Buyers Redefining Dynamic Pricing
Travel buyers and hoteliers, fatigued with repeated renegotiations to keep up with constantly falling hotel rates, are exploring dynamic pricing in hotel program negotiations this year, but largely coming to the table with disparate views of what such pricing would entail.
This year, however, buyers have had to return to the negotiating table several times to revisit rates set before either side knew the severity of the economic downturn. Hotel rates since have plummeted by double-digit percentages in many key business travel markets. Smith Travel Research´s latest projections are that U.S. rates on average will be down 9.7 percent year over year in 2009.
Some buyers already have adopted de facto dynamic pricing arrangements for travel this year. For example, Claudia Hurtado, global travel manager for AllianceBernstein, said her travelers are instructed to grab the lowest rate possible, so long it is at a preferred property.
"If I´m using my corporate rate as my cap within that property, and I´m telling the agency to book the lowest rate available within that property, we´re really not using our corporate rate," Hurtado said at a recent hotel program discussion hosted by the New York City chapter of the National Business Travel Association. "I´m now using the dynamic pricing model."
As negotiations begin this year, many buyers are trying to get that in writing. Bob Brindley, vice president of BCD Travel consulting arm Advito, said his company advocates locking in a rate with last-room availability along with a floating discount for situations in which the LRA rate is not available.
"This way, hotels can guarantee themselves to be price-competitive," Brindley said. "We´ll see more of it, though not necessarily do a lot of it, because you´ll have to negotiate two items instead of one: a rate and a discount."
One Corporate Travel 100 buyer already has successfully persuaded hotel chains to offer a global discount based on market conditions combined with a maximum cap rate. The agreements, however, did not come without resistance from hotel companies, the buyer said.
InterContinental Hotels Group earlier in the summer said it would invite its corporate accounts, particularly those in the Asia/Pacific region, to adopt a dynamic pricing model. Stephen Powell, the hotel company´s senior vice president of worldwide sales, said IHG was not interested in mixing that model with a capped rate, however.
"There´s nothing in that for the hotels," he said. "We´re trying to evolve this process, and there should be a renovation. It shouldn´t just be a tweak here and there."
Powell said IHG is pushing dynamic pricing to relieve the cumbersome burden of the requests-for-proposals process on both sides of the negotiating table. The RFP process and negotiating season already had been increasing in length every year, and the renegotiations this year have left both clients and hotel sales teams worn out, he said. Dynamic pricing with a capped rate would do nothing to ease the RFP process, he said.
"We have an account that delivers a lot of business on several days of the week, not on a seasonal pattern, and that company saved when it put a dynamic pricing scheme across the top," Powell said. "Because prices are fluctuating, they´ve been able to take advantage of that."
As for budgeting difficulties, Powell said corporate clients often can´t get their LRA rates during high-volume and high-price times anyway. IHG by no means intends to stop offering fixed negotiated rates, but he expected an uptick in dynamic pricing agreements this year, because "during extraordinary times, people will consider extraordinary things," IHG´s Powell said.
Buyers and consultants, however, remain doubtful that many travel programs will adopt a non-capped, dynamically priced program this year, particularly with buyers in the power seat.
"The only times we´re starting to see dynamic rate deals are in non-core locations, where the corporation doesn´t have the volume to negotiate a discount," said Margaret Bowler, director of global hotel relations at Hogg Robinson Group. "Even if it´s 10 to 15 percent off the best available rate, there´s no sort of mechanism stopping them from going sky-high. If you´ve got a procurement department looking at savings, the discount off the best available rate could be saving nothing."
Bowler saw some companies holding back on negotiations this year to wait for a better picture of what 2010 holds. For now, Smith Travel Research predicts rates will continue to decrease, although by a more modest 3.4 percent from 2009 levels.
IHG´s Powell said dynamic pricing comes with another advantage: It would be easier for buyers to negotiate multiyear hotel agreements with set discounts instead of set rates, making the RFP process necessary every few years rather than every year. Advito´s Brindley does not see that in the near future because of technological limitations in measuring and understanding complex hotel rates.
"If technology evolves and it becomes more of a transparent process, some could go multiyear," he said. Buyers often can negotiate multiyear deals with fixed or capped rates, but they´ll usually revisit them regularly to keep them in line with market conditions.
In the meantime, corporations without a dynamic pricing component also should be cautious about allowing travelers to book rates below the corporate negotiated rate, Bowler said. Not only does it affect volume, but also travelers could be missing out on negotiated value-adds like Internet access, which could bring the total cost above what the corporate negotiated rate had been in the first place, she said.
As AllianceBernstein´s Hurtado requires travelers to stay at preferred properties, other buyers have set rules to deal with price fluctuation. Michelle Pacheco, vice president of supply management at Credit Suisse, said during the NYCBTA session that she´s set parameters around nonpreferred bookings.
"Credit Suisse did not go to dynamic pricing as it is known in the industry," Pacheco said. "We have the option to book at a nonpreferred hotel that´s not on the list as long as it´s at least 20 percent less than the least expensive hotel for that particular city."