Is Dynamic Pricing Relevant for Your Hotel Programme?

By: Kevin Iwamoto

Now that hotels are better optimising revenue per room, travel buyers need to think carefully about their sourcing model
In full transparency, I was a global hotel programme category leader for HP for many years. We had the large volume global spend numbers that suppliers worldwide find exciting and attractive. We had hundreds of preferred hotels globally and had to deal with the local non-GDS rates that were only made available for the local market and never meant to be made available to a corporate hotel programme (India, for example, is notorious for this practice). Not only did we interact with our corporate preferred supplier partners but made allowances for local marketplace suppliers that were being patronised by local staff. The primary argument was that the global chain properties were too expensive for local and regional staff but were OK for the US travellers.

I often heard of companies using 2 and 3-star properties locally while only allowing 4 stars and above for US travellers. No matter what geographic region, the local vs. corporate preferred argument for properties was an international justification for the inherent failure of the global corporate hotel programme to capture and adjust to global marketplace dynamics and prices.

By the time I was leaving the industry as a corporate buyer, “dynamic pricing” was being introduced at all the chain property advisory boards that I belonged to and was being universally rejected by other hotel buyers like me. The age-old traditions such as annual hotel RFPs, negotiating last room availability (LRA), service amenities and selecting preferred hotels for a global directory were set in stone. Around the time I was leaving HP and my corporate buyer status, I recognised that the industry was changing and I could completely understand why the hotel chains were pushing for acceptance of dynamic pricing.

A common definition
Dynamic pricing simply means that you give your corporate clients a percentage discount of your BAR (best available rate) instead of a fixed (or seasonal) contracted rate. The corporate rates, and all other rate plans, basically adjust as yield is applied (up or down) to the pricing and availability of the hotel room inventory.

Revenue optimisation – where it started
The hotel suppliers have become very efficient in using client booking patterns and demands to develop revenue optimisation projections. This is a total break from the legacy cookie cutter discounts which were based mostly on volume and market shares.

This change was a move from guesswork and anecdotal client projections into a more solid numerical quantification which was well received by the property owners and general managers. In case you are wondering, the main components for revenue optimisation are generally:

Multiple inventory buckets and price points
Market segmentation
Business traveller versus leisure traveller pricing dynamics
Varying degrees of booking date flexibility
Travel day
Length of stay
Advance purchase
Refundability
What has led to this drive for customer revenue optimisation by the hotel suppliers? It’s primarily driven by the ultra-sophisticated revenue management systems that all the mega-chains have developed to put more quantifiable data into their business processes to determine which clients and programmes are most optimal for their overall profitability.

Yes, they have all succeeded in this optimisation ritual while the buyers only defense has been to engage with third-party analytical companies either independently or part of their TMC supplier partner relationship.

Here’s a snapshot of what has happened rapidly over the past few years.

Revenue management, yield and hotel systems are becoming more complex
Room types now match the number of number of inventory categories that airlines have
Hotels are smarter now about how they manage inventory
Hotels have granularised layers of room inventory (Club Access rooms, Higher Floor Room, Deluxe Room, Standard Room, Breakfast included, etc.)
Increasing room inventory that’s more market based/dynamic driven rather than fixed
Introduction of 48-hour cancellation pricing
Introduction of resort fees (isn’t it amazing how many properties consider themselves resorts now?)
These trends are now affecting travel buyers where more and more fixed pricing strategies for hotel programme s are becoming less effective.

Our recent Rate Audits for clients suggest most programmes only get their negotiated rates 60-70% of the time. Therein lies the problem; traditional negotiated hotel rates are a static solution to a dynamic situation where:

Compliance is impacted
Leakage occurs more often
Savings are harder to measure
Trust is eroded between buyer and supplier
What are the pros and cons of each model?
To have that discussion one should compare the current prevalence of fixed negotiated rates and dynamic pricing rates for corporate hotel programmes.

Fixed negotiated pricing advantages and disadvantages

Fixed pricing is intended to attract more customers and clients because it offers them rate assurances. Fixed pricing is also consistent, so customers get used to your pricing and you have less risk of offending them by fluctuating prices over time. Cost savings, market share commitments, sales forecasting and profit estimates are also simpler when both buyer and supplier knows the set price points.

The risk with fixed pricing is that it doesn’t allow for the marketplace and seasonal inventory adjustments. The buyer also risks the possibility that their cost basis could be higher than their negotiated fixed prices. The customer pays the established price regardless of changes in seasonality, marketplace demand, etc.

Dynamic pricing advantages and disadvantages

Dynamic pricing allows hotel suppliers to maximise profitability with each customer. Another strength of dynamic pricing is the ability to adjust prices based on seasonality, marketplace conditions (i.e. conventions, special city-wide events, etc.) and available room inventory including fluctuating demand. Some other advantages of dynamic pricing are:

You can model programme value more effectively versus fixed rate
You should expect discounts to apply to all bookings
Bookings should not be undercut (at the same time) at the same property as fixed pricing will often be
However, dynamic pricing can lead to customer alienation. If customers realise they paid higher prices than others for the same solution, they may demand their money back or spread negative messages in the marketplace. This approach also may turn off customers who prefer to know the set price up front for budgeting and cost savings ROI calculations reporting. Another challenge for companies that use dynamic pricing is the need for advanced technology programmes to optimise price adjustments over time. The travel and meetings hospitality companies have invested a lot of money into intricate software solutions programmed to adjust prices in real time based on demand.

Now let’s throw in the technology disruptors also pushing industry changes

Specifically, while there are others, the two dominant disruptors have been YAPTA and TripBam. These technologies have received some effective and attention-getting reactions from hotels because their clients are now using their own dynamic pricing strategies against them via the introduction of TripBam and YAPTA into their corporate hotel programmes. Many early adopters have some compelling success stories and there are also some case studies available online.

At a high level, what do these disruptors do for corporate hotel programmes? They offer:

Continuous shopping/rate assurance post reservation booking
They are now working directly with corporate hotel programmes
They have signed agreements with TMCs as intermediaries for their products and services
Is your hotel programme ready to start making the shift?
My best recommendation is to review your current hotel booking data and analyse the trends. What percentage of hotel bookings are already being booked due to dynamic pricing vs. your fixed corporate directory rates? Also, review your annual cost savings numbers – are they higher or lower than the years before? The details you need to make this critical decision can be found in the data.

If you do not know how to interpret or retrieve this data, hire industry professionals who can assist you. Only after careful review of your annual hotel programme data and trends will you feel comfortable enough to focus more on a dynamic pricing-based programme and move away from fixed pricing strategies.

The decision for fixed versus dynamic will need to be made on a case by case basis depending on the fixed rate usage and value at a given property. The results of this analysis vary by market and property.

In conclusion, I would like to provide some interesting food for thought: moving to dynamic pricing discounts would reduce or eliminate the tediousness, rising costs and inefficiencies of continuing the annual RFP process. Now that in itself should be an incentive for change for both buyers and suppliers!

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