Blog

The pros and cons of rate parity

​Most hotel marketers that I have spoken with are convinced that rate parity - offering the same rate to all distribution partners is something that must be done to ensure successful distribution. While rate parity can make sense for some types of hotels and distribution channels, I believe that there are multiple scenarios where rate parity is a bad strategy - one that can cause lost revenue. There are multiple factors that should be examined before determining that a “one rate for all channels” strategy will generate the most revenue for the hotel.

  1. How unique is my hotel?
  2. What is the strength of the hotel’s brand?
  3. What are the hotel’s target market segments?
  4. Which distribution channels have been targeted and what are realistic revenue expectations for each of them?
  5. What role do online travel agents (OTAs) play in the hotel’s marketing strategy? Consider preferred relationships with the right partners and make offers that add real value.
  6. How well known is the hotel’s own website and what efforts have been made to promote it?

Let’s explore each of the above questions and why the answers are relevant to our decision to offer rate parity or not.

How unique is my hotel?

A good marketer will find innovative ways to differentiate his or her hotel from the competition. It has been said that innovation breeds competition. Therefore, if your hotel has established itself as truly unique, it is quite possible that your competitors have copied whatever it was that was unique. Establishing unique features and services is an ongoing process. If the answer to this question is “yes”, then the savvy marketer will know that he or she does not need to offer the best possible rate to every distribution partner. To a greater or lesser degree, the hotel’s unique features will attract business at a higher rate if the hotel is positioned properly, reducing the need for rate parity in weaker booking channels. If the hotel truly does have unique selling features that have real (as perceived by customers, not hotel management) value, then customers will pay more for them. A corollary argument is that the need for widespread distribution is reduced proportionate to the unique value that the hotel offers. If your hotel is perceived by prospective customers as a commodity (whereby shoppers perceive no real difference in the facilities, services, amenities and location offered compared to your hotel’s competition), then rate parity makes more sense. To summarize:

  • The greater the hotel’s uniqueness, the less rate parity makes sense
  • The more the hotel is perceived the same as its competitors, the more rate parity makes sense

What is the strength of the hotel’s brand?

In addition to the hotel’s unique attributes we must also consider the strength of the hotel’s brand. Do prospective customers know your hotel and what to expect about their experience based on the brand? My favorite example in the travel industry is Southwest Airlines. Southwest invested heavily and consistently in promoting the value of its brand, primarily through no frills service and price differentiation. At the same time, it also avoided traditional high cost avenues of distribution. As a result, customers have proven that they are willing to participate in less convenient methods of booking a seat on the airline. Southwest does not offer rate parity, nor does it participate in traditional distribution channels readily used by its competition, including global distribution systems and online travel agencies. The best rates offered by Southwest are found on its own website.

Therefore, if your hotel’s brand is well known by both existing and prospective customers for its unique attributes - be they price, luxury or something else, offering rate parity is not a wise idea. All marketing efforts should be focused on driving shoppers and existing customers to the hotel’s own website or other company operated methods of distribution. For those hotels that do not enjoy the benefits of a well-known brand, be it the hotel itself or association with a national/international brand, then rate parity becomes a more compelling argument. To summarize:

  • The stronger the brand, the more willing shoppers are to circumvent typical booking channels
  • Without any real brand identity, it may be necessary to rely on rate parity to gain additional distribution

What are the hotel’s target market segments?

A good hotel marketing plan will have clearly defined existing, and possibly new market segments. This must be determined before deciding which distribution channels and distribution partners will be used. Why? If the target segments the hotel is pursuing do not use (or have proven they are unwilling to use) the distribution channels where we have offered our most competitive rates, then we may not only be wasting time, we may also be sending a message to our valued distribution partners that they are not playing a key role in the hotel’s distribution strategy. In this case, we will have less ability to craft a preferred relationship whereby we would expect these partners to direct more than our fair share of business to our hotel. Understanding the channels and companies that are used by our target customers is critical to the success of our distribution strategy. To summarize:

  • We first must define our target customers before we set-up a distribution strategy. Not all customers use all channels and intermediaries.
  • Our distribution strategy should target those booking channels and companies that are frequently used by our target customers and intermediaries.
  • By offering rate parity to distribution partners with poor revenue generating potential, we send a signal to our preferred distribution partners that their business is less valued.

Which distribution channels have been targeted and what are the realistic revenue expectations for each of them?

