What is hotel rate parity?

What is hotel rate parity?

Rate parity is the practice of maintaining consistent rates across all distribution channels. If the quoted price on hotels’ own websites is the same as the price shown by OTAs and other third-party channels then there is rate parity.

If the quoted price on hotels’ own websites is higher or lower than the price shown by OTAs and other third-party channels then there is disparity

The two main sources of disparity arise from:

1. Contracted OTAs who have a direct relationship with hotels, but undercut the hotel’s brand.com price or have an unauthorized promotion in place which results in price discrepancies

2. Non-contracted OTAs who receive inventory from wholesalers with rates that were supposed to be sold as a package, but have been stripped down. This results in a rate that should be at B2B rates, rather than B2C.

The three basic problems of disparity:

1. Being undercut by OTAs discourages direct bookings on Brand.com, which dents your profits by sending customers channels where the rate is lower, on top of which you have to pay commission.

2. Disparity can damage your hotel’s brand reputation by presenting a confusing, inconsistent message to potential guests, which undermines their confidence that they’re getting good value for money.

3. When searching for affordable hotel rates on metasearch platforms versus on your hotel website, guests tend to choose the more cost-effective option. Consequently, any investment you have made in SEO to boost your property's search engine rankings will go to waste.

Why is hotel rate parity important for the guest?

Rate parity creates consistency for guests and ensures they don’t get confused by seeing the same room for different prices on different channels.

A guest may be tempted to buy the cheaper rates, but if the non-contracted OTA is problematic, and there is an issue with the booking, this could have a negative impact on the guest/hotel relationship.

Many hotels also offer a best-rate guarantee/promise, which, if broken, has a negative effect on the guests.

Why is rate parity important for hotels?

Every distribution channel (except brand.com) has a cost of acquisition/commission cost (e.g. booking made via Booking.com = hotel needs to pay booking.com 15-18% commission; Booking made via Expedia = hotel needs to pay Expedia 20-25% commission).

Distribution channels rank hotels according to several factors, one of which is the percentage commission hotels have agreed to pay OTAs. 

The higher the commission rate, the higher the ranking. Other factors that may impact a hotel's ranking on OTAs include reviews, reputation and relevance. 

As such, OTAs are also monitoring parity and want to make sure that a property’s brand.com is not undercutting them - if they catch hotels undercutting, they may send them to the bottom of the rankings which ultimately impacts the hotel’s visibility. 

This has a big impact on revenue and profitability, given the high proportion of non-direct bookings. And, when operational costs are high, it becomes even more important for hotels to maximize their profit through direct bookings.

Why are distribution channels important for hotels?

Distribution gives a hotel global visibility. If you are a hotelier you will only have a marketing budget to focus on a couple of markets, and the reality today is that most people book via an OTA (e.g. Booking.com and Expedia) or meta-site (such as Trivago, Tripadvisor and Hotelscombined).

Hotels want to be available on those channels, so they can be seen and potentially booked by consumers who are going on a trip. Being available on online distribution channels helps hotels to be successful and gain market share.

What is a metasearch engine and why are they important for hotels?

Metasearch engines simplify the process of comparison shopping by aggregating results from top search engines and providing a single destination for consumers seeking to quickly find the best deals on products ranging from clothing, electronics, airfare - and hotels. 

In the context of hotels, a metasearch engine gathers rates from various channels and aggregates them in one place giving the guest an overview of options and prices on a variety of channels.

After entering details such as destination, travel dates, and the number of guests into its search engine, hotels meeting those criteria are presented as results - with prices from different booking sites like Expedia or Booking.com summarised in one place.

By presenting all results from all sources in one place, including those from the hotel’s own website, metasearch engines make parity issues more discoverable to the guest. This can harm a hotel’s brand integrity and cost the hotel direct bookings and future business. 

In order to rank higher and be more visible in a metasearch engine’s results, many hotels invest in pay-per-click (PPC) on meta sources.

Ensuring all rates are at parity becomes even more essential using this model. PPC is irrelevant if parity issues appear because the guest would likely book the lower rate, making any investment in ranking a waste of money.

