The Price of Rate Parity
On Monday, June 24th, 2010 hundreds of people gathered into a ridiculously freezing cold conference room at the Orange County Convention Center in Orlando, Florida to participate in HSMAI’s annual Revenue Management & Internet Strategy Conference. The opening session was delivered by a man named Rafi Mohammed, Founder of Pricing for Profit. Most of his speech revolved around supply and demand scenarios and cute anecdotes about how the people who sell umbrellas on the street in New York double their prices when it appears that it is going to rain. He also shared a story about his meeting with Don Henley of The Eagles, and how the band is one of the few that actually charges much more for their tickets because of the high demand for them. While the presentation was somewhat entertaining, the faces around the room were not exactly blown away with Rafi’s wisdom.
Toward the end of Rafi’s presentation however, he had the cojones to suggest that the hotel industry should offer variable pricing by channel. Suddenly the stress level of the room began to rise. I could see the half-asleep faces suddenly filled with a sense of anxiety and opposition. There were immediate protests from the audience. “Are you actually suggesting that we offer different rates in different channels?” one audience member asked. After the speech I heard murmurs of “this guy obviously isn’t from the hotel industry…” Isn’t it funny how uncomfortable a crowd can get when most people think the same way and someone gets up and publicly challenges that way of thinking? It’s amazing to me that someone who wrote a book called The Art of Pricing, which, as stated in the HSMAI program, “has been translated into seven foreign languages and earned rave reviews from The New York Times, BusinessWeek SmallBiz, Entrepreneur Magazine, and Forbes.com”, could be so easily dismissed by the audience because he was challenging a commonly accepted theory of the hotel industry. Could it be that Rafi Mohammed actually knows a thing or two about “the art of pricing,” and that we should take a second listen to what he was saying?
I reluctantly kept my mouth shut during the opening session (which, if you know me, you know was not easy)… but I decided not to turn the opening session into my own personal vendetta against rate parity. Later on that afternoon in the 2:30pm session, however, I was on a panel moderated by Cindy Estis Green with Robert Cole from RockCheetah and Valyn Perini, the Executive Director of the Open Travel Alliance. About half way through the session Cindy asked “So what’s the deal with rate parity?” and I just couldn’t hold back anymore. After the session, to my surprise, several people approached me (some from major companies that might surprise you) and asked me to write an article about this issue.
Where did this whole rate parity thing start in the first place? The way I remember it, when the OTAs first came around, they would vary their margins in order to compete with other OTAs. Later on, when hotel websites became stronger, hotels started undercutting OTAs in order to attract more business. Suddenly, back in 2003 I started hearing about this new thing called Rate Parity, and it started to creep its way into OTA contracts. In a nutshell, Rate Parity means that it is the hotel’s responsibility to ensure that the rate to the public for a given hotel room on a given day is selling for the same rate in all channels. So one channel may be taking 15% of the revenue, another 25%, and another 30%, but the hotel has to adjust their net rates accordingly so that each of those channels can compete with each other on a level playing field in the marketplace. Is it just me or does that seem like the most insane way to do business??
I’ve been ranting about this for seven years, since the first day I heard about rate parity basically. We are the only industry that I know of in which the burden of keeping the retail channels competitive on price falls on the shoulders of the suppliers. How did we allow this to happen? Do you think that Best Buy calls up Sony and says “Hey, we want to start making more money on your televisions, but we don’t want to raise our prices… so you have to lower yours?”
I’ve heard a lot of arguments for rate parity. “If you don’t have rate parity, it confuses the customer. The hotel will lose credibility with the consumer…” Oh really? If I’m shopping for a Sony television, and Best Buy wants to charge me $2,500 and Target wants to charge me $2,000, I am not going to blame Sony. They will not lose any credibility with me and I will not be confused. I will simply think that Best Buy is ripping me off, and that I should buy that television from Target. Perhaps there are certain customers that would say “Buy a television from Target? What are you nuts? I’ll pay the extra money to buy from Best Buy because I feel more confident buying from them,” which is totally fine.
