Understanding rate parity and its impact on hotels

Rate parity is a common practice in hotel revenue management. It’s also a quite controversial one. The debate around its fairness is ongoing, and in one case, a dispute on its application even had to be resolved by a Supreme Court. 

There are two sides to the argument. On the one hand, it makes it easier for hotels to manage their pricing strategy, preventing dumping and price wars. But it also makes it more challenging to get travelers to book direct. 

In this article, we explore what rate parity is, its pros and cons, and how you can adapt to it successfully. 

Pros and cons of rate parity

Rate parity is regulated by contractual agreements between hotels, OTAs, and other booking platforms. This clause was initially enforced by large hotel chains in the pre-online booking era. As OTAs appeared at the end of the 1990s and started to undercut hotels’ rates, rate parity clauses were extended to them, too.  

Pros of rate parity

The advantages that rate parity offered to hoteliers back then still apply to hotel businesses today. 

• It ensures a level playing field between direct and non-direct channels, such as GDS, online travel agents, and brick-and-mortar travel agencies, preventing one channel from dominating.
• It makes pricing strategies easier to control, preventing dumping and price wars.
• It allows hotels to present a consistent brand image, increasing trust with guests and preventing brand devaluation due to too-low prices.

Cons of rate parity

Thirty years after OTAs started to appear their contractual power and commissions have increased considerably while new players—such as smaller OTAs and wholesalers—have also entered the supply chain. In this changed scenario, rate parity has presented a few revenue management challenges for hotels. 

• As a hotel, you cannot offer rooms for lower rates than OTAs on your hotel’s own website and must inform them whenever you’re running discounted promotions. OTAs, however, may offer lower prices than those on your website by cutting into their own commission.
• Wholesalers may resell your room inventory to lesser-known OTAs, adding a small markup and applying lower rates on public sites. A study by Lighthouse (formerly OTA Insight) revealed that European independent chains, especially, frequently suffer parity loss from non-contracted channels.
• Because of the proliferation of online booking sites, you may have to spend more time and resources monitoring rate parity to ensure it’s being maintained across different channels.
  
  

The debate around rate parity

The growing market power of OTAs has created a lot of controversy around rate parity. For more than a decade, a debate has been going on as to whether this practice is good or harmful for the hospitality industry and consumers. 

On one side, detractors claim that parity agreements are anti-competitive. By preventing hotels from setting lower rates on their own channels, the largest OTAs are damaging consumers and abusing their dominant position while preventing other smaller OTAs from entering the market.

On the other side, supporters of hotel rate parity claim that it actually helps the profitability of hotels. They argue that many establishments, especially independent hotels, don’t invest enough in marketing and direct booking technology, so even if they were allowed to offer lower rates on their websites, no one would see them.

Another point of contention is that forbidding rate parity would encourage free riding, meaning that travelers would use OTAs to find the hotel room that suits them and then finish the booking on the hotel website, where the rate would be lower. This way, hotels would be unfairly taking advantage of OTAs’ investments in marketing and website usability. 

Types of parity: Wide vs. narrow parity 

In Europe, regulators have stepped into the debate by limiting the scope of rate parity or even prohibiting it altogether. 

In 2015, following actions from French, Italian, and Swedish National Competition Authorities, Expedia and Booking.com decided to change rate parity clauses from wide to narrow throughout the European Economic Area (EEA).

Wide parity 

With wide rate parity—the type of rate parity known until then—if you enter a contractual agreement with an OTA, you won’t be allowed to offer a lower rate on any other channel, whether it’s your own website or another one. In other words, with wide rate parity, an OTA always gets to match the lowest available rate for that room, regardless of where it may appear. Its commission, however, won’t necessarily be lower.

Narrow parity

With narrow rate parity, the clause is only enforced between you and the OTA. While you’re not allowed to offer a lower rate on your website, you can offer lower rates to other OTAs or through offline channels, such as over the phone or to walk-in customers. 

