Hotel Dynamic Pricing: Is It Different for SMEs, & Is It Worth It?

Business Travel News 9/9/2019

AAA World Article

Dynamic pricing has been part of the lodging world for at least five years. It's been getting more buzz, though, since EY switched to a mostly dynamic program about two years ago and other big companies began to follow suit. In fact, the Global Business Travel Association conference in August devoted three sessions to dynamic pricing versus negotiated rates. During one, 76 percent of the attendees said they were using a hybrid dynamic model; only 22 percent had fully static programs that use only negotiated rates.

But can dynamic pricing work better than fixed rates for small and midsize enterprises? As with most pricing strategies, it depends on several factors.

First consider the definition of dynamic pricing below. For hotels, this can be a percentage off the best available rate at a given property for the given travel dates at the time of booking. The GBTA discussions left out chain wide discounts for a few reasons: They're typically lower than a buyer could negotiate with dynamic pricing. Amenities often are not negotiable. And the RFP is different, said GBTA panelist Mira Rosenzweig, director of travel services for midsize company KBB Partners.

What Is Dynamic Pricing?

The definition presented during hotel dynamic pricing sessions at the Global Business Travel Association conference in August:

Also known as time-based pricing, it's a strategy that prices goods, commodities or services based on time. It matches demand to supply to maximize topline revenue for an organization.

When to Use Dynamic Pricing

Whether a hotel will engage in dynamic pricing with a company and what the percentage discount will be usually is determined by the location and that company's volume of business. An organization that's not among the Fortune 1,000 still can have leverage with a property if it can drive more volume than other companies can to that city or property. A small company headquartered in a small city, for example, likely can drive more business there than can a large company. It's for the markets where an SME has lower volume than other players that it has a better shot at getting a dynamic discount rather than negotiating a static rate.

The biggest key is to know a company's spend, said Laura Kusto, BCD Travel senior director and global lead of spend management consulting and dynamic sourcing. "Have that data," she said.

Next is knowing the travel program's footprint. "I've seen this with global clients," she said. "You can have two companies with the same spend, but one will have more leverage in top markets simply because their spend is more concentrated, while the other has spend all over the place." Even in properties that draw a decent amount of corporate business, "a good midsize company with a certain amount of spend to drive to one or two properties should be able to achieve dynamic discounts, just smaller."

The Right Discount

The size of the discount is going to vary, based on that volume and footprint. If she were an SME travel manager, Kusto said, she wouldn't accept a dynamic discount below 12 percent. "Assuming this discount is negotiated in the spirit of partnership, I think you can get 10 percent via other methods," she said. Rosenzweig—who has increased KBB's use of dynamic pricing significantly, to about 65 percent of her hotel program—said KBB's dynamic rate discounts range from 10 percent to 45 percent. "It really depends. I make sure if we're going down a dynamic pricing route that it needs to be over a certain percentage, which is better than a chain wide [discount]. What you have to understand is: It is a strategy. So you can also include amenities in that strategy." And as she explained above, amenities often do not factor into chain wide discounts.

Trade-Offs

One of the reasons Rosenzweig has moved toward a dynamic program is to give travelers more choice. "I have travelers who are Baby Boomers, as well as Millennials. I need to understand who our travelers are, where they are going, and I need to make sure I have a wide range of hotels."

Dynamic pricing usually ditches the tedious annual RFP process and allows for a greater breadth of properties in a company's program. That means a travel program that uses dynamic pricing can bring in properties that travelers had been booking outside the program, either because they had found better prices or because of the travelers' loyalty status. Many companies also combine dynamic pricing with city caps. Again, the cap a company can get will depend on its volume of room nights and spend, so caps for SMEs may be higher than what large enterprises can negotiate. But the benefit is the expanded choice for travelers, which leads to higher traveler satisfaction. Dynamic pricing and city caps combined mean travelers have a better chance of finding the hotels they want within the program, can get a discount on them and can keep their loyalty points.

The knowledge that travelers are always going to get a discounted rate is a positive for dynamic pricing, but by its very definition, dynamic pricing means the price for a room will always be in flux. "With dynamic rates, the downside is: You are not in full control of your spend because it will always depend on how the inventory of a specific hotel is doing," said HRS SVP of sourcing solutions Marco D'Ilario. "If it's a tight market, the rates will go up. Even with a discount, you're spending more than probably expected. In this regard, with dynamic rates, it's harder to plan your budget."

Also difficult: getting travelers to accept a fluctuating rate. A company travel buyer with a $5 million annual travel budget told BTN she would not move to dynamic rates because she would have a hard time explaining to her travelers why the same room at a hotel is priced differently each time they stay there or why the price might swing from night to night during the course of one stay. "The [traveler's] value perception is not the same as our value perception, and because of that, they're thinking, 'I don't think I'm getting good value every time I come into town,'" she said. "It might work better with large cities, but when in midsize or smaller towns—and select-service properties are prevalent in those towns compared to full service—it's a difficult sell to make." By this, she means her travelers understand that rates can fluctuate more in large markets due to special events or high seasons. Staff at properties in large cities also tend to be better at answering travelers' questions about rate differentials.

Depending on how much a company wants to control its T&E—and most companies do—the optimal value from a dynamic rate program comes when the traveler pays attention to events at his or her destination. "If there is a trade fair in a destination and you are not attending it, plan that travel for another week" when hotel rates will be lower, D'Ilario suggested.

Another challenge to using dynamic pricing is that it's difficult to compare side by side with a negotiated static rate, said GoldSpring Consulting partner Neil Hammond. "Which is better, the 15 percent discount or a flat rate? We don't know," he said. "You need to know with that flat rate what you would have paid [for a consumer rate] so that you could convert it to a percentage and then how available it was." He gave an example of a negotiated rate of $150, compared with a $200 room rate. That's 25 percent savings for that night. But what if the negotiated rate isn't showing up in the company's booking tool? "If you were only getting it available half the time, then it's really only a 12.5 percent savings, and you'd be better with a 15 percent dynamic rate," he said. "Those are the numbers you need to play around with." He recommended using a reshopping tool that will capture this information booking by booking. Over the course of multiple bookings, the travel buyer can see what the actual savings are and how often they are available. That produces a comparison of dynamic versus fixed on a case-by-case basis.

The buyer with the $5 million program agreed that the difficulty is capturing the rates at the time of booking. "I looked at my agency [reports] after GBTA, and I didn't see where we can capture the rate before a dynamic percentage is applied to it," she said. "So how do you know you've got the correct dynamic percentage? There's a fit for [dynamic pricing] in the world, but I don't believe most midsize and small companies are prepared to invest that much time trying to manage it."

Another consideration is the company type. On a GBTA panel, Ilene Onieal, global travel program manager for midsize company NetJets, said she can't use dynamic pricing because her travelers, who are plane crew members, have to book the same day they travel. "It becomes an availability challenge," she said. Meanwhile, companies doing work for the U.S. government are restricted by per diems set by the General Services Administration. Those companies likely will not get reimbursed for rates booked above the GSA rate.

Still, companies that have gone dynamic say they have been able to keep costs down. Though she's the global travel director for the massive EY, Karen Hutchings said she's kept her dynamic rates flat or in some cases discounted them further, even as certain markets have raised their rates. She gave examples in which the savings spread was as much as 7 percent. An SME might have a harder time doing that or might not see as big of a spread in terms of savings, but it's something to consider.

Hotels are more amenable to multiyear deals when they're based on dynamic pricing, not unlike airlines, added Hammond, and that can help with a travel program's spend forecasting. The challenge, again, is that "you need a lot of intelligence and data to make those decisions," he said.


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