Dynamic pricing interest grows, but CWT Solutions Group research shows negotiated rates prevail

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1 Dynamic pricing interest grows, but Solutions Group research shows negotiated rates prevail Dynamic pricing, or a percentage discount off of a hotel s Best Available Rate (BAR), has been strongly advocated by hotel suppliers over the past years; but corporate travel buyers have not been convinced, continuing to opt instead for flat negotiated rates. However, with buyers recently indicating that their appetites for dynamic pricing may be evolving*, Solutions Group recently performed an in-depth study to understand under what circumstances, if any, a dynamic pricing approach is more beneficial to corporate travel buyers than a corporate negotiated rate. The potential for more corporate hotel agreements to shift from negotiated to dynamic pricing is worth examining because it would represent a change in how corporations have typically managed the hotel category for decades. Time, communication to travelers, overall management strategy of the hotel category, and financial results would all be impacted. Methodology Solutions Group utilized a proprietary dataset of more than 210,000 tracked BAR rates on 15,050 hotels, collected on weekdays (Mon., Tues., Wed., Thurs.), from January to April In order to perform the analysis, Solutions Group set a minimum prerequisite for the analysis: all duplicates records were removed (same hotel audited for different clients on the same date) and only hotels with a minimum of 5 unique BARs tracked have been used in the analysis. The resulting pool of data used for the analysis was: 68,954 unique BAR registered on 6,404 hotels and compared to the Average Negotiated Rates of 134 clients. This analysis was performed using the period of January to April Since the BAR for the rest of the year is not captured in this analysis, the results will shift by market variance, seasonality and hotel yield management. Understanding the options When examining the average discount off BAR achieved by corporate negotiated rates, various options could be examined to determine PRICING STRATEGY Negotiated rates Dynamic (per hotel) Chain discount RATE TYPE CONTRACT TYPE CONTRACT LENGTH RANK OF DISCOUNT Fixed Per hotel 1 year Highest Flexible (typically percentage off BAR) Flexible (typically percentage off BAR) Per hotel 1-3 years Mid One agreement for chain 1-5 years Lowest * Business Travel News Vision: 2020 survey, which found that 61% of surveyed travel buyers think dynamic pricing will be more relevant in the future than it is today.

2 circumstances in which a dynamic pricing agreement would be more beneficial than a negotiated rate. If the discount achieved by negotiated rates is less than a typical dynamic agreement, then the dynamic agreement would be more beneficial. In order to make this comparison, we first need to establish a typical dynamic agreement, which can be difficult as different hotel companies have different approaches to dynamic pricing. First, we must note the difference between a chainwide discount agreement, where all hotels in a particular portfolio offer the customer the same percentage off BAR globally. These agreements typically carry a lower discount, around. In addition, many hoteliers offer dynamic pricing that varies at the hotel property level. This pricing model is similar to traditional negotiated hotel programs. Hotels have the ability to opt in to the program and to offer a unique percentage discount, typically based on a client s volume with that property or in that market. These discounts have a greater variance, anywhere from -. Letting the data speak The average discount achieved by corporate negotiated rates compared to captured BAR is 22.7% globally. It might be tempting to make a quick assumption that a dynamic agreement of more than 22.7% across all properties in the managed program would be an obvious choice; however, our findings show that dynamic rates vary significantly by market, hotel category, and client buying power, so they aren t necessarily optimal over negotiated rates even when the discount percentage appears to be higher. The hotel landscape continues to vary widely market by market, which means a market-bymarket approach will continue to be required to From a global perspective it seems that negotiated rates offer more benefit in low occupancy (buyer s) markets. In seller s markets, dynamic pricing could be a better option. AVERAGE DISCOUNT OFF BAR GIVEN BY NEGOTIATED RATES BY CITY Average BAR vs negotiated Occupancy - HOUSTON MEXICO CITY ATLANTA SHANGHAI TORONTO KUALA LUMPUR MUMBAI VANCOUVER PETALING JAYA BANGALORE ABERDEEN Average BAR vs negotiated discount BEIJING SYDNEY RIO DE JANEIRO PARIS Occupancy April YTD BERLIN MELBOURNE FRANKFURT AM MAIN GUADALAJARA LONDON PARIS LA DEFENSE SAO PAULO NEW YORK Linear (Occupancy April YTD) Sources: BAR Database; occupancy provided by Smith Travel Research COPYRIGHT 2014 PAGE 2

