Rate parity is the process by which travel agents force hoteliers to give them a price no higher than it is on any other website. This supposedly forces prices down and is good for the consumer. Sounds good, right? Imagine you are a hotelier and you get quite a bit of walk-in traffic or repeat business and you are happy to charge a hundred dollars a night. However you need to fill up the last 20-30% of occupancy using travel agents. Now these guys tell you that they will not add their fee on top because it makes their prices uncompetitive. Instead they tell you that you will need to sell on their websites at 100$ or less and they will invoice you 17% so you will earn no more than 83$ per booking. Ok, so there is no harm in this you think. You are using these agents to fill bookings you would not have had otherwise.
Affecting The Price The Customer Pays
Not so fast. Many users Google your hotel name to check if they can get a better price at the hotel. When you offer the same price as the agent the user has no incentive to book with you. That customer was prepared to pay 100$ but you get only 83$. If you were free to charge what you want on your own website you could even offer 99$ and still get the sale. All the money would be for you.
Lowering Competition Between Travel Agents
This is not the only reason rate parity is bad. Let’s say a big agent, Mega-agent.com can get away with charging 17% commission just because of the sheer volume of bookings he brings. And let’s say another agent, Mini-agent.com would like to charge only 10% to gain market share. He will not be able to do this because if the hotelier gives Mega-agent.com a price of $100 a night he has to give Mini-agent.com $100 a night too. Mini-Agent.com can charge 10% if he wishes and the benefit will go to the hotelier who now gets 90$ a night instead of 83$, but the benefits don’t reach the consumer. No additional demand can be generated by agents dropping their fees. Rate parity is a form of price fixing. And whilst price fixing can benefit the seller, because small agents have no incentive to drop their fees unfortunately this benefit accrues to the agents and not the hoteliers.
Bidding Up The Price For Adwords
By supporting the strongest of agents, hoteliers are making a rod for their own back. Large agents strengthen their infrastructure to outbid hoteliers for customer eyeballs. These days a big agent does not even try to make a profit on an Adwords click. They are after repeat visitors and this means they can bid three times the price per click of a hotelier who is looking to do business with the customer only once. This is why you don’t see hotels bidding on Adwords anymore. “But agents would not survive without rate parity and then we would have no sales from them at all,” you say. This is highly unlikely to be the case. Housetrip has a policy of marking prices up to reflect the extra value they create and they are a strong market player. Yes, if commissions stayed at 17% then consumers would get wise but if competition were to drive margins down to 5 or 6% then there is no reason why consumers would defect in droves to search for the hotel’s own website. “Ok, but if hoteliers could charge whatever they wanted,” the argument goes, “there would be price gouging and hotels would even sell at a loss to one-up their competition.” Again this is propaganda spread by the agents. Hoteliers already live in a highly competitive environment and already engage in such practices. Price competition is already fierce.
And what about Vacation Rentals?
We are lucky in the vacation rentals sector that this practice is not yet standard and we should resist it at every turn. Rentals United is a net pricing platform meaning agents can mark your property up as they see fit. There is no fixed margin and this will force agents to lower commissions to compete. We do not support the rate parity model.
How Hotels Could fight Back
Hotels loathe the big agents and the fees they pay to them, but they contend they cannot live without them. I would propose a test. Let’s see what happens if all the hoteliers in one town get together and agree not to work with rate parity and thumb their nose at the agents for a year to see what happens. Without the opportunity to play one hotel off against another the agents would have no option but to comply with their demands or to stop selling the town altogether. Do you think travelers will stop coming to this town? Of course not. The smaller agents who have fair pricing practices will be able to sell the hotels and will be visible in Google, as will the hotels’ own websites. Another scenario might be an agreement among the top chains of the world to refuse to work with rate parity. It would have pretty much the same effect. Airlines refused to work with rate parity and you can see the result. There are no dominant travel agents which dictate to airlines how they can price their tickets. Is it time to rethink rate parity? We think so.
I was contacted by Dorian Harris, the founder of Skoosh who made a complaint to the office of fair trading about exactly what I’ve described above. You can read the final sorry outcome here. If you liked this article try our newsletter to get regular updates and feel free to share on social media.