As noted above, the customer segments we have identified in our marketing plan should determine the distribution channels we use. There should be evidence that our target segments (e.g. - corporate business travelers, leisure independents, small groups, etc.) are using distribution channels before we decide to make rates available. Do the research and make sure there is a need for rates to be available in each channel before signing agreements. Once this has been done, carefully select the best companies in each channel before offering distribution agreements. This can vary by channel. For example, there is good reason to distribute through all four global distribution systems (GDS) - once GDS have been determined as a viable channel. However, as noted below, there may be valid reasons not to distribute rates through every online travel agent (OTA). To summarize:

  • Distribution channels and companies operating in those channels should match our target market segments.
  • Do proper research before arbitrarily signing widespread distribution agreements.

What role do online travel agents (OTAs) play in the hotel’s marketing strategy? Consider preferred relationships with the right partners and make offers that add real value.

An entire blog post could be written about the pros and cons of using OTAs as distribution partners. We will assume that the hotel has determined that there is at least some value in using OTAs as distribution partners for the purpose of this discussion. In today’s global marketplace, it is difficult to limit distribution partners to specific geographic areas. Exceptions apply for the Chinese market and a few other markets where there are cultural and language challenges. This said, each OTA has its own strengths and weaknesses in various parts of the world. These should be well known before we decide to offer rate parity to every OTA. It is also safe to say that OTAs are hyper-sensitive that they be offered at minimum rate parity, and will not tolerate being placed at a disadvantage by any hotel in regard to their competitors. The volume of reservations and customer base of most all OTAs intimidates hotel marketers into signing distribution agreements with all of them. Based on the OTAs’ insistence on rate parity as a minimum level of participation, the norm has been for hotel marketers to offer all OTAs rate parity. As noted elsewhere in this article, this can make sense for some hotels. However, there are some other considerations before following this course.

Before offering every OTA the same rate, consider these factors. OTAs list hundreds of hotels in most markets. If your hotel does not appear on the first page of search results, the odds of you getting any incremental bookings from the OTA are reduced dramatically. The best method to get your hotel to appear on the first page of search results is to offer the OTA a special or exclusive deal. This precludes rate parity. Therefore, in order to use OTAs to drive real incremental revenue to your hotel, you should select the strongest OTA in each geographic source market that you have targeted, and make them your true marketing partner in that region. When doing so, you should insist on preferred placement in return for the exclusivity. These same principles apply to travel agency consortia. If the partner OTAs do not generate any incremental revenue, then the deals should be scuttled and new partners should be found.

The argument against this strategy using rate parity applies to those hotels that because of their lack of any unique selling features and need for distribution everywhere possible, must have a presence in all distribution channels. Before adopting this strategy, I recommend carefully evaluating your market position. Finding a few true distribution partners can generate far more revenue than a “one rate fits all” approach. To summarize:

  • Consider other factors before assuming OTA distribution agreements are necessary
  • The stronger your hotel’s market position, the less there is a need for OTAs
  • Hotels lacking unique selling features and brand strength may need wider distribution, and therefore rate parity across multiple OTAs
  • Properly structured exclusive deals with a select few OTAs can generate more revenue than rate parity across many OTAs

How well known is the hotel’s own website and what efforts have been made to promote it?

In addition to brand awareness, another factor to consider when contemplating rate parity is the strength of the hotel’s own website. In some cases, this may include or be limited to the parent company’s (franchisor, management company, etc.) website. Before offering rate parity through all distribution channels, consider these factors:

  • Is the hotel’s website well known and easy to locate by all target segments and intermediaries?
  • Has the hotel made a significant effort to promote booking through its own website, such as low rate or best rateguarantees and or exclusive offers?
  • Is CRM being used to drive customers to the hotel’s own website?

Before extending rate parity to all distribution channels, consider making a significant effort to promote the hotel’s own website first. Use the above concepts before surrendering to widespread rate parity. Bookings made through the hotel’s own website are almost always more profitable due to lower cost of distribution. To summarize:

  • Before offering rate parity across multiple channels, make every effort to drive new and existing customers to the hotel’s own website. These bookings are more profitable and provide the opportunity for developing loyalty through CRM programs.

Rate parity can be an effective method of gaining widespread distribution with many partners in multiple distribution channels. However, rate parity is not a guarantee of more revenue. Before adopting rate parity, consider adopting the above analyses and practices. Used properly, each concept discussed can lead to incremental revenue.

Jon Pyle
Jon Pyle

Prior to founding roommarketer in 2003, Jon operated Pyle Marketing Group from 1991 to 2003, and held a senior sales and marketing management position with Mandarin Oriental Hotel Group in North America. In addition, Jon has held sales and marketing management positions with Jetset Tours (North America), and The Hertz Corporation. Since 1991, Jon has worked with dozens of the world’s leading hospitality companies, achieving results that have won him praise from small hoteliers to executives from the world’s largest hotel organizations.

0 Comments

Leave your comment