Six questions (and answers) about the future of rate parity
Attendees on a recent webinar hosted by Tnooz titled “Hotel pricing in a post-parity world” were asked to disclose how much of their business came from online travel agencies.
NB This is viewpoint by Jason Q Freed, managing editor for Duetto Research.
The largest number of people (31%) selected the 11-25% range, followed by 26% of attendees who reported 26-50% of their business came from OTAs. Twelve percent of attendees actually said they rely on OTAs for more than 50% of their demand.
The sample size was good, although the results could’ve been skewed by the fact that many of the viewers were in Europe and a majority of them working at independent hotels.
Still, those numbers are alarmingly high.
When you’re receiving anywhere from 20% to 60% of your demand from OTAs, it’s imperative that you optimize your channel mix and pay close attention to the ever-evolving distribution landscape.
Case in point: the current movement away from rate parity restrictions in third-party distribution contracts. How will France’s Macron Law, Booking.com’s elimination of rate parity language in its contracts, and Hilton Worldwide’s successful bid to remove some rate parity restrictions affect a hotel that relies so heavily on OTA demand?
On the webinar, hoteliers Ted Teng, CEO of Leading Hotels of the World, Etienne Faisandier, vice president of revenue management at Mövenpick Hotels & Resorts, and Michael McCartan, managing director at Duetto Research, attempted to paint a picture of life after rate parity.
McCartan and Faisandier said hotels had already begun to offer unique rates on opaque channels and closed user groups while retaining price consistency on public channels and therefore won’t be affected too greatly.
Teng, however, suggested the shift is an opportunity for the hotel industry to really step back and evaluate the way hoteliers are distributing their inventory. He said:
“I think this is an incredible opportunity for us to reexamine this whole issue of rate parity—if it’s still applicable, important and relevant for your hotel…It’s an opportunity for us to not be in a status quo situation and make incremental, minor changes.… I think this is an opportunity to bring the focus back on the suppliers and consumers and not be so focused on the distribution partners.”
Plenty of questions remain on whether rate parity is good for hoteliers and, should restrictions be scaled back or outlawed completely, how hotels should react most effectively.
Here are half a dozen of those questions the speakers ran out of time to answer during the recent webinar.
Q: What is the difference between MFN and rate parity?
A: Most Favoured Nation clauses were designed by the OTAs and obligated partner hotels to give them the best price out of any distribution channel.
They required the hotel supplier to offer the distribution provider the same or better rate as any other third party. The concept of rate parity, on the other hand, was introduced by hoteliers when demand was recovering post 9/11 and OTAs were undercutting rate to continue gaining market share.
Q: With the demise of rate parity, who wins, hotels or intermediaries? Why?
A: The simple answer is that removing rate parity restrictions will give hotels better control of their channel management and pricing.
Hoteliers could conceivably offer their highest cost channels higher rates to make up the difference, and give low-commission channels better rates. They could give discounts or value adds that lead guests to book direct.
The danger, however, is that OTAs are valuable and powerful partners, and hotels still need them as part of a balanced distribution strategy.
They could make up for any unfavorable or disadvantageous rates by alienating your hotel or dropping it down in their rankings.
The question is whether you’re prepared for a significant impact on your OTA demand by replacing it with an empowered internal sales force and increased digital marketing spend focused on ROI by channel.
A more intelligent way to leverage the price parity rulings is to focus on value. Hotels need to give guests a reason to book direct other than price. This can be achieved by including unique, relevant pre-stay and on-property services in the rate that only the hotel can provide whilst retaining price consistency.
Another factor that will challenge hotels is the distribution of net rates.
Hotels already spend many hours trying to manage unscrupulous merchants who undercut the agreed public price. In the absence of any regulatory controls hotels could find themselves back where they were in 2005, so consideration should be given to how and where merchants are distributed.
Q: How much does offering discounted rates to direct/loyal customers negatively impact profitability from the hotel’s highest yielding distribution channel?
A: By leveraging information about guests you can understand things about them that the OTAs cannot and then use that information to tailor rates.
Perhaps one loyalty member spends nothing once on property. Yes, he’s loyal and should be given a value-add, but perhaps no or very little discount.
Another loyalty member might spend a ton on non-room items and you can use that to offset the cost of offering him a price that he can’t get anywhere else.
With an open pricing strategy you can start treating independent guests and groups of guests independently and delighting them with offers relevant to their behavior. And offering discounted rates to loyal customers doesn’t have to mean a decline in ADR. Rather, you could slightly raise your other rates and still offer lower loyalty rates and actually raise your ADR or keep it flat.
Q: How do you think the expectations of business and leisure travelers differ when it comes to loyalty programs?
A: Traditionally business travelers have saved up their reward points and spent them on a leisure trip for the family. That will continue even as a new generation enters the workforce and begins traveling for their job.
But Millennials don’t want the traditional loyalty program. They want to be able to register quickly using their Facebook account and want to redeem and be rewarded in an instant.
For Millennials, reward is all about being offered something that is unexpected but relevant. In other words, if you can offer something that they didn’t even realize they had earned, then you can build a great deal of loyalty and they’ll start booking with you.
Q: How should we create a rate integrity strategy (as a hotel) if we depend so much on big OTAs?
A: Get everyone within your hotel on the same page and understanding common goals.
While revenue management has traditionally been an underutilized function in the hotel, today it can be a central department overseeing all revenue generating functions, whether it’s marketing, digital marketing or sales. This way, not only are you looking at same key performance indicators but you’re sharing the same data and that gives you the ability to make smarter decisions on where to place and price your inventory.
By creating a single, broader commercial function a shared understanding of guests can be achieved, and a systematic approach to the development of targeted propositions across the website, distribution channels, the digital marketplace and offline markets can be established.
Q: How can hotels replace the knowledge that OTAs have? How can they reduce their reliance on OTAs and replace third-party bookings with more direct demand?
A: OTAs are engaging with guests long before they arrive through the door and hoteliers need to learn how to do this, but better.
Like Amazon’s “Because you bought this we think you’d like this” strategy, hotels can take advantage of their connection to the guest to offer relevant offers and upgrades.
In May, when Booking.com announced that they would not share guests’ email addresses with hotels, they cited security concerns. Hoteliers know, however, that this is clear evidence that the battle moving forward is better guest recognition, targeted benefits and overall value perception.
NB1 This is a viewpoint by Jason Q. Freed, managing editor at Duetto Research, a hotel revenue strategy technology company.
NB2 Image by Shutterstock
Special Nodes is the byline under which Tnooz publishes articles by guest authors from around the industry.