Dynamic pricing could lead hotel rate revolution

IHG’s dynamic experiment

WORLDWIDE Although dynamic pricing was first introduced to the hotel industry by the big brands nearly a decade ago, it seems most of the industry is only now starting to scale the hurdles of this hotel pricing revolution.

About a month ago, IHG announced that following a successful test of dynamic pricing in Asia Pacific over the summer, it now seeks global adoption of dynamic pricing. Upon inviting corporate clients to adopt the dynamic pricing model, more than 1,000 accounts signed up. Now, IHG wants to move away from the hybrid model of offering both dynamic pricing in secondary and tertiary markets and fixed pricing in key markets to offer complete dynamic pricing to all corporate accounts worldwide.

The key to achieve this is good forecasting. If a hotelier can forecast results accurately, showing corporate travel managers what they will be paying, it essentially allows them to budget travel expenses more accurately.

A recent survey of travel buyers found that about two-thirds do not use a dynamic pricing system. While the dynamic pricing model has long been accepted on the airline side, it seems the hotel industry is still behind. The biggest challenge in gaining acceptance is the lack of transparency in hotel pricing—hotels have too much of a challenge controlling rates over the various distribution channels.

Indeed, rate parity and rate integrity are at the core of this dynamic pricing revolution.

What is dynamic pricing?

Dynamic pricing means giving corporate clients a percentage discount of the best available rate instead of a fixed or seasonal contracted rate. The corporate rates, and all other rate plans, basically adjust as yield is applied up or down to the pricing of the hotel.

The operational advantages of dynamic pricing for the hotel are quite obvious:

• The time-consuming request for proposal process is simplified, resulting in time and cost savings.

• Rate-loading into 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 challenges of corporate accounts booking promotional rates is eliminated.

From a strategic perspective, dynamic rates are ideal for revenue management, as it truly allows hoteliers to match supply and demand at all levels.

There was a famous quote by a pioneer in yield management, Robert L. Crandal, an ex-CEO of American Airlines: “If I have 2,000 clients in a given route and have 400 different prices, obviously I miss 1,600 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 best available rate and possibly even lower than negotiated flat rates on distressed days.

• Increased availability and choice as no more blackout 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 renegotiation 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 when we are talking about high production volumes with and individual hotel. Carlson Wagonlit Travel published a brief in July of 2008 stating: “Overall resistance to dynamic pricing agreements stems from the fact that hotels have been slow to provide concrete evidence of fair or added value.” The brief advised travel buyers to continue to negotiate flat rates wherever possible.

One of the main points for advising travel managers to approach dynamic pricing with caution was that many hotels did not have the knowledge, skills and technical infrastructure to properly manage rates and availability. “Although dynamic room-pricing is said to mimic the sophisticated revenue management techniques used by airlines, few hotels, however, have access to the kind of revenue management technology employed in air pricing, as the investment is often too high for properties that function as individual cost centers.”

Those days are long gone. The hotel industry and technology has moved forward since, and is extremely capable to offer the right room at the right time at the right price through dynamic pricing.

What should hoteliers do?

Hoteliers need to create trust, take away fear and offer a feeling of security, partnering with travel buyers and telling them what it would cost if they produce the same amount of business in 2011 as in 2010.

It boils down to effective and efficient revenue management. If hoteliers can forecast accurately business in the year to come, they can tell their partners easily what the rooms will cost. Convince them with numbers, stats and graphs. Showing them what they will be spending on a monthly and annual basis will allow them 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 the unknown. A hybrid rate structure, however, is counter-effective for the hotel. With ceiling rates, nothing really changes from the old fashioned flat-rate system. It would not save cost; actually, it would signify a cost increase.

It is advisable to move to 100% dynamic contracts right away. To convince the travel buyer you need to be able to present detailed cost forecasts, and offer incentives like last room availability and best rate guarantee. Offer a long-term strategic relationship, possibly through a multiple-year contract.

The hotel industry is on the brink of the dynamic pricing revolution. Who will the real leaders of this rebellion will be?


Patrick Landman is president of Xotels, a Netherlands-based hotel consulting and revenue management technology firm.