What is bait-and-switch on a metasearch engine?

Bait and switch on a metasearch engine is a sales tactic used by unethical booking channels to lure customers towards a lower price. 

Due to the nature of a metasearch engine, bait and switch is both more effective and more visible on these platforms where search results are presented in one place for customers to click through to the most attractive option.

Bait and switch is intentional behavior, often by non-contracted OTAs, where channels advertise a lower rate on a meta-search engine to entice guests to their channel. 

Once the guest clicks through the links, they find a number of fees have been added to the rate bringing the total into parity/or higher than brand.com.

There are four types of bait-and-switch scenarios:

• Intentional caching where the rate type has expired, but is still advertised

• Taxes added late

• Other fees are added late, eg. service fee

• Room type or hotel is no longer available so they are directed to any other (more expensive) relevant option

As the guest is already down the booking funnel, they are likely to continue with the booking. These bait-and-switch rates have a negative impact on a hotel's revenue as they drive business away from direct bookings.

How should hotels approach rate parity?

It's essential for hoteliers to strike the perfect harmony between direct and OTA business.

Assessing performance requires taking a closer look at which channels are responsible for supplying guests - as well as any rate issues that may be leading them away from your property.

Ultimately, finding the right mix is key to ensuring success.

With the increasing number of OTAs and metasearch engines providing localized versions, hotels should also be keeping track of rate parity across all their Points of Sale (POS). Done manually, searching through each country's domain is not only a time-consuming endeavor; it's sometimes even impossible without using a VPN. 

The same is true when it comes to bringing to light device-specific rate disparity. Tracking rates via both desktop and mobile devices across all key distribution channels is a good way for hotels to ensure they are keeping on top of any mobile promotions on offer. 

As well as tracking POS, mobile and desktop rates on OTAs, hotels should also be monitoring meta-search engines. These platforms provide guests with an all-inclusive overview of comparative prices - exposing any potential gaps in their current rate structure at the same time.

Why is there so much discussion about parity?

There has been a huge shift in online business from hotel websites to OTAs, which has increased the cost of acquisition significantly for hotels. It also makes them a lot more dependent on OTAs.

During the Covid-19 pandemic from 2020 to 2022, parity was less of a priority for hotels. Many hotels were closed and those that were open were often trying to get whatever business they could. 

With hotels back open in full force, but still facing severe labor shortages, supply change delays, inflationary pressure and higher operating costs, minimizing revenue leakage is essential.

As the competition between hotels and OTAs to win customers gets stronger, hotels are looking for ways to incentivize direct bookings through unique value additions if the guest books direct. 

Flexible cancellation policies, early check-in and late check-outs are just some of the measures being used by hotels to drive direct bookings.  

OTAs, of course, do not want to lose their customers and are also adding value and implementing new initiatives to keep customers with them through their various loyalty programs. (loyalty programs like Booking Genius etc.

This opens up further opportunities for parity issues to occur, where for every instance of rate parity that a hotel or OTA flags, another one is sure to pop up. 

The rise of meta and non-contracted channels means solving parity issues requires continuous effort and constant attention to ensure that hotels are not losing out on revenue, or damaging their hard-earned reputation. 

Parity is a global issue, evidenced by the variety of stances taken in different countries.

Price parity clauses (PPC) or most favoured nation (MFN) clauses are provisions within contracts to ensure that hotels do not offer lower prices for their products or services on other sales channels. 

Typically, they can be divided into two categories; wide and narrow clauses. 

Wide parity clauses stop hotels from offering lower room prices or more availability on any other sales channel. 

Narrow parity clauses are less restrictive but still prevent the hotel from publishing better prices on its own website. However, with a narrow parity clause hotels would be permitted to offer better terms and prices to other online and offline sales channels.  

Both prevent hotels from selling their rooms at a lower price than the OTAs on their own hotel website. 

However, in many countries, the level of restrictions imposed by price parity clauses has faced scrutiny under competition law. Agreements that have the effect of preventing, restricting or distorting competition are prohibited.

