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The Flaws of Hotel Rate Parity

Albert BarraAugust 13, 2018 · 4 min read
THE IDEA

This article examines rate parity in the hotel industry and argues for greater hotelier control over distribution. It explores how blanket rate parity can undermine revenue management and RevPAR optimisation, and why commissions, distribution costs and sales volume should be considered when setting channel strategy. Using three different distributors as examples, it shows how inconsistent inventory and pricing structures can create unnecessary complications for hotels.

The Flaws of Hotel Rate Parity
My previous article has prompted objections (and many messages of support) that I would like to address in a series of articles. The first issue I wanted to discuss is rate parity, which we have debated on these pages before. If we were to ask 10 hoteliers why they must apply rate parity across their distribution channels, most likely one or two would not know how to answer, while the rest would unanimously state that it is imposed by distribution channels rather than being their own choice. In other words, hoteliers are forced to apply rate parity, most likely against their will and in order to accommodate all their distributors equally. It should be made clear that I am not against rate parity, but rather in favour of hoteliers controlling their own distribution. With this in mind, I can state that rate parity, far from improving hotel performance within its distribution system, constitutes a genuine burden on the results of its Revenue Management strategy. Treating all distributors equally is a major mistake, just as distributors do not treat hoteliers equally when it comes to commissions, volume rebates and other fees. Furthermore, if contractual terms vary from one channel to another, and the channel with the highest cost of intermediation is not always the highest producer:
  • why should pricing be considered uniformly for each and every one of them?
  • Why, when discussing rate parity, do they refer only to retail rates and never to net rate parity?
  • Is their margin sacred? Shouldn't each distributor's margin be based on its value?
Indiscriminate rate parity across each and every distribution channel, regardless of its commission and sales volume, generates a chain reaction that makes RevPAR optimisation impossible—or rather, slows it down. Let us consider an example. Let us consider three distributors: The Distributor A is a Central Reservation System. It has a high cost of intermediation, but its value can be considerable, as it distributes our property through Travel Agencies, GDSs, as well as a good number of Online Travel Agencies. Due to its management model, the hotel can load different inventory allocations for different rate levels in order to facilitate its yield management. Once the lowest rates are sold out, it proceeds to sell the inventory at higher rates. In this way, the hotel sells at higher prices as it consumes its inventory. The Distributor B is a reputable Online Travel Agency, with high production for the hotel and a moderate cost of intermediation, even lower than in case A. Here, to make availability searches more flexible, a single rate is managed, which obliges the hotel to continuously maintain its inventory in order to remain competitive and maximise its yield management performance. The Distributor C is another Online Travel Agency, in this case with lower sales volume; the cost of intermediation is not decisive in this instance. A single rate is also loaded, but sales volume is low, so inventory barely turns over and requires little maintenance. As a result, the hotelier usually leaves it open for sale so as not to have to worry about maintaining it. Let us assume that the Central Reservation System sells out its allocation of 10 rooms at €90 for a given date. Logically, it will then proceed to sell the next tier of its inventory, namely the rooms it has open for sale at €120. But of course, distributors B and C will probably still have part of their inventory available at €90, so the hotel will very likely receive a telephone call from the Central Reservation System asking it to match the prices. In response:
  1. Will the hotel raise the prices of distributors B and C to €120? I do not think so. Furthermore, Distributor B could probably penalise the hotel.
  2. Will it allocate more inventory at €90 to Distributor A? It most likely will.
Where is Revenue Management in all this? The party exercising the greatest power here is neither A nor B, but Distributor C, with the lowest sales volume and barely any inventory turnover. It is the one retaining the low rates that set the minimum price and the maximum price at which the hotel can sell. Does Distributor C deserve to benefit from rate parity, thereby harming RevPAR optimisation?
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