In the past, hotel negotiations worked like this: Hotelier set annual or seasonal pricing strategies and generally controlled inventory at these fixed rates. However more recently, there has been an industry movement by both major chains and independent properties toward a different structure – dynamic pricing.

“Instead of having fixed pricing levels that are set during budget season, hotels are now using complex revenue management systems that use predictive analytics to set pricing based upon the supply and demand of each day and room type and how competitive hotels are priced,” says Shannon Hyland, SVP global supply for RoomIt by CWT.

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This has created a significant amount more volatility in how rooms are priced, as hotels are focused on optimizing top line performance and using sophisticated technologies to do so.

Alison Guilbeaux, director of business analytics at Yapta, defines dynamic pricing as a discount off BAR (Best Available Rate) instead of static rate (known as last room available, or LRA) at contract hotels.

“The percentage off BAR varies by hotel and may include specific amenities such as breakfast, WIFI or other value adds,” she says. “Dynamic pricing provides savings during high demand times when the static contract rate will most likely be sold-out.”

Jennifer Steinke, global head of travel for PPD, says in the past “dynamic” used to be code for “arbitrary pricing,” but that attitude among buyers has changed. They are viewing it more as a way to leverage better discounts by accommodating the hoteliers’ need for flexibility to adjust to changing demand.

“Travel managers really need to look at their hotel programs differently than maybe they have in the past,” Steinke says. “It’s no longer about negotiating one flat rate at a property. You need to manage the program based on market conditions and understand that a dynamic rate in a lot of markets might be a better option.”

Since dynamic pricing is a percentage off BAR, on any given day, a hotel always has a best available rate, notes Laura Kusto, senior director and global lead of spend management consulting and dynamic sourcing for BCD Travel.

“If it’s $200 today, and your dynamic discount is 20 percent, that means you get a rate of $160. So tomorrow, it might jump up, and your rate will go up a little bit. The next day it might go down, so it’s dynamic,” she says. “A dynamic discount rate in a client’s program should be more competitive than anything they would ever get at a chain-wide, so it does have a special place in a program.”

Most major hotel chain reps are tasked with increasing the number of dynamically priced hotels in the program. So the number of dynamic rates is increasing by property, while fewer static rates are being offered based on a company’s volume, arrival and departure patterns and business demands. “The ability to get static rates is diminishing and the need for price assurance is increasing,” Guilbeaux says.

According to Kelly Phillips, senior vice president sales, customer engagement and industry relations at Hilton, the hotelier defines dynamic pricing as flexible pricing paired with an agile buying program.

“We work closely with buyer partners and travel management company partners to offer flexible pricing and customization, which could include a static rate and percentage off BAR, depending on needs,” she says. “It’s rarely one or the other.” Phillips notes the industry has discovered one size does not fit all programs, so Hilton is “listening to and acting on feedback from partners who work with us to perfect the model.”

Business Traveler Centric
Hyland notes one way to illustrate how dynamic pricing works is to look at a common booking pattern for business hotels. Tuesday and Wednesday will have peak demand, Monday and Thursday will have moderate demand, and Friday through Sunday have mixed demand from non-business travel.

For instance, the revenue management system may optimize pricing based on demand at $150 a night for the Monday and Thursday bookings, and $200 a night for the peak Tuesday and Wednesday bookings, she says.

“Imagine the business traveler with a negotiated rate of $175 any night; if the business traveler is coming in on Tuesday for one or two nights, the client negotiated rate can provide great savings to the company,” Hyland explains. “Now imagine that same traveler wants to stay from Monday to Friday. Here, their rate would be $700 for the stay because their rate is fixed, where a dynamic rate that includes a 10 percent discount off retail may be available for $630 for the stay.”

In this example, the client rate provided protection against the high peak night rates, but sacrificed savings opportunities on the lower demand nights.

As pricing becomes more dynamic, the key is being able to shop multiple sources for each stay to find the best price, Hyland advises. “In addition, by combining with a solution like Price Tracker, if better pricing becomes available after the booking, that exact booking can be rebooked to save more money.”

Phillips doesn’t believe business travelers realize that pricing is dynamic – which she says is a good thing. “They shouldn’t. It’s the same model they are accustomed to when booking flights, whether they book direct or through a preferred travel agent,” she says.

Dynamic pricing is being pushed to managed travel programs, Kusto says, and she sees that as a net positive; however, because hotels are looking at what your static rate is today, and the fact that it’s in the secondary market, it probably means the discount is not as good as it would be in a primary market where you have more buying power.

“Also, the fact that there’s a lot of inventory available to you. I would be very careful about that because what that means is all the standard room types are available to you, but so are all of the suites, and all of the other upgraded room types – and those are room types you may not want your travelers to book,” she says.

Audits of hotel program performance are critical, says Lexi Benakis, director of sourcing consulting in the Americas for HRS, and the more, the better. HRS’ proprietary automation can perform up to 156 audits per year, she says. When cross-referenced against the corporate hotel agreements in HRS’ database, her clients get clear conclusions regarding rate availability and hotel performance.

“This auditing data married with recent studies show negotiated rates in the US are typically 10 percent lower than chainwide discounts,” Benakis says, pointing out the value of securing a flat, negotiated rate with optimal cancellation policies and amenities.

Leveraging Better Discounts
Obviously, this is a different way to look at room rates and discounts. Steve Reynolds, CEO of Tripbam, notes every client he works with is interested in dynamic pricing because they believe it’s a potential solution to avoