Tripbam CEO Steve Reynolds constantly examines hotel discounts on corporate rates. To help buyers assess the best negotiating approach, he explains the differences between corporate rate types and suggests a few targets to shoot for.
This time of year, travel managers often ask whether they should consider a chainwide discount, a dynamic property-level discount or a static property-level discount. As usual, the answer depends; one size doesn’t fit all. We have several clients generating 25 percent in savings from their hotel programs and others only 10 percent. What’s the difference? First, we need to define a few terms.
Offered by a chain such as Marriott, Hyatt or Hilton to larger customers, the discount is a set percentage off the best available rate (BAR) at hotels within the chain. The average effective discount for a chainwide agreement across our clients is 12 percent. The biggest challenge with a chainwide discount is determining the rate used to apply the discount percentage. Chains often refer to the BAR as the benchmark rate, but it can be difficult to find this rate for auditing. Is it the BAR for the same bed and room type booked? If there isn’t a BAR rate available, which rate should you use? For multi-night stays, is it the average BAR or the BAR for each night?
For auditing the effective discount and measuring savings, we find the rate that we think the traveler would have paid for the same dates, bed and room type. We call this the Lowest Qualified Rate (LQR).
Chainwide discounts are typically non-commissionable, don’t include amenities and don’t provide last-room availability (LRA). A standard 24- or 48-hour cancellation policy applies. If your company doesn’t retain commissions, a 12 percent discount is fairly good compared to alternatives. If your company retains commissions, you’re effectively getting a 2 percent discount on your spend and losing commission revenue (normally 10 percent), which can provide a lot of value to your travel program.
If your travelers tend to cancel at the last minute, you could get stuck with penalty fees. Without LRA, hotels don’t always offer the chainwide discount, increasing your spend. Add it all up, and in these scenarios it may not be worth the potential 2 percent in incremental savings.
The primary benefit of a chainwide discount is coverage. You can cover a lot of room nights if your travelers stay at the major branded hotels spread across a wide variety of locations.
Similar to a chainwide discount, this is a floating discount negotiated with an individual property. The discount is usually much greater (27 percent on average among our clients), and includes amenities and LRA, plus a more lenient cancellation policy (typically day of check-in).
Dynamic rates, however, are more difficult to audit than static rates. The rate varies by booking, making it challenging to measure whether it was applied correctly and whether LRA was honored. Unfortunately, there are a few bad apple hotels which use this to their advantage
The primary benefit of a dynamic discount is its applicability across all rooms and dates. You should expect hotels agreeing to dynamic discounts to honor LRA 100 percent of the time — no blackout dates applied, no seasonal adjustments and no room type restrictions. In addition, a company can avoid the annual RFP process by having a dynamic discount that is evergreen and automatically renewed each year.
A concern for many travel managers using dynamic discounts is travelers potentially paying extremely high rates during high occupancy periods. If the lowest rate at a hotel is $1,000 per night, you’re still paying $730 after applying a 27 percent discount.
One way to resolve this issue is to negotiate a secondary static rate and use it as a rate cap. As an example, setting a $400 per night static rate helps travelers avoid extremely high rates when occupancy levels are high. Travelers can then choose to book a different hotel, change the dates or not take the trip. Negotiating a second static rate will require a second rate code within global distribution systems but it provides comfort when transitioning to a dynamic program.
As hotels begin to offer dynamic discounts of at least 27 percent with 100 percent LRA, and as buyers add a static rate as a cap, we see a strong shift from static to dynamic rates in return for longer-term, automatically renewed agreements.
This type of discount is a set rate negotiated at the property level and is the most common in the industry for several good reasons.
A static rate stays the same for the entire term of the agreement with exceptions applied for specific dates and potential seasonal adjustments. The average static discount generates an effective savings of 34 percent when compared to LQR. These rates typically include amenities (free breakfast, Wi-Fi, parking) and a more lenient cancellation policy. Another key benefit is the ability to audit rate availability at the time of booking.
The downside of static rates is that hotels may effectively turn them into semi-dynamic rates by applying blackout dates and seasonal adjustments. Hotels also tend to limit the discount to specific room types, greatly limiting their value.
What’s The Best Mix?
Most companies use a mix of chainwide, static and dynamic discounts. The optimal mix depends on the level of discounts a company is able to obtain. For most companies, covering as many room nights as possible with static rates results in the highest amount of savings (acknowledging the cost and time needed to negotiate, and the possible gaps in coverage). While these rates are more easily audited, you still must be diligent in measuring property performance. We expect a hotel to deliver a static rate at least 85 percent of the time.
Many companies are giving dynamic discounts a try. If you can get a reasonable discount that is available 100 percent of the time, it’s definitely worth considering; it should produce as much savings as a static rate that’s only available 60 percent to 85 percent of the time. The long-term potential of avoiding the annual RFP process is a huge motivating factor for many travel managers. Unfortunately, we rarely see dynamic discounts offered at high enough levels to offset the static rates currently in place.
The Tiered Model: A Best Practice
Companies with hotel programs generating the highest amount of savings apply a tiered approach. The first tier covers higher-volume properties willing to provide a good static or dynamic discount. Online booking tools can be configured to show only these hotels or bias the display so travelers know they are preferred (and offer added amenities). To avoid leakage, consider a policy of only reimbursing travelers who book preferred properties when available. Best-in-class companies cover at least 60 percent of their nights with property-level discounts.
They cover around 15 percent through chainwide discounts in second-tier markets.
The remaining 25 percent is in a third tier comprised of bookings with smaller, independent hotels. These are covered by agency, consortia and other preferred TMC discounted rates.
No matter the strategy and mix of rates, you must regularly monitor hotel and chain performance, and changes in your hotel booking patterns, to obtain the maximum benefit. Travel managers on their game negotiate deep discounts, actively monitor hotel performance and coverage, establish an ability to shift share as needed and cover as many nights as possible with property-level negotiated rates. Gone are the days of “set it and forget it.”
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