Recent decisions made by the governments of several European countries may have a significant impact on the online hotel distribution system. Hotels will be able to introduce more flexible and independent rate policies. Who wins and who loses on abolishing the parities?

The French administration body that oversees competition on the Internet received a complaint from French hotel operators’ associations and the Accor group which resulted in Booking.com being forced to introduce a number of changes that allow hotels to introduce more flexible, fully independent – at least in theory – rate policies.

Europe leads the changes

Recent decisions made by the governments of several European countries may have a significant impact on the online hotel distribution system. The French administration body that oversees competition on the Internet received a complaint from French hotel operators’ associations and the Accor group which resulted in Booking.com being forced to introduce a number of changes that allow hotels to introduce more flexible, fully independent – at least in theory – rate policies. These changes mean that hoteliers no longer have to abide by the rate parity when dealing with partners, both online booking platforms and traditional sales channels. Hotels will also be able to offer more convenient terms of sale than those of Booking.com, both in their own and their partners’ distribution channels. The freedom to make independent business decisions also applies to allocating the numbers of available rooms to individual sales channels.

Similar decisions were made around the same time by competition monitoring bodies of Italy and Sweden. Legal procedures questioning the rate parity are currently underway in Germany and Great Britain. The European Commission is also looking into online hotel distribution as part of a broader electronic trade investigation. As we can clearly see, the rules of the game in Europe are bound to change soon, however the same cannot be said about the United States. Not too long ago, the rate parity practice was deemed to be compliant with US competition regulations. Last year, a Dallas court ruled that setting uniform rates for the biggest OTAs (Online Travel Agent) by hotel groups is a ‘rational business practice’ that does not go against the interests of consumers and does not hinder competition.

Who wins, who loses?

A new deal is approaching in the rate game between hotels and online partners in the European market (including Poland) and, perhaps in the future, the global market as well.

Who may benefit and who may lose from this turn of events?
Abolishing the parity seems to benefit hotels, especially those that are not part of a chain and, thus, not required to implement a corporate rate policy. Hotels will be able to vary the services that they offer through individual distribution channels in line with their own criteria, for example depending on the commission fee charged by the partners or the segment of the market that the partner specialises in. As regards hotel chains, they are certainly more attached to the rate parity as it allows them to position their brand and maintain uniform prices across all of their hotels. In this case all decisions concerning differentiating prices across distribution channels will most likely be made at the central level, which will allow hotel chains to maintain a coherent rate strategy.

Regardless of the rate parity, hotels will still be able to utilise such rate mechanisms as promotional or corporate codes and package offers which, even now, give them a certain degree of freedom when negotiating with OTA partners. Abolishing the rate, availability and terms of sale parities will obviously not be well received by the biggest OTAs, such as Booking,com and Expedia. They draw in large revenues, mainly due to their 15%-25% commission fees, but at the same time incur heavy expenses mainly tied with advertising and positioning on the Internet (in 2014, over 30% of revenue generated by Priceline, the parent company of Booking.com, was spent on advertising and positioning). The struggle over advertising space and customer attention causes a constant increase of expenses. In these conditions the competing rates of smaller partners, who have less expenses, would put additional pressure on leading OTAs which could lead to them lowering their commission fees.

The pressure would be increased by the fact that diverse rates in the market would be made more evident by rate comparison websites, such as Kayak and Trivago. Rate diversification would probably make these websites the go-to tool for prospective hotel guests, making them leaders in the hotel distribution ecosystem.

Equilibrium returns

Rate diversification will greatly benefit customers – following the decision of the French authorities, even Booking.com issued a press release stating that it will allow for: ‘greater transparency and increased competition between online booking agents. Removing the rate parity will not bring an immediate increase of hotel revenues. Hotel operators should take into account a number of interdependent factors when adopting a diversified rate strategy. Is a partner who charges lower commission fees able to promote the hotel’s services as successfully and bring in a comparable number of bookings as a more expensive partner? How does promoting the hotel through its own website, which is potentially the most financially feasible solution as it does not involve paying commission fees, compare against selling the services through individual distribution channels? How many bookings does the hotel website bring in compared to OTAs? Does selling through a channel with lower rates increase the total number of bookings or does it cannibalise the bookings of another channel?

Abolishing the rate parity will require hotel operators to seek answers to these and many more questions. Finding an optimal solution for your hotel will require adopting a proactive approach to managing your portfolio of sales channels and a gradual modification of parameters meant to maximise revenue and profit. This will require using the right tools, which will aid in making decisions and streamline their implementation.

Flexible strategies and effective management

One of the most notable advantages of tools that automatise online hotel distribution is increasing the control that the hotelier has over the rate policy of his establishment while minimising the effort that rate management would otherwise require. For most hotels, which adhere to the soon-to-be-gone rules of the game, one of the most important functions offered by the tool is controlling the rate parity. Once the rate parity is abandoned, other functions that allow to coherently conduct a diverse rate policy in all of the hotel’s sales channels will gain importance. Tools such as YieldPlanet’s Channel Manager give hoteliers full control over the parity as well as flexibility when setting rates for individual partners. When the rate parity is no longer in force, tools which make it possible to follow the rate strategies of competitors, such as YieldPlanet’s Price Shooper, will grow in importance.