The UK: In 2020 hotel booking platforms dropped any misleading practices, such as pressure selling, discount claims, and hidden charges. This means that booking platforms could no longer give a false impression of scarcity, offer misleading discounts (such as comparing the price of a luxury suite with a standard room), or bury compulsory fees deep in the booking process. 

These platforms must also make it clear how hotels are ranked after a customer has entered their search requirement by, for example, telling people when results have been influenced by hotel commission payouts.

The UK’s Vertical Agreement Block Exemption Order (VABEO) came into effect in June 2022, which means that companies should consider the competition law risks before including wide MFNs in their agreements.

France: France was one of the first countries to ban restrictive rate parity clauses back in 2015. Championed by Emmanuel Macron, at the time Minister of Economy, the law allows the hotelier “to consent to any customer discounts or pricing advantage of any kind whatsoever.” In essence, hotels can price their rooms however they want on whichever channel they prefer - except on their own channels, which must match the OTA price. This is “narrow parity.”

Spain: Despite efforts elsewhere, narrow parity clauses can still be enforced in Spain. The country never participated directly in active investigations on rate parity clauses. 

This wait-and-see approach nonetheless benefited the country once parity clauses fell in countries like Italy, France (see above), Austria, and Belgium: one piece of research analysis (PDF) determined that banning MFN clauses resulted in lower hotel room costs in Italy, France, and Spain.

Sweden: In mid-2018, a Swedish court ordered Booking.com to drop all parity clauses from its contracts, ruling such clauses in violation of EU competition law. 

OTAs responded with attempts to limit parity to only between OTAs and a hotel’s direct channel, or “narrow parity.” The courts struck down these contractual restrictions as well.

However, on appeal, the decision was reversed in 2019, and narrow clauses are permitted. 

Germany: Germany joined France in limiting broad rate parity clauses. However, it wasn't until early 2016 that the country also prohibited “narrow parity,” or contractual restrictions that required hotels to price rooms at the same rates on both direct channels and OTA. Hotels have total control over channel pricing strategy.

Australia: Recent developments in Australia point to a likely ban on rate parity clauses. As one legislator told the media about the OTA duopoly, “They’re gauging local hotel owners”. While there hasn't been any action yet, Expedia has already announced that it will no longer enforce any narrow parity restrictions.

While rules around rate parity continue to change, and more research is conducted on the effects of price parity clauses, hotels will have to navigate complex new world.

What role does Lighthouse play in solving rate parity issues?

Lighthouse helps hoteliers by providing tools to show when they are being undercut on OTAs and metasites. This is fundamental to effective revenue management, as it helps maximize a hotel’s profit.

Our data and easy reporting help hoteliers spot issues, and take easy steps to resolve them, stemming any further profit loss. This helps hotels keep control over their rates across different channels and manage distribution the right way.

Several times per day, rates are being updated or changed, and it is time-consuming to check your distribution health manually. Lighthouse automates the process via cutting-edge technology. With only a couple of clicks, users can see the real-time pricing situation on different channels. This is done through a live shop.

How do I start taking action on rate parity?

Parity doesn’t have to be a constant problem. In setting up an action plan you can take more control. Consider the following:

1. Use data to identify the biggest problem areas. Start with OTAs with which you have a contractual relationship/partnership. Get some proof (screenshot etc), and reach out to your market manager to get the problem solved. Continue to monitor this over time.

2. Work your way down through the worst offenders (contracted partners).

3. Focus next on meta and smaller non-contracted channels. Perform a couple of test bookings on offending small channels to see if you can catch some wholesale rate leaks. Work your way through and closely monitor. Contact the offending wholesaler with proof and get the problem solved. Continue to monitor.

4. Define your escalation process - consider implementing a system to deal with parity offenders that acknowledges the size of the violation.

5. Build your case and contact offending parties - isolate the data that proves your case, and have a process for contacting those causing disparity that is simple and effective.

6. Review your partnership strategy - look at your partnerships and contracts moving forward and examine if they are providing you with value.