Corporate travel veteran Steve Reynolds is a hotel rate wonk, and you’re the beneficiary. Read on as the Tripbam founder dissects the arguments surrounding dynamic versus fixed rates, just as many corporate programs are in the thick of securing preferred pricing for next year.
Our industry has been discussing the potential for years: Why not convert flat/static hotel discounts to dynamic ones, making life easier for both buyers and suppliers? Unfortunately, challenges that buyers have historically faced include how to conduct audits ensuring that the discount is available and being used as promised, what benchmark rate is used by hotels to apply the discount and whether this will replace the time-consuming annual RFP process. Based on conversations with several of our clients, now might be the time to give it a try.
Ensuring discounts are available and used as promised
How to best leverage big data has been a topic of discussion in our industry for a long time. Buyers now have greater access to data than ever before, and systems that calculate the discount received, in real time on every booking. These analytics can tell you if the discount was applied, and whether the effective discount was achieved.
As an example, if ABC Company negotiated a 20 percent dynamic discount at a four-star hotel near Times Square, analyzing data can ensure the discount is applied at least 95 percent of the time and that the effective discount actually is at least 20 percent. If the discount is applied less often or the effective discount drops below 20 percent, it’s time for a call with the hotel to resolve the issue. If it’s not corrected, it’s time to consider a different preferred hotel.
Which benchmark rate is used?
This is the most difficult question to answer when it comes to dynamic discounts. In my opinion, it should be the rate that the traveler would have booked for that hotel stay if a negotiated discount was not available. The rate could be the Best Available Rate (BAR), an agency discounted rate, a loyalty rate, etc. The best comparable rate to use considers not only the dates, but the bed type, room type, amenities and cancellation policy, and compares it on that level to rates available in the open market.
The level of detail in generating this comparable rate is necessary because there are some challenges in using other rate types. For example, if using BAR, the rate tends to drop as you get closer to the date of check-in. Therefore, if booked several weeks in advance, the discount could appear very high compared to a traveler booking just a few days out. To account for this, you need to take the average of those rates found on the open market between the time the stay was booked and the check-in date. Only then can a company accurately measure the effective discount received and the realized value and savings of the discount.
Will this replace the annual RFP process?
I think the answer must be yes. Why accept a dynamic discount if you still must RFP the agreement every year? Both sides need to win in this negotiation. Suppliers can automatically adjust up or down the rate paid as market conditions change and buyers avoid the annual RFP process, saving both time and money. The only time a buyer needs to conduct an RFP is if they are replacing a poorly performing hotel or sourcing a new hotel in a new market.
By using the data available today to travel managers, the RFP cycle moves from static to fluid, from sourcing in the traditional sense to program maintenance. I think we can all agree that parting ways with the traditional hotel RFP process is a step in the right direction.
The trick to implementing a dynamic discount is accurately determining the percentage that results in pricing as good or better than the current flat rate. Again, analytics to the rescue. Buyers can now measure the effective discount they are receiving from their current static rates using the metrics outlined above. Armed with that information, they can then negotiate a discount with a hotel that is as at least as good as the flat rate, confident they haven’t given up any savings.
As an example, if the current negotiated rate for a property is $189 and the average benchmark rate across a client’s bookings for that hotel is $249, the effective discount received is 24 percent. The supplier needs to provide a discount of at least a 24 percent to achieve the same level of savings. You could argue that an even greater discount percentage is appropriate as the supplier is avoiding the costs of an annual RFP and rate loading.
Some corporate travel managers took the plunge and moved to a fully dynamic hotel program. It’s still early days, but so far the results appear to be very positive. These buyers are spending less time negotiating, auditing and reconfiguring point-of-sale systems while spending less money on RFP tools and the overall annual sourcing process. The savings from the hotel program have gone up significantly, even after accounting for volume changes and seasonality.
You might have an option today, but I can foresee a future in which suppliers only offer dynamic discounts. It would be best to at least test a few dynamic discounts today so you’re ready if the time comes when you don’t have a choice.
In summary, any travel manager that has access to comprehensive analytics should strongly consider dynamic discounts to replace their flat/static rates. You’ll not only save more money but also save a huge amount of time each year better spent monitoring hotel program performance, replacing poor performing hotels with good ones and shifting share to the better-performing properties and chains. All of that drives even more savings for your organization.