On the Brink of Revolution: Dynamic Pricing inHotels!http://connect.phocuswright.com/2010/10/on-the-brink-of-revolution-dynamic-pricing-in-hotels/ November 24, 2010Even though dynamic pricing was first introduced in the hotel industry by chains likeMarriott, Hilton and InterContinental in the early 2000’s, it seems we are only nowstarting to get onto the barricades in this hotel pricing revolution.Just over one month ago IHG announced at the National Business Travel Associationconvention that following the success of a test with dynamic pricing in Asia-Pacific over thesummer, it now seeks global adoption of dynamic pricing.They implemented the strategy worldwide this spring, but have met some resistance.Upon inviting corporate clients in the APAC region to adopt the dynamic pricing model,over 1000 accounts signed up. Now they want move away from the hybrid model ofoffering both dynamic pricing in secondary and tertiary markets and fixed pricing in keymarkets and offer complete dynamic pricing to all corporate accounts worldwide.The key to achieve this, as Stephen Powell, SVP of worldwide sales, put it, if goodforecasting. If you can forecast your results accurately, you can show corporate travelmanagers what they will be paying, essentially allowing them to budget travel expensesmore accurately.Ok, so that is the hotel side of the story. What does the travel manager community have tosay about it?On September 6, in a publication of Business Travel News, I came across and article titled;‘Dynamic Hotel Pricing Making Limited Inroads among Buyers’. It featured a survey of221 travel buyers of which two-thirds said they did not use a dynamic pricing system. Thedynamic pricing model has long been accepted on the airline side, it seems in the hotelindustry we are still behind. The biggest challenge in gaining acceptance was accredited tothe lack of transparency in hotel pricing. Hotels seem to have too much of a challengecontrolling rates over the various distribution channels.So it seems our earlier articles and discussions on rate parity and rate integrity are at thecore of this dynamic pricing r-evolution.Before we go any further with recent news, let’s look at the concept of dynamic pricing a bitcloser. How does and should it really work. What are the up and downsides for all partiesinvolved. Dynamic pricing simply means that you give your corporate clients a percentagediscount of your BAR (best available rate) instead of a fixed (or seasonal) contracted rate.The corporate rates, and all other rate planes, basically adjust as yield is applied (up ordown) to the pricing of the hotel.
Below a simple graph to visualize the mechanics of dynamic pricing.The operational advantages of dynamic pricing for the hotel are quite obvious: The time-consuming RFP (request for proposal) process is simplified, resulting in time and cost savings. Rate loading into GDS (global distribution systems) becomes easier and more accurate. Rate management is simplified as dynamic rates apply discount on the public BAR year round on all room types. Tracking challenge of corporate accounts booking promotional rates will be eliminated.From a strategic perspective, dynamic rates are ideal for revenue management, it trulyallows you to perform the art of matching supply and demand at all levels. It makes methink of a famous quote of a pioneer in yield management, Robert L. Crandal, Ex-CEO -American Airlines;‘If I have 2.000 clients in a given route and have 400 different prices, obviously I miss1.600 prices’For corporate clients there are important upsides as well: Time and cost savings due to easier RFP process and faster negotiations. It will give travel managers more time to add greater choice in hotel product. Chain negotiations are simplified. Guaranteed lower rate than the public BAR (best available rate) and possibly even lower than negotiated flat rates on distressed days. Increased availability and choice as no more black-out dates would apply and discount will be simply applied to all room types. Last room availability becomes the new standard. Ability to negotiate multiple year contracts. No more need for re-negotiation like during the 2009 crisis. Rates are automatically adjusted according to economic trends. Another huge time and cost saver.Despite these advantages, travel buyers seem to prefer flat-rate contracts, especially whenwe are talking about high production volumes with and individual hotel. CWT (CarlsonWagonlit Travel), published a brief back in July of 2008 (CWTVISION) stating;‘Overallresistance to dynamic pricing agreements stems from the fact that hotels have been slowto provide concrete evidence of fair or added value.’ Back then they advised travel buyersto continue to negotiate flat rates wherever possible.One of the main points for advising travel managers to approach dynamic pricing withcaution was that many hotels did not have the knowledge, skills and technicalinfrastructure to properly manage rates and availability; ‘ Although dynamic room pricing
is said to mimic the sophisticated revenue management techniques used by airlines, fewhotels, however, have access to the kind of revenue management technology employed inair pricing, as the investment is often too high for properties that function as individual costcenters.’Those days are long gone. The hotel industry and technology has moved forward since, andis extremely capable to offer the right room at the right time at the right price to the rightclient through dynamic pricing.So what do we need to do as hotels to finally unleash this revolution of dynamic pricing? Weneed to create trust, take away fear, and offer a feeling of security. We need to become apartner of our travel buyer and be able to tell him if he produces the same in 2011 as in2010 what it will cost him.It basically boils down to effective and efficient revenue management. If we can forecastaccurately what our business will do in the year to come, we can tell our partners easilywhat the rooms will cost. We have to convince them with number, stats and graphs. Byshowing them what they will be spending on a monthly and annual basis, you will allowthem to budget better their travel expenses, and become a valuable strategic partner.Travel buyers tend to request a ceiling or cap rate, as they are afraid to dive into theunknown. A hybrid rate structure however is counter effective for the hotel. With ceilingrates nothing really changes from the old fashioned flat rate system actually. You would notsave cost; actually it would signify a cost increase.So you have to move to 100% dynamic contracts right away. To convince the travel buyeryou need to be able to present detailed cost forecasts, and offer incentives like LRA (lastroom availability) and Best Rate Guarantee. Offer a long-term strategic relationship,possibly through a multiple year contract.All talk and theory you might think. We actually tried with one of our client hotels that wemanage. A large phone company was completely open to dynamic pricing when presentedwith credible numbers and a clear financial outlook.We are on the brink of the Dynamic Pricing revolution. Let’s see who the real leaders of thisrebellion will be…Next step, dynamic rate for wholesalers, or are we moving too fast now?