Rate Parity Strategy can improve a boutique hotel's revenue

Most hotels find the issue of rate parity to be a headache, but there are ways to maximize your revenue and minimize frustration with this issue.  Some hotels think that parity is a contractual or policy issue, while others refuse to be intimidated by OTAs and insist on pricing each channel as they wish, based largely on commissions and selling costs.  These approaches may seem to work, but some hotel managers or owners are unaware of the negative consequences that can result.  We advocate a moderate and measured approach that maximizes revenue and minimizes some of the negative consequences. 

Whichever approach you choose, it is always important to understand the consequences of your actions, but doing that takes time, focus, data, technology, and experience.  The optimal strategy may be obvious to experienced, full-time revenue managers, but many boutique hotels cannot afford such expertise in-house, so this role may be one of the many hats worn by the GM, Owner, or marketing manager.  Below are some quick tips on how to understand this issue and maximize revenue in all channels.

Causes

In our regular work with boutique hotels we see parity problems usually caused by:

• Technology – Software that is not properly set up from PMS, to Channel Manager, to OTAs
• Non-rate factors – Minimum length of stay, Cancellation policies, and others
• Complex promotions and rapid changes – Hard to coordinate (and change) in each channel

Future blog posts will get into the details of each of these causes, but sometimes a fresh perspective can do the trick.  Most hotels (understandably) do not want to be told how to price their rooms.  In some cases, they are simply looking for ways to increase Direct bookings, but ignoring other channels.  Other times a hotel might assume that lower rates is all it takes to increase direct bookings, but this depends on more than price, including factors like:

• Overall merchandising and navigation of the hotel website
• Loyalty programs
• Global brand recognition
• Ease of use of booking engine (especially mobile)
• Value Add specials (shuttle, free breakfast, and others)
• Quality traffic (ready to book) coming to the website… Better rates help conversion, but generally they do not attract more, or better, traffic  

Before getting into the details above, it is often important to establish the right perspective and strategy and this should be done with data.  Gathering data for this may be tedious, but it will lead to a much better strategy than reacting on emotion and frustration.  After all, you want to improve the revenue and profitability of your whole business, not just one channel. 

Consequences

It may be odd to think of an OTA like a person, but OTAs are channel partners, just like traditional travel agents and behave rationally (for the most part :-).  Traditional travel agents choose which hotels to recommend and highlight to their customers.  If they recommend a hotel and the client finds a cheaper rate elsewhere, the agent may lose that sale (perhaps after investing considerable work), and in the long term will damage their reputation and brand. 

OTAs behave in a similar way, but with more automation.  OTAs spend money to get consumers to their website.  Consumers go to OTAs (and the whole internet) to shop around, so if an OTA has higher rates for a hotel, they may lose sales and their overall reputation will suffer.  The OTA will reduce visibility for such a hotel, just like a human travel agent, and naturally this reduces bookings from that channel.  Even though selling through an OTA can cost 15-20%, traditional agents often charge more... Plus an OTA sale is still much better than an empty room.  So, you can view the glass half full, or half empty.  When you hear that success in business often comes from a positive attitude, it is not always about smiles and cheery disposition, but is often about viewing these kinds of strategic partnership issues with a positive perspective.

The most critical drivers of visibility in OTAs are rate parity, reviews, promotions, and overall volume and revenue.  Give them a better product to sell and they will boost your visibility.  So keeping rate parity is a baseline starting point.  Drifting OUT of rate parity is the most reliable way to REDUCE visibility and bookings for your property.  Doing this well requires ongoing management - and software can help a great deal. 

It also requires some discipline when setting and changing rates during the year.  Many hotels make choices with cancellation policies, minimum length of stay, and promotions, that cause a rate to not display on one OTA, but be visible in another.  This can indirectly lead to a loss of rate parity, so with each decision it is important to understand that there may be unintended consequences. 

If a mistake happens, you should get an alert, and it is important to act quickly.  The longer the parity problem persists, the lower you will slide down the rankings.  The longer the problem persists, the longer it will take to climb up.  If you have a long history of parity, that can work in your favor by slowing the decline.  But if you engage in this behavior regularly, the algorithm will know this, and the decline can be quick.    

So, what should you do? 

Hotels have high fixed costs, but some boutique hotels find it hard to turn that into a business strategy.  Many experts say that empty hotel rooms incur 70% of the costs of occupied rooms.  Property and building costs don’t change much for a few less occupied rooms, and neither do some other costs like utilities and software and many staff positions.  That’s why the best strategy is to GROW the low-cost channels, while minimizing the downside in higher cost channels.

Expedia and Booking.com will check for parity on public sites and rates that do not require a login.  This means that some rates are not visible to these bots:

• OTA private rates available to Members or VIPs. This just means that these are people that have a login and email established with the OTA, but it has profound commercial implications.  These people are more frequent travelers and they get emails.  And the bots cannot detect higher discounts that require login.
• Airbnb requires a login, so we have not seen any rate comparisons that include this channel. Since commissions are just 3-4% you could price these rooms lower and still get more net revenue.
• Direct bookings should have a public rate that is equal to other channels, but you can offer additional discounts with a coupon or code. Naturally, you can also offer Value Add promos, such as free breakfast, shuttle rides, or to other benefits that are exclusive for booking direct (and you should make this clear to website visitors if you want them to notice) 

Unique Factors

Some additional factors, like repeat guests can also make a big difference.  You may have a high percent of repeat guests that return frequently and book a future stay on their way out or via phone or email, without shopping around.  You can offer lower rates to these customers, but you probably don't have enough of these to fill your hotel.  Loyalty programs or repeat guests are a major reason why large chains can risk losing some OTA business because they have ongoing contact and a direct relationship with many of their guests.  Just remember that for online channels it should require a login or code for extra special discounts, or you may lose visibility in some other channels. 

Most Important:  Calculate the Cost/Benefit Relationship

Perhaps the most important thing is to understand the trade-offs and measure the costs and benefits.  For example:

Benefits of lowering rates in the direct channel

• If you have 100 room nights coming through direct bookings each month
• And ADR of $200, then that’s $20,000 in monthly revenue
• Let’s say you lower rates in direct channel and gain 10 room nights. If that came from lower rates alone, and no extra marketing investment, then that’s a gain of $2,000 in net revenue.

Costs of this strategy would be revenue drops from Expedia and Booking.com

• Let’s say this particular month normally generates $20,000 in net revenue from OTAs
• With lower direct rates, visibility in OTAs drops, and net revenue falls to $15,000 this year
• That’s a loss of $5,000 net revenue

Gaining $2,000 to lose $5,000 is not a tradeoff that most businesses want to make very often.  In other scenarios, there may be more upside from lower direct rates, but make sure to gather all your expenses and do a proper cost-benefit analysis. 

Communication is key

Do not just lower rates without clearly communicating that on the website.  If you are going to offer something special or unique on your website (and take a hit from the other channels), then make sure you communicate this clearly to visitors, so that they will convert.  Any extra value that is exclusive to your website should be communicated as a reason to book now.  Otherwise, you may just be lowering rates for people that would have booked anyway.  Promo codes may also be an extra hassle for consumers, but it can avoid rate parity bots and still give consumers a discount – but only if they see it!     

Closing Thoughts

Rate parity is not usually contractual or legal, but make sure to check your local laws and OTA agreements before implementing the strategies above. 

The next few blog posts will go into more detail on pricing strategies and rate distribution technology, so stay tuned for next week’s email!