How Distributed Ledger Technology Can Align Incentives to Encourage Rate Parity in Hotel Distribution

The last few years have seen a steady rise in the impact of rate-parity and onward distribution issues on hotelier’s bottom line. GMs and revenue managers are scrambling to find best practices to adapt to these new distribution challenges.

At Arise, we believe that these challenges are actually symptoms of a much deeper problem.

Distribution technology in use today has been designed with goals that are out of alignment with hotelier’s best interests. These design choices incentivize business models that rely on imperfect information and rate arbitrage, taking advantage of hotel’s lack of visibility and control over their distribution to siphon off revenue at each step in the distribution chain.

Unfortunately there are few options available while hoteliers are reliant on distribution technology they don’t control.

Recent advances in Distributed Ledger Technology have created an opportunity for hotels to take a more active role in their distribution and align incentives with their interests, capturing more revenue for themselves.

Symptoms of a deeper problem

Rampant rate-parity issues are the leading indicator that hotels are struggling to execute their distribution strategy — a problem that costs hotels over $1 billion a year.

Many hoteliers focus on driving direct bookings and building brand loyalty, but when discount rates pop-up online undercutting direct rates, guest confidence in booking direct can be permanently damaged. The impact on revenue is greater than a single lost direct booking, as it’s likely the guest will continue to book through non-direct channels in the future.

Even major online travel agencies (OTAs) have adjusted their strategies. They’ve begun offering guests rates sourced from third party channels through platforms like Booking.basic and Expedia’s Add-On Advantage. They’ve made a choice to cut into their own margins in order to stay competitive with the rise of discounted rates publicly available on non-contracted OTAs that don’t have direct relationships with hotels.

A recent white paper published by TripTease entitled “Are we on the verge of a parity nightmare” quantifies the scale of the rate-parity issue. Analysis of their client’s Q4 2018 rate-parity statistics show direct rates were undercut by Agoda 27.5% of the time, compared to Expedia at 13.1% and Booking.com at 11.7%.

Most hoteliers point to wholesalers as the primary cause of their rate-parity issues. While originally bringing value to hotel distribution with their relationships to off-line sales channels, evidence suggests wholesalers have shifted their model and are moving more and more of their distribution through online channels.

We believe wholesalers are leveraging the lack of transparency in distribution technology to maintain plausible deniability when providing discount rates to online channels — in breach of contract with hotels. They are seizing this opportunity in order to secure their place in hotel distribution moving forward.

Technology from a different time

Current distribution technology was developed at a time when data caching was an acceptable solution to protect hotel central reservation systems (CRS) from increasing load as online travel booking exploded with the growth of the internet. OTAs could maintain their own local cache of data, and periodically synchronize it with hotel CRS. Results for online searches could be returned from this cache quickly and reliably without any reliance on hotel systems.

This design choice resulted in industry data formats that were optimized for caching. Primary identifiers of inventory and rates were reused and valid for long periods of time making it easy to create bookings from cached information. Unfortunately, this cache-based model removed hotel visibility and control over their data as soon as it left their CRS.

A second design choice involved the opacity of information surrounding the amount a guest paid when booking with a net rate. While this decision may have been acceptable when most net rates were being packaged and sold through off-line channels, the increasing probability that net rates will pop-up unpackaged online has made this lack of visibility a major pain point for hoteliers.

These two design choices have made it nearly impossible for a revenue manager to implement a distribution strategy. Any discounted net rate they push out for packaging can easily be sent to a non-contracted OTA and sold unpackaged to a guest. The hotel has no visibility or control into which non-contracted parties have access to their information and with no validation of the amount guests are paying for a booking any rate-parity policy can’t be enforced.

This lack of oversight by hotels has created a huge incentive for intermediaries to break contract to increase their margins and solidify the hotel’s dependance on the intermediary as a distribution channel.

It’s time for an upgrade

With the recent advances in Distributed Ledger Technology, it’s time to re-evaluate the design choices in distribution technology that are failing hotels.

Using this new technology, the advantages of the old cache-based distribution model can be combined with the transparency and control required to remove the incentives for the onward distribution of discounted rates that are causing so many of the rate-parity issues today.

Distributed Ledger Technology creates a shared, geographically distributed data store, replacing intermediary caches and the need to constantly synchronize data between different systems with APIs. It shifts storage and computation onto infrastructure run by network participants following an edge computing model. Edge computing allows for lower latency and better privacy and security because all data doesn’t need to flow through a central set of servers.

At Arise, we’re using Distributed Ledger Technology to offer hotels two features that aren’t available in distribution technology today. By providing visibility and control throughout the entire distribution network we help hotels fix the root of the problem plaguing the industry.

Our technology is different

The first change strips out the long term identifiers used to identify rates, inventory and content, replacing them with temporary identifiers. Without the need to optimize data formats for caching, we can make it much more difficult to pass useful hotel rate, availability and content data onto a third party without a hotel’s explicit permission.

The second change hooks into point-of-sale payment flows making an additional rate-parity check possible at the time of booking. The edge based computation model makes it practical to perform payment amount validation without transmitting or storing guest card data and remaining PCI compliant.

These two changes are already being used by industry leaders to control affiliate channels. Expedia’s EPS Rapid API uses both of these techniques to enforce restrictions on their affiliate network. Shopping results that are difficult to cache and built-in payment processing help Expedia maintain control over the data sent to affiliates. Expedia has been able to make these changes because they have the IT budget to build and maintain centralized infrastructure that can support the 200,000 requests per minute they serve to support their affiliate network.

With our technology, we’re able to offer hotels the same level of control Expedia has over their affiliate network without the large expenditure on IT.

How technology changes intermediary incentives

Technology that can enforce rate-parity is a critical piece thats missing from hospitality distribution today.

Most non-contracted OTAs offer little differentiation or competitive advantage over a hotel’s direct offerings or larger OTAs. They survive based on their access to discounted rates from intermediaries. They only capture guest business by undercutting hotel’s normal distribution channels.

If hotel’s could enforce an in-parity booking price on a net rates, the entire side of the industry built on discount rates would die. If unpackaged net rates cannot be sold to guests for a price below a hotel’s direct channel, the advantage non-contracted OTAs use to drive bookings would be erased. The additional revenue and bookings normally gained when an intermediary breaks contract would no longer be an incentive.

Channels that respect packaging restrictions and contracts could continue to sell hotel rooms bundled with other travel products for a combined price that is higher than the in-parity rate for the hotel room.

By removing the competitive advantage gained with access to discount rates, all parties will compete for guest business on an even playing field. Booking.com and Expedia will be able to shift away from third party intermediaries and rely on their existing direct relationships with hotels.

An Incremental Approach

Now that the technology is available, hotels have the opportunity to explore their role in travel distribution. At first taking control of distribution may seem daunting, but with advances in Distributed Ledger Technology it’s actually less complex than the processes in place today.

Our technology connects to a hotel’s CRS or Channel Manager and makes it possible for hotels to progressively roll increased control and transparency out to distribution partners in parallel to the channels they have in place today.

To start, hotels can provide access to rates through this new technology to unproven distribution partners, or renegotiate the broken contracts of intermediaries enforcing their use of this technology to continue a business relationship.

Ultimately it’s fallen on hotels to take action to stop the destruction of guest confidence in their brands and recapture revenue that has been slipping between the cracks in today’s distribution networks.

To learn more visit https://arise.travel/