How to Improve Hotel Profitability with Rate Parity Data
There are many industries where third party reseller issues present a profitability and liability problem. Even Amazon is forced to contend with marketplace reseller issues, where federal courts ruled in an “unprecedented” decision that customers can hold the e-commerce giant financially accountable for defective products sold by third-parties.
The hotel management industry has bigger third party profitability issues than retail and other verticals. Hotel rooms are sold through third parties, specifically online travel agent (OTA) sites, more than any other industry. OTAs entered the market in the mid-nineties and since then have grown to take 39% of the US online digital booking market. This number is expected to climb to 41% market share by 2020.
Selling on OTA channels significantly dents the profitability of a hotel for a variety of reasons. A dynamic pricing model that responds to fluctuating supply and demand mandates that hotels use quality, up-to-date data.
There is an overwhelming amount of data hoteliers need to manage in order to respond to the market’s supply and demand fluctuations. PMS data can provide insight to the following questions:
Market segmentation: what segment of the market does each reservation fall under?
Rate code: which PMS price code is attached to each reservation?
Distribution channel: which distribution channel was used to make the reservation?
Location data: where is the guest traveling from?
Day of the week stay: which days of the week are being booked most commonly?
Length of stay: for how many room nights is each reservation?
Lead time: how far in advance is the reservation made?
Company: is the reservation linked to a company with a negotiated rate?
Agency: which travel agent made the reservation?
However, pricing needs to be informed by market intelligence data as well: everything from competitor data (revenue per available room, occupancy rates, and average daily rates from STR) to event data (i.e., when a local concert is in town or an airport terminal is being renovated). Rate parity data is the most critical touchpoint, offering a comprehensive view about how your hotel is selling on third-party channels. This data set is necessary for profitable pricing – yet many hoteliers struggle to get the full picture they need from OTAs and other third party partners.
Non-contracted OTAs obfuscate the data needed for a hotel brand to profitably price their rooms. Parity is also impacted by contracted OTAs who charge commission fees between 15-30% for larger hotel chains; sometimes higher for smaller shops. Here’s how parity works (or doesn’t work) in the hotel industry, and how smart hotel owners can begin to approach the data problem.
What is rate parity?
Rate parity, or disparity in the case of the hotel industry, is the difference between prices quoted on a hotel’s branded website versus the prices quoted by an online travel agent such as Booking.com.
When online travel agents first appeared on the scene, they were considered a promising new channel for hotel brands seeking to offload excess inventory in the off-season or reach customers through new and different advertising. However, as OTAs have become more popular, many hotel owners no longer see this relationship as a win-win: mostly due to parity issues.
There are two main scenarios where rate parity gets thrown off, mainly due to the way the hotel ecosystem has evolved to account for online travel agents. Here’s a snapshot of what the current booking marketplace looks like:
“The Rate Parity Playbook” by TravelClick (source)
Hotels, wholesalers, search engines, and OTAs are the main players in the “parity landscape.” As OTAs capture more and more market share, each relationship is impacted financially.
Contracted OTAs, those agents that work directly in a commissionable or direct net merchant agreement with a hotel, cause parity problems usually through technical issues. For example, tax miscalculations or other outdated “cached” data can throw off a pricing model despite the OTAs aboveboard commitment to parity with the hotel. Non-contracted OTAs that have a relationship with a wholesaler present a bigger problem. Hotels offer an exclusive “gated” rate to a third party reseller. That reseller turns around and unofficially resells rooms at that gated rate to a party who lists that rate publicly. This forces the hotel to pay a high commission for rooms that sell at a much lower rate, losing tons of profit in the process.
The problem of rate parity is only becoming more serious. Travelers are constantly comparing rates across channels – especially Millennials and Gen Y, who hold the largest travel market share at 33% of the market. When you consider that 52% of Millennials prefer to book using an online travel agent, the problem becomes clear.
“Customers are much savvier these days. I had a guest contact us on our website directly to ask, 'Is this the best deal you can give me? We are trying Airbnb as well'. We had that same guest going through Airbnb to see if they could get a lower price, and then they also went to the extended-stay agent. And this customer was actually part of a very big international company; they had a contracted rate with the hotel as well. The guest had all these different ways to contact the hotel and get the best rate possible,” says Jennifer Kim, the Director of Revenue Management at Cycas Hospitality.
How to solve the rate parity problem
The good news is there tools that hotels can deploy to solve the rate parity problem that arises from working with OTAs. Great rate shopping software should not only deliver real time competitive set intelligence but should also alert hotel owners when there are parity breaches.
Rate shopping software, like Rate360 by TravelClick, shows how your direct competitors are pricing hotels rooms. Additionally, Rate360 highlights channels that violate parity agreements. Hoteliers can use this information to react swiftly to unauthorized resellers, remedy parity discrepancies, and improve profitability by utilizing data that was previously unavailable. Both rate shopping and parity management platforms are easy-to-implement due to how they leverage publicly available data; this means there’s no integration with your existing software to work though.
There are many rate shopping tools out there that can map a hotel’s rooms, define competitive sets, and deliver reports to improve pricing decisions. In the past, we’ve highlighted a few of our favorites such as Rate360 which really stands out with it's integrated BI platform and parity monitoring system to give you a full view into the areas of your business that require attention.
Hoteliers can’t sleep on solving the threat to hotel profitability posed by working with online travel agents and unauthorized resellers. OTAs are only becoming more popular with travelers looking for the best deal out there. Therefore, it’s incumbent on hotels to take charge of their data and lock down pricing parity in their favor.