels can have a better understanding of the position they’re in. Unfortunately hotels do not look at this even when running a price integrity image just because of the lack of knowledge (Ota’s affiliate partners are secret) or they are just too scared that their cooperation with the Ota’s will hit rock bottom.
HRP, I think you may be missing the point. The question is what will happen when hotels stop colluding with OTAs to sell at the same price, not what’s stopping them colluding.