Why Rate Disparity Matters, and What to Do About It
Rate disparity, if left unchecked, can seriously impact your hotel’s bottom line. Hotels often find themselves with lower rates on OTAs and other third party channels than they do on their own website – that’s not good! So what can hotels do?
This article will cover:
- The impact of rate disparity on your hotel’s bottom line
- Causes of rate disparity
- How hotels can combat rate disparity and encourage direct bookings
If you’re not particularly familiar with rate disparity, or how it affects your pricing strategy, this guide is for you. We’ll be reviewing what rate disparity is, how it affects your revenue strategy, and what you can do about it.
Let’s get started.
Why Does Rate Disparity Actually Matter?
What does rate parity mean, exactly? According to Eye for Travel, it can be thought of as “maintaining consistent rates for the same product in all online distribution channels – Expedia, Orbitz, Hotwire, etc. – regardless of what commission the OTA makes.” It also applies to rates on your own website compared to third party sites. Put simply, you’re maintaining the same rate across all your publicly available rates. This means private loyalty rates, corporate or group rates, and inventory offered through GDS are unaffected.
Rate disparity, then, is when wires get crossed and lower rates are offered on some or all OTAs than the rates your own site.
Note: The reverse is much rarer. Rate parity clauses in OTA contracts usually prevent you from offering a lower rate on your own site. However, that’s not always the case – check your contracts to see, as not all of them will require rate parity, and recent legal changes may affect where OTA’s can require rate parity in any case.
Why is rate disparity important? There are two parties it matters to: you and the customer! It also affects OTAs, but they are mostly protected from harmful effects by their contracts – and if the price is lower on their site, it gives them an advantage.
For customers, it can be a matter of trust. If rates on your own “Best Rate Guaranteed” site are more expensive than those on the OTA, you might lose their trust or lead them to believe that an OTA is offering ‘discounted’ prices.
For hotels, when OTAs offer a lower price than your own website, there’s no incentive to book direct – and you’re still paying those OTA commission rates.
There are circumstances and strategies where different public rates will be encouraged, where possible. Open pricing is one example of this, and we’d encourage looking into it (along with more flexible public rates, open pricing advocates yielding up discount sites as demand increases, rather than closing them off. This is the same strategy airlines use).
However, if your hotel is following a fixed-tier strategy centered on BAR or other length of stay restrictions across all your channels, you’ll normally want rate parity. Even if you’re following an open pricing strategy, rate disparity should still be at your discretion, not due to a third party’s choices or an error.
Causes of Rate Disparity
If your hotel frequently experiences rate disparity issues, it’s important to know that it isn’t always deliberate. In fact, it’s probably mostly accidental.
Unintentional rate disparity is usually caused by – you guessed it – administrative issues.
Your hotel is probably active on many online channels. Third-party channels have been known to change their prices based on factors like price and location. This puts tremendous pressure on revenue managers to spend time they don’t have monitoring OTA prices in an attempt to continue matching them.
In Triptease’s 2016 study, “OTAs Undercutting Hotels: A Billion Dollar Sinkhole,” they found that:
- On average, the price on a hotel’s website was undercut by an OTA 1 in 4 times
- This undercutting is costing hotels over $1B a year in direct bookings
- Despite this, the direct price is an average of $10.27 cheaper across the board
What causes this high rate of disparity?
Their study lists 10 factors that lead to cheaper rates on OTA websites:
- Promotions might have been created directly with an OTA Market Manager or through and OTA extranet, meaning it isn’t available on the hotel website.
- A property has an out-of-date rate code still running on an OTA. Remember to close them!
- The OTA has failed to change the rate they were given , for technical or other reasons – this may apply across the board or only to certain geographic markets.
- The OTA is using a different currency conversion rate than your hotel.
- The OTA has a base allocation, and you’ve sold out all other rooms of that grade and below.
- Your Channel Manager is tracking inventory from your PMS, and the CRS is suffering latency errors and showing inventory that’s no longer available.
- The revenue manager might have linked the wrong OTA rate from their CRS.
- Your CRS does not support length of stay rates, but they are used on the OTA.
- Wholesale rates have been put on sale by the OTA – they might have sold them to third party sites. Unless your hotel has specifically agreed to the rates being sold, you can insist on the rates being removed.
- The OTA is using their commission to discount the rate or is applying a lesser markup to a net rate – this might happen all the time or only certain times, and may only happen for specific markets.