The Europe-wide application of narrow parity clauses, however, was short-lived. In the following years, France, Austria, Italy, Belgium, and Switzerland adopted laws that banned the use of all parity clauses. In 2019, the German Supreme Court prohibited Booking.com from applying narrow parity clauses. The European industry association HOTELREC welcomed the decision as “a breath of fresh air for hoteliers.”

A similar prohibition was implemented in Australia and New Zealand, where Booking.com and Expedia were forced to use only narrow parity clauses. The debate on a total ban, however, is ongoing, with Tourism Accommodation Australia firmly in favor of abolishing all parity clauses. In the United States, rate parity is not regulated, and wide parity is generally applied between hotels and OTAs.

At the moment, the legal state of rate parity around the world is a confusing patchwork of deregulation, partial limitations, prohibitions, announced bans or bans applied only to some OTAs. 

5 strategies to drive direct bookings while maintaining parity 

When rate parity clauses are applied, the surest way to increase revenue is to drive more direct bookings to your hotel’s website. Here are the five best strategies to do that.

1. Add value 

If you can’t charge guests less, provide more value with extra perks. Think free parking, wi-fi, early check-in, late check-out, discounts to local attractions, flexible cancellation terms, and free airport transfers.

You can also add value (and escape parity restrictions) by offering special rates via social media, email, phone, or walk-in guests or by selling some room types exclusively on your website. With the latter strategy, however, you won’t be able to use the visibility provided by OTAs, so it’s best to use it only if your website already has a good amount of traffic.  

2. Optimize the booking experience

If you don’t want visitors to abandon your website without booking, you must offer the same level of user experience as OTAs. Invest time and resources to ensure that room rates, perks, and amenities are easy to understand and the booking process is seamless. Also, put a Best Price Guarantee statement on your website and monitor all public sales channels to make sure that no one is undercutting your prices.

3. Advertise on metasearch sites

Metasearch engines such as Trivago, TripAdvisor, and Google Hotels allow you to compete directly with OTAs, increasing the chances to drive visitors directly to your site. These platforms typically use a pay-per-click model, which is likely to be cheaper than OTAs’ commissions.

4. Create your loyalty program

Offering exclusive discounts to your mailing list is a good way to avoid rate parity restrictions and drive direct bookings. It also allows you to connect directly with customers, secure first-party guest data, and increase repeat bookings. 

5. Invest in digital marketing

The one surefire way to increase direct bookings is to invest in digital marketing. Pay-per-click advertising can be very effective in driving bookings in the short term, but it should be used in conjunction with other marketing tactics like SEO, social media, and influencers to increase visibility online. 

Once you have a solid foundation with the basics, you can raise the bar and move to more advanced strategies, such as using CRM data for segmenting guest profiles, personalizing campaigns, and retargeting ads. 

How technology can help 

Hospitality technology provides several tools to help you drive direct bookings and maintain rate parity. 

Integrated booking engine. Create the same level of booking experience as OTAs on your website, offering real-time availability, secure payment processing, and instant confirmations with a booking engine integrated with your property management system (PMS).

Chatbots. Mimic human conversations and offer basic assistance to website visitors such as responding to queries, suggesting rooms or putting them in touch with customer service. Chatbots allow you to start interacting with potential customers as soon as they land on your website and are becoming more sophisticated thanks to AI.

Customer relationship management software (CRM). A CRM gathers and stores guest data, helping you organize personalized email marketing campaigns where you can bypass rate parity restrictions with special offers. 

Channel manager. Helps you comply with rate parity clauses, by updating all different rates in real-time on all contracted sales channels.

Rate shopping software. Typically used to monitor competitors’ prices, it can also determine whether any booking platform is breaking parity. If the parity issues come from a contracted OTA, you can work with them directly. If the offender is a non-contracted OTA that bought room packages from wholesalers, you can try to reach an agreement to offer rooms to them directly. 

Final thoughts

Whatever the legal status of rate parity in your country, OTAs will continue to be a crucial sales channel for hotels. Whether you are a small independent hotel or a large chain, the best strategy to increase revenue without selling more rooms will always be to increase direct bookings.