3 AVERAGE NEGOTIATED DISCOUNT BY CATEGORY 27% 17% High-end category hotels tend to offer negotiated rates with a stronger discount off BAR compared to economic hotels % 3 DELUXE 5 & upscale 4 FIRST 4 STANDARD 3 ECONOMIC 2 In the graph each bar represents a hotel s average negotiated discount in relation to BAR. ensure the best possible pricing is secured. For example, the chart on the previous page reveals significant variance across 23 key destinations frequently visited by Solutions Group clients. Not surprisingly, the cities with higher YTD occupancy levels are experiencing lower rate discounts achieved through negotiations compared to countries with lower occupancy levels. This is logical, as supply and demand dictates that in these seller s markets, hoteliers don t need to offer deep discounts to attract business. In high occupancy markets (e.g., New York, Sao Paulo, Paris La Defense, London) we begin to see how a dynamic agreement could be more beneficial to a corporate customer. In these markets where hotels don t need to offer significant discounts to attract business, a - dynamic pricing agreement may very well be more beneficial than flat corporate negotiated rates. That said, if hoteliers are not willing to offer deep discounts on corporate negotiated rates, it is unlikely that they would offer significant dynamic agreements in either case, the laws of supply and demand give hoteliers the upper hand in pricing. At this point of the analysis, it is important to note, that January and February can be defined in some markets as the lowest of the year, bringing the BAR lower than the rest of the year (e.g, New York). With this in mind, we can assume that the gap between the BAR and the negotiated rate will be higher the rest of the year. Thus bringing higher value to the flat negotiated rate. We also examined the average negotiated discount by classification. As expected, the variance here is also significant. Generally speaking, negotiated rates at economic hotels tend to represent a smaller discount off BAR than negotiated rates at Deluxe hotels. Dynamic agreements could potentially be more beneficial in economic hotels than negotiated rates. However, since the average discount for these economic hotels is 17%, a typical dynamic agreement at is not a blanket solution. Again, market variances should be taken into account. Volume of room nights is often the centerpiece of negotiations with hoteliers, it was therefore essential to examine the impact that a client s room night volume at a particular hotel has on COPYRIGHT 2014 PAGE 3

4 the discount achieved by their negotiated rate as compared to the hotel s Best Available Rate. The findings are as expected, the laws of supply and demand hold true as it relates to pricing. The higher the volume, the higher the discount the hotel is offering. Please refer to the results in the table below: AVERAGE DISCOUNT OFF BAR ACHIEVED BY NEGOTIATED RATES 21.3% nights nights nights 501+ nights Even with small volumes, hotels should offer a minimum of 21.3% off BAR in order for a dynamic agreement to be more competitive than a negotiated rate. Annual room night volume The final piece of our analysis examines the average negotiated discount at Top City level, and takes into consideration the breakfast inclusion/exclusion in the negotiated rates. The range shows the discount of the bid as it was negotiated versus the BAR, and the discount of bid without the value of breakfast (when it was included) versus the BAR. When the gap is less than it is due to the small inclusion of breakfast in the negotiated rate in that particular city. Amenities can bring significant savings in key destinations. In this graph the analysis is demonstrating the additional savings brought by negotiating rates with breakfast included. INCREASE OF DISCOUNT OFF BAR RATE DUE TO BREAKFAST INCLUSION HOUSTON MEXICO CITY ATLANTA SHANGHAI TORONTO KUALA LUMPUR MUMBAI VANCOUVER PETALING JAYA BANGALORE ABERDEEN BEIJING SYDNEY RIO DE JANEIRO PARIS BERLIN MELBOURNE FRANKFURT AM MAIN GUADALAJARA LONDON PARIS LA DEFENSE SAO PAULO NEW YORK Sources: BAR Database COPYRIGHT 2014 PAGE 4

5 Recommendations In this analysis, we have determined the average rate savings achieved by a negotiated program (when compared to the BAR) is 22.7%, but there is significant variability depending on the market, supplier, region, etc. However, this should not be the only consideration when weighing negotiation strategy. Some additional considerations are: Traveler Behavior/Travel policy The classification mix of a hotel program as well as the traveler behavior should be carefully considered before looking into dynamic pricing, as it appears that economic hotels would be optimal for dynamic discounts, while Standard, First and Deluxe hotels should remain in negotiated rates. Advance booking of travelers should be considered as well, since a short booking window will be subject to yield management tactics from suppliers. Amenity savings Amenities are not typically included in dynamic/chain-wide models. Breakfast and internet alone can represent another savings (value of amenities as a % of rate); parking, food and beverage, meeting and events should also be considered as negotiation points. Time cost savings Dynamic agreements at specific hotels still need to go through a regular negotiation process, but hotels are usually willing to offer dynamic rates for more than 1 year, representing long-term time savings. The same applies to chain-wide contracts, with greater time savings due to negotiating in bulk. Travel buyers should continue to place most focus on corporate negotiated rates, as the greatest benefit is currently still here; however, consider dynamic agreements as a beneficial program supplement in low volume markets or at hotels with few room nights, particularly in the economic category and in seller s markets with low volume. Organizations whose hotel spend is not large enough for a chain-wide or dynamic agreement should consider using another supplemental program option, such as discounted rates available via the travel management company, since these typically provide greater savings than BAR. Introducing city caps will help ensure that the travel budget remains under control. Though research shows that static, negotiated rates continue to offer the greatest benefit to corporate clients in most situations, Solutions Group recognizes that dynamic pricing strategies will continue to become increasingly relevant in coming years. In order to effectively consult with buyers, Solutions Group has developed new logic and methodologies to determine the right thresholds to be considered for a particular company in a particular market, in order to determine the best sourcing strategy and achieve the most savings. Client room nights per hotel HIGH LOW Take advantage of strong buying power and buyers market. Pursue negotiated rates. Consider hotel-specific dynamic agreements. Buyers market exists, even with low buying power. Pursue 2+ year agreements. Hotel city occupancy Pursue negotiated rates. Sellers market means high BAR rates. Consolidate as much as possible to improve buying power. Utilize strong chain relationships. Dynamic agreements will be more beneficial. HIGH COPYRIGHT 2014 PAGE 5