Buyers Resist Dynamic Hotel Pricing Tide

Some hotel companies are pushing toward a dynamic pricing model for 2007 negotiations, leaving many corporate travel buyers perplexed and angered at the prospect of revamping hotel programs to account for fluctuating rates that may be higher than fixed, negotiated prices and tougher to estimate and budget.

With average daily rates steadily increasing year over year, according to PricewaterhouseCoopers, hoteliers are favoring a market-driven, fluctuating rate structure. PwC forecasted ADR would rise 5.3 percent in 2007 over 2006, which bodes well for thriving hotel companies.

Brian Nichols, speaking as chair of the National Business Travel Association hotel committee but whose day job is as a buyer for Deloitte, is inclined to look at dynamic pricing as a new strategy for hotel room procurement, but he too is still concerned that there is not enough information presently available to persuade him. "As a buyer, I'm open to any new pricing models, but I would like to see a data-driven model that shows how it would positively impact my hotel program and benefit our travelers. That's really the key point—measurable benefits that you can weigh against the change management and potential risk. Until that happens, most buyers are not going to make the leap."

Several buyers from companies with substantial travel spending are not at all optimistic about dynamic pricing. One, who preferred to go unnamed, said that dynamic pricing would be ruinous. "Most of my peers will say the same thing: It's a disaster. Hotel companies are not thinking through the full picture. They're not going to have designated companies directing business to them. If I have five hotels in New York and all of a sudden we don't have preferred rates, we tell our agency to go pick best available rates wherever you can. We all kind of roll our eyes when the hotel companies talk about this. If you could get your rates loaded properly and your Sabre codes—just get the basics on the NBTA format done, I'd be happy. Forget about dynamic pricing, do a better sales effort."

Another large-volume buyer said that dynamic pricing would hurt hotel companies because there would be interest in using competition on the open market. "The Marriott's dynamic might be different than the Hilton's dynamic on a day-to-day basis," said the source.

"Dynamic pricing is just a way for hotels to generate more profits," said one travel buyer, during last month's Corporate Travel 100 benchmarking session at Corporate Travel World. Despite calls by some to fight efforts to impose dynamic pricing, another attendee reluctantly submitted that dynamic pricing was inevitable and buyers need to prepare for it.

Hoteliers are intent on giving buyers a better understanding of the benefits of a dynamic pricing model. "We need to give each other a comfort level of what actually happens in that environment through any shared data," said Kevin Kelly, executive director of sales for Hyatt Hotels & Resorts. "The fixed model just doesn't work anymore and for the most part the big chains have moved toward a dynamic pricing model with the travel management company agency consortias."

Hilton Hotels Corp. also is prepared to move toward a dynamic pricing strategy, according to Denise Lodrige-Kover, Hilton's vice president of business travel sales, a strategy she said that most of Hilton's business already is using. "The corporate negotiated world is where the fixed rates are," she said. "There are a lot of naysayers who say it will cost more money and there is no way to make it work. The responsibility of the hotel company is to sit down with the customer and make them understand what dynamic pricing is." Lodrige-Kover added that Hilton used 2006 as a testing ground for dynamic pricing—beta-testing it on some customers—and said she was pleased with the results.

"We feel that with the continuous changes in market rates, a percentage discount offers the corporate customer a consistent value," said Jill Cady, director of global sales strategy & systems for InterContinental Hotels Group. "This extends a preferred rate product to the corporate guest, providing consistent savings and maintaining price integrity as their actual rate now fluctuates along with the other hotel rates."

Whether travel buyers agree with hoteliers' explanation is a sticking point. Many are hesitant to migrate to the fluctuating structure and feel that the move is somewhat shortsighted. "Clients are skeptical because you can't estimate savings," said Heidi Sanderson, senior hotel procurement consultant for Eclipse Advisors. "You don't know what the fluctuating rate will be and if it will be rate-capped." One source added, "There has to be one as part of the pricing mechanism. The ability to know the range and frequency of movement would be desired."

Buyers often prefer fixed pricing because it is easier to budget and allocate for. Sanderson said that clients might be open to a fluctuating rate model if they knew what the maximum rate would be, but that historical data needed to be improved along with furthering education.

Compliance is key to a successful hotel program, but Hilton's Lodrige-Kover said that many times corporate negotiated rates are not even being booked. "We are able to track what distribution channel our reservations come through, and most of the time a low percentage of travelers book the corporate negotiated rate—for whatever reason, there could be a lower best available rate. Dynamic pricing can help streamline the process."

Hyatt's Kelly said that a dynamic pricing structure would vastly improve availability, which is becoming more and more compressed, especially in gateway cities. "Everyone works off a standard room type. If it's a percentage off, it could be a percentage off any room type in the house—again growing availability. Everyone also works off last room availability per room type, not generally last room in the house. Anytime we can work with a percentage off, that's going to be a benefit. It almost reduces everyone's reliance on LRA because if we have a room open in the house the percentage of discount would apply."

Differing opinions exist on how a floating rate structure would affect the request-for-proposals process. Many buyers are concerned that the NBTA format does not have a percentage discount module in place. Further, tools that facilitate the process are not equipped to handle dynamic pricing structures. The National Business Travel Association's Nichols said the hotel committee was in the process of collecting information from buyers and suppliers on dynamic pricing, and a white paper would be presented at the 2006 NBTA's annual convention in July.

Hoteliers scoffed at the length and complexity of the process. "Anything the industry can do to reduce the RFP process from a time standpoint is a step in the right direction," said Hyatt's Kelly, while Hilton's Lodrige-Kover is concerned with the amount of labor and cost it takes to facilitate an RFP: "Right now, the process is very lengthy and complex and it's taking both the hoteliers and customers an overwhelming amount of man hours just to process the paperwork back and forth and negotiate and renegotiate. We want to streamline that process, and whenever you streamline, there are cost savings involved."

Marriott International has had a dynamic pricing structure in place for the past four years with roughly 20 accounts, but is not seeking to impose it across the board. "It is a piece of the strategy, not the strategy," said Steve Richard, vice president of Marriott's global sales organization, adding that most customers are comfortable with locking in flat rates where their highest volume is, but will concede to a fluctuating rate structure at the 20 percent or so of properties where they have less volume. "We would like to do more dynamic pricing," said Richard, "but our philosophy is sell the way the customer wants to buy."