Rate Parity – Definition and Strategies
Many Revenue Manager find themselves worshipping daily at the altar of Rate Parity. This means that their core value is rate parity and everything else falls in place after that. For example, I have seen articles written that start with the assumption that, “Of course you need to have rate parity in every distribution channel.”
First, let´s define ´Rate Parity.” Rate parity shows up in the Revenue Management lexicon in two contexts, a strategic pricing principle and an OTA contract provision.
1. The first is a strategic Pricing concept that says: “No matter where your customers choose to shop for your hotel, they will find a consistent price.” Not a bad idea, if you do not want to use channels to actually differentiate your offering. Ultimately, this will support your brand by adding to your rate integrity. On the other hand, it makes less sense if you want to favor a particular channel (for example your own web site) and train guests to go there for your lowest price. Here are some points to consider:
a. Room rate is only one of the tools you have to attract and satisfy guests. (Price is only one of the four P´s of marketing.) Depending on your hotel and room products and services, you may have different pricing structures and strategies. Don´t just have rate parity because everyone else does or because everyone else says you need to have it!
b. Depending on your distribution channel strategy, you may not want rate parity. If you have some very strong channels you may want to reward them with a rate advantage. For example, if you get a significant amount of business form a local CVB web site, you may provide them with rate parity but charge more in other sites. (You can expect some of the other sites not to display your property, but your channel strategy may be more important.
2. The second context for rate parity is in contracts with your third party online travel agents (OTA´s). These OTA´s seek to distribute your hotel to their audiences and in return make several demands on your hotel, one of which is that you provide them with rate parity. In other words, you will not undercut the price they charge (either on your own web site or on a competitive OTA). This sounds pretty straight forward, but can get complicated. Here are some points to consider:
a. Rate parity only applies to “public rates” that do not have special qualifications, like, affinity rates or limited audience rates. Examples might be special email rate offers to a non public list, like Travelzoo or your in-house special offers list. Also, opaque channel rates, like Priceline, are not subject to rate parity rules in the OTA contracts.
b. Rate parity applies to a particular room on a particular night and these rates are constantly changing. There may be lag times or human errors that result in rates being out of parity for short periods. Many easily available rate shopping tools can give reports and warnings when rates are out of parity.
c. Since the OTA´s have to fit your rates into their booking engine and also accommodate all your competitors, they may not have the breadth of product offerings that you have on your own site. For example, they may not have some of your value-added package offerings. Obviously, there is no possibility for rate parity on these packages.
d. According to a recent study, most hotel shoppers go on the OTA site to screen for possible hotels and then, with a short list, go on the hotel sites for more information and to book their stay. That´s why they want rate parity with your site. However, you can have a super add on package that can capture these shoppers when they hit your site.
i. For example, you may have a standard room on your site and on the OTA at the rate of $100. Then, you could offer that same room in a package, with free internet, free breakfast, a free in-room movie and a free drink at the lobby bar for $109, and still be in “rate parity.”
e. Are you getting enough business from each OTA for the mark up and the parity clause to be worth it? Consider not offering rate parity if you do not need their business. The larger ones may not display you at all, but the smaller ones may want to have your property anyway. Remember, if you part ways with an OTA as a merchant model supplier, you can choose whether to pay them commissions or not, when they book through the GDS. For more information on this and similar profit enhancing strategies, subscribe to our Hotel Revenue Tools programming.
f. Since the OTA´s have to fit your offering into their booking engine and also accommodate all your competitors, they may not have the breadth of product offerings that you have on your own site. If they choose not to offer some of your rooms, there is obviously no requirement for rate parity on those rooms.
Summary:
Rate parity is important for most properties most of the time. It helps avoid confusion over your price point in the market and it is a requirement to do business with a few large distribution channel players. In down markets, many properties can´t even break even without the steady flow of traffic from Expedia, Orbitz, and Travelocity and their subsidiaries. If your property is one of them, that is another strong reason to practice rate parity. But if neither of these conditions exists, remember your Mother´s advice and don´t offer rate parity just because “Everyone else is doing it!”
By Tim Coleman & Bill Geoghegan