Tarun Gulati, who has worked in the hospitality space as both a hotel CEO and in hotel sales, has similar conclusions about the causes of rate disparity in his 2015 piece, “Price Disparity Could be Cannibalizing Your Hotel’s Revenue.”
He advises that human error during manual room and rate uploads to OTAs often occur, and it’s common for managers to forget to revise OTA rates during an update, or to accidentally leave old rates on certain sites. He advises a channel manager to solve this.
Other causes he lists are rooms being sold as a discount package by OTAs (which can be difficult for hotels to control, depending on their contract terms), inconsistent listings on OTAs (e.g. selling only luxury rooms on OTA X and only base category rooms on OTA Y), and OTAs competing with one another, treading into “grey areas of price parity agreements” in the process. When it comes to OTAs trying to beat the competition, Gulati recommends taking a firm stand – after all, when they exist, rate parity agreements go both ways.
Most of these problems, as you might guess, are easy to resolve. The trickiest part is staying on top of problems! Fortunately, there are several technology providers that offer potential solutions for monitoring and adjusting rates – all you need to do is figure out which one is right for you
How Often Does Rate Disparity Happen?
Rategain’s March 2016 study analysed degrees of rate parity by location.
They found that Dublin held steady at 26% rate parity (or 77% disparity), and London had just 13% parity between hotel brand websites and OTAs. For Dublin, on average, 26% of hotels practiced parity, 23% had hotels offering better rates than OTAs, and 51% were cheaper on OTA sites.
In Venice, a shocking 97% of hotels offered better rates on OTAs than their own site – only 3% of Venetian hotels offered better rates on hotel brand sites, and no hotels included in the study practiced full rate parity.
That’s how we feel, too
A different study from the University of Delaware, led by Dr. Cihan Cobanoglu, also investigated instances of rate disparity.
In his study, they explored differences in room rates from 100 different 3- to 5-star hotels, based on the dates of booking and channel of booking. Here we’re focusing on the channel, since rates changing as the date of check-in approaches is normally just a reflection of an updated, clearer demand forecast for that date.
They compared direct channels to indirect channels. Direct distribution channels include calling the hotels, calling their reservation hotline (1-800 number, if they have one), and booking on the hotel’s website.
Indirect channels are OTAs like Expedia, Booking.com, Orbitz, Travelweb and Travelocity.
Dr. Cobanoglu and his team found that hotels trying to claim a “Best Rate Guarantee” on their site were facing a real challenge.
Indirect channels beat direct channel prices in every room rate collection point – 7 different channels on 4 different dates. Furthermore, demand on the date they were testing for was below hotels’ forecasts, leading to prices dropping as check-in date approached.
These results are not the most encouraging. Namely, they point to insufficient revenue management practices across the board in the industry.
Cobanoglu’s diagnoses was that “the hotel industry needs to react soon and address this disparity to maintain the viability of direct booking”, especially if hotels are claiming a “Best Rate Guarantee” on their own site.
How Hotels Can Combat Rate Disparity
If you’re advertising a “Best Rate Guarantee” or similar on your own site, which we recommend, it’s vital to follow through on that.
In most cases, OTA contracts will demand rate parity, although recent legislation indicates that the tide may be turning against these clauses. If your contracts include rate parity, follow the rules- but don’t give OTAs a better price!
Invest in the technology to monitor and update your rates if OTAs lower or raise them in certain times or locations. To comply with your contracts and avoid legal risks, it’s also important to monitor your own rates.
If your contracts don’t demand parity, offer a slightly lower rate on your own site than you do on third party sites.
Remember that rate parity clauses also generally only apply to publicly available rates – that means if you have a loyalty club, a discount group or similar, you can offer them better rates privately, via email, a login system on your website or over the phone. You can even offer lower rates to Facebook or Twitter followers!
What can you do for publicly available rates on your site to incentivize direct bookings? Offer perks! Free wifi, parking or discounted tickets to local events are all great ways to make your site’s offering more appealing than an OTA.
There are many creative ways to manage your rates, but you should always have one eye out for rate disparities. Correcting rate disparities only costs you time in the short term, and it can save you thousands in revenue.
When you overcome rate disparity issues, you encourage guests to book direct, maintain control over your property and prices, and give yourself the chance to capture more revenue.