So the bottom line is that I think rate parity is a farce. In fact, I think it should be illegal. Have you ever looked up “Price Fixing” in Wikipedia? Allow me to save you some time:
“Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand. The group of market makers involved in price fixing is sometimes referred to as a cartel.
Price fixing may be intended to push the price of a product as high as possible, leading to profits for all sellers, but it may also have the goal to fix, peg, discount, or stabilize prices. The defining characteristic of price fixing is any agreement regarding price, whether expressed or implied.
Price fixing requires a conspiracy between two or more sellers or buyers; the purpose is to coordinate pricing for mutual benefit of the traders. Sellers might agree to sell at a common target price…”
and it goes on and on… Is there any doubt that rate parity is a euphemism for price fixing? The funny thing is that since “the purpose is to coordinate pricing for mutual benefit of the traders,” it is normally the distributors that are guilty of price fixing. In the hotel industry, the distributors have gotten the hotels to do it for them, even though it is not beneficial for them to do so.
I remember vividly participating in the Cornell University Roundtable in April 2009. The roundtable was called “Customer Management – The Integration of Revenue Management and Marketing.” The topic of rate parity came up and as usual I went off on a tirade. Tim Gordon, SVP Hotels at Priceline.com, also participating in the roundtable discussion said “Our suppliers actually want rate parity.” That may be true if the OTA is undercutting the hotel website by reducing its margin, but let’s face it… if you have one source of revenue that costs less than 10% per booking, another that costs 15%, and another that costs 30%, it makes sense to charge a little bit less through the cheaper channels to grab the price sensitive consumers and make much more money.
Do most hotels really follow rate parity anyway? Don’t many hotels end up giving temporary exclusive deals to certain channels in exchange for better placement? Even if it’s a fifth night free, or some other subtle way of discounting… don’t those practices serve to break the rate parity rules set forth by the OTAs in the first place? Not to mention that this is always a source of tension between hotel corporate offices, OTAs and individual hotels. If we need automated robots to constantly monitor rate parity, a police force of market managers to enforce the rules, and individual hotels that are constantly finding ways to break them, doesn’t that say something about how most hotels truly feel about rate parity?
Furthermore, if a certain OTA can justify a high margin by stating that they spend millions of dollars in marketing and have built a strong brand with consumers, then charging a few dollars more shouldn’t prevent customers from shopping with them. The brand, which they claim is so strong that it warrants a hefty premium, should deliver enough value to the consumer that they are willing to pay a little bit more for it. Isn’t that how most industries work? If a brand is truly a high quality brand that delivers value, consumers will pay more for it. I suppose the OTAs could argue that the hotels are the customers in this case, and they should be willing to pay more to participate with a premium OTA brand. My question is, if the OTA brand truly delivers more value to the consumer why wouldn’t consumers pay more?
I would like to see a day when we move to NET rate parity. The hotel decides how much its room is worth on a given day, and charges that amount to all third party channels. Then it is up to each travel agent or OTA to decide how much they want to increase that price, and they compete with each other like any other normal industry in a capitalist economy. Is that really so crazy? I bet the meta search engines would love that. It would certainly make channel management much easier on the supplier. I also think consumers would love that. There will be certain customers that are loyal to a certain OTA… certain customers that prefer to book the hotel directly with the hotel, and some that just want the lowest price regardless of what kind of service or extra benefits they get. The hotels can finally take control of their pricing and choose to offer attractive discounts to encourage price sensitive consumers to book directly. I have a feeling we would also see some hotels charge more through their own sites for added benefits and services not available through other channels.
Unfortunately I don’t see this happening anytime soon. We have trained ourselves too well to follow the rules that have been set for us… and even if someone from outside our industry (let’s say… a published author with rave reviews and a Ph.D. in economics from Cornell) tells us that we should be doing things differently, most of us will just roll our eyes and defend our methods by saying “he’s not from the hotel industry… what does he know anyway…”