Dynamic pricing continues to generate controversy and a wide difference in opinions between travel managers and hotel representatives. Preliminary findings from a study by BTE Tourism Training and Consulting and Buckheister Hotel Revenue Management suggested that hotel officials have much work to do if they intend to narrow the gulf between themselves and their clients and shift the managed travel industry to the new pricing model.
"Dynamic pricing is predicated on the fluctuations in supply and demand in the market," said Leslie Anne Palamar, principal at BTE Tourism Training and Consulting, during a presentation in May at an Association of Corporate Travel Executives conference. "In our study, we are referring to corporate contracted room rates that are discounted off a benchmark rate. Best Available Rate (BAR) is often used as the benchmark rate; however, other rates (i.e. corporate rate, consortia rate) may also be designated as the benchmark rate. Either the benchmark rate or the discount off of the benchmark will fluctuate in response to supply and demand, and therefore the term dynamic pricing."
Some hotel companies favor this modelas they focus on revenue management and strategic rather than tactical pricing, Palamar said. They are "looking at the pressure of demand from a different perspective and realize they can capture incremental revenue by adjusting rates," she explained. "With dynamic pricing, hotels are indicating they can open more room types to buyers. The client is generating more revenue because of more room nights," though not necessarily at higher average daily rates.
Speaking at a recent Midwest Business Travel Association meeting, Interstate Hotels & Resorts global director of worldwide sales Sean McCurdy said other drivers include consolidated ownership within the lodging industry, tight supply exacerbated in the aftermath of intense hurricane seasons and a desire to simplify the request for proposals process. Despite some common reasoning, McCurdy added, "Each brand can, and will, vary how they do dynamic pricing."
"Hotels expect or have found that this is a revenue-neutral exercise or a minimal shift up or down by 3 percent," BTE's Palamar explained. "So why bother? Hotels are looking at all the other things dynamic pricing addresses," including its efficiency and its "fair-market" basis that accounts for fluctuations between high- and low-season demand and pricing.
But travel managers are largely opposed, generally feeling ill informed about the model and unconvinced of its purported benefits. They fret over the impact on traveler per diems and other practical applications. Some existing request for proposals tools, for example, do not include dynamic pricing options, Palamar said. [A veteran of the National Business Travel Association's Hotel Committee, McCurdy said NBTA plans to include a dynamic pricing module in its RFP template for the 2009 bidding season.]
Palamar also noted that dynamic pricing could present questions about the inventory available to travelers at the point of sale and undermine longstanding relationships between clients and their hotel sales reps--who traditionally negotiate on the basis of "reference rates" from previous years.
Above all, Palamar added, travel managers are concerned about how dynamic pricing will impact budgeting and auditing. "Buyers need to benchmark their savings," she said. "From an auditing perspective, how can the buyer be sure that their travelers got the best rate? By its very nature, the lack of predictability in dynamic pricing rates causes issues with per diems and presents a loss of control for the buyer in terms of hotel spend. Buyers wonder how they will be held accountable for their budget."
Such perceptions, uncertainty and the lack of communication can breed mistrust and hesitancy. Among the 94 buyers covered by the BTE/Buckheister survey's preliminary findings, more than three-quarters said they had not entered into a dynamic pricing agreement. For those who had, the new model covered only a small portion of their hotel program. "In the past, a value-driven model would be used. That is what we are more comfortable with," Palamar said. "What is the value of the accounts? How many room nights do you have? When do you bring them? What time of year? What do you spend? Dynamic pricing does not take those things into account as much as they did before. This is definitely a hotel-driven, buyer-resistant pricing model."
Interstate's McCurdy suggested a number of questions buyers should be asking their hotel suppliers and their travel management companies, including, "How will your online booking tools and agencies manage and sell such rates?" His presentation also posed a number of additional change-management challenges for corporate clients to consider: "How will you manage cities where you have a hybrid situation? Will you be able to quantify the value of the new program to management? How will pre-trip approvals and post-trip audits need to be changed as a result of dynamic pricing?"
Despite interest among hoteliers, there are plenty of obstacles on their side, as well. "The primary concern is training and education," Palamar said, noting how at any given chain or property, the general manager and personnel from reservations, revenue management, sales and the front desk all must understand the associated issues. Moreover, hotel companies often use legacy technology that can hinder full implementation of new pricing models. "The hotel industry is very fractured when it comes to technology," she said. "This doesn't help hotels that want to provide data and analytics to buyers to help them manage hotel programs. Technology is definitely an issue. Property management systems can absolutely handle dynamic pricing, it is just a question of how to track it."
Yet, nearly nine in 10 of the 127 hotel respondents covered by the preliminary survey findings said they have dynamic pricing agreements in place. Palamar offered one possible reason for the apparent disconnect: "A chain is negotiating, for argument sake, on behalf of 20 locations. The buyer has big volume in only three. There is a hybrid agreement coming out where the buyer will have static rate agreements with those three hotels and then a blanket dynamic pricing agreement for the remainder of chain. This is the point of entry for many into the world of dynamic pricing." She added that chains also negotiate consortia dynamic pricing agreements with travel management companies on behalf of clients with comparatively small hotel volumes.
With the large majority of hotel respondents saying dynamic pricing is here to stay, buyers should expect their suppliers to continue promoting the concept. "Buyers may see [that] hotels are reserving the most valuable last room availability policies for dynamic pricing agreements," Palamar suggested. "If you enter static agreements, there is the possibility that the LRA policy will not be as attractive, especially where availability is an issue."
To make dynamic more palatable, she also recommended that hotels consider rate caps that set a range for best available rates, and that buyers endeavor to understand the array of best available rates--which can number into the double digits based on day of week and other factors--from which their negotiated rates would fluctuate. Palamar also suggested that buyers help hotels build a more accurate picture of their business volume forecast. "There are some customer benefits but they are not being clearly communicated," she concluded. "If it does gain traction, it will be an evolution and not a wholesale revolution."
"Can suppliers provide a data driven model that quantifies the economic benefits of dynamic pricing?" asked Interstate's McCurdy. "Yes, they can, and should."
A final BTE/Buckheister white paper, also developed by Buckheister vice president of strategic development Victoria Edwards, will be published in the coming weeks.