Most hoteliers agree that discounting is necessary during difficult economic times. It is also necessary during peaking times. Discounting is typically done to achieve additional revenues by enticing guests into booking hotel rooms by lowering rates in order to increase occupancy in the short-term.  

It is a well-known fact amongst senior revenue management experts, that decreasing room rates does not bring higher room revenues. In fact , decreasing room rates dilutes RevPAR. Instead, hoteliers need to focus on the bigger picture — overall strategy and value. There have been numerous arguments and studies surrounding whether discounting is beneficial or harmful to hotels. Research has shown that hotels with an ADR significantly lower than that of their competitive set have an inferior RevPAR performance relative to their competitors.  

According to research conducted overall, for hotels that held their price below that of their competitive set, average percentage differences in occupancy was higher, but average percentage differences in RevPAR were lower as compared to the competition. For hotels that held their price high relative to their competitive set, on the other hand, average percentage differences in occupancy were smaller, but average percentage differences in RevPAR were greater.  

According to the research, hotels with ADRs 12% to 15% lower than those of their competitive set had 10.38% higher occupancies but recorded a 4.44% lower RevPAR. However, hotels that priced 6% to 8% above their competitive set obtained a lower occupancy by 1.84% but a higher RevPAR by 5.02%.  

The research also included information about the different hotel market levels. The results show that the relationship holds true across all different hotel levels, from luxury to limited service.  

Over the years my own experience supported with research it is obvious that discounting is not the best course of action just because a hotel needs to achieve their budget or to generally increase revenues. My experience in multiple markets has shown:  

• Hotels still haven’t learned that dropping rates will not recover enough revenues to cover the discounting. These just cause price wars in the long run.  
• Discounting can cause Price Wars!! How low does one go? It can also cause “rates versus perceived services” issues. If one sells too low this may cause damage to a brand’s perceived image.  

• Discounting is not a demand generator unless the discounting is tied with a strong marketing plan. Discounting as it is practiced by most hotels allows for customers to buy up but does not necessarily drive demand. Instead discounting has a cascading effect that will impact the overall competitive landscape.  

Why Do Hotels Discount?  

The basic principle and foundation of discounting is to try to fill rooms that would otherwise remain empty.  

Discounting is an attempt to increase occupancy. This is achieved by potentially stealing market share from the competitive set by enticing leisure customers or price- sensitive customers who may respond to the perception of a better value.  

Additionally, by increasing occupancy it provides the hotels with opportunities to generate revenues throughout the other revenue generating departments at the hotel. It also provides the hotel with more cash flow during difficult economic times.  

While there are some potential benefits to discounting it is of the utmost importance that hoteliers understand the complexity and dangers that discounting may potentially bring.  

The following charts illustrate the complexities of discounting and how important it is to understand the impact discounting has on a hotel.  

 They illustrate the occupancy needed in order to make up for the discounts that are applied to the rates.  

Using this example, if a hotel running a 60% occupancy drops its rate by 10% it will now have to obtain a 66.7% occupancy in order to reach the same overall forecasted revenue. This increase in occupancy is necessary just to break even. In order to increase revenue, the hotel would have to achieve an occupancy greater than 66.7%.  

A hotel that drops its rates by 20% and previously ran a 60% occupancy would need to obtain a 75% occupancy to make up for the lost revenue.  

Rate parity is now very much on travel industry’s lips. The buzz around this controversial and complicated topic, follows recent agreements between the competition authorities in France, Italy and Sweden and Booking.com.

Antitrust legislators throughout the EU are pushing major online travel agencies to amend their rate parity agreements to allow for more competition among suppliers and distributors. The aim is to create an environment that supports increased transparency and competition among OTAs which would ultimately benefit consumers. Rate parity remains a double-edged sword though.

Regulators throughout the European Union are pushing major OTAs to amend their rate parity clauses, under which hoteliers must chart the same rate on their websites as on third-party distributors. France, Italy and Sweden took the first step, opening a fantastic opportunity for hotels to conduct a more flexible and theoretically fully independent pricing policy. These changes remove the bond to comply with parity price in relation to all dealers, both online booking platforms and traditional sales channels. Following pressure on Booking.com, the provision in their agreements that a hotel could not provide another OTA with a lower rate, disappears.

While rate parity agreements might be coming to a head in Europe, in the US, the practice of price parity is considered legitimate competition. Last year, a court in Dallas stated that setting equal prices among different OTAs represents a “rational business interest”, and it is not against the consumers nor breaches competition law.

I am a hotelier, how does these changes impact my business?

If you are a big hotel chain you most probably favour or at least accept price parity agreements as you wish to maintain control over pricing and brand equity. However, if you manage an independent hotel, a B&B, hostel or apartment, you most probably run into rate parity as a consequence of dealing with the big OTAs. You would rather prefer to sell a room at a lower price on your own website than through an online agency which charges you a 15-20 percent commission. In order words, you could undercut prices given to OTA to reflect commissions paid, and try to attract guests to your hotel website for a better deal.

The rate parity debate, it seems, continues. What happens next is still uncertain and only time will show if the rate parity „crisis” will turn into an opportunity to create a new business model in which the hotels and OTAs will work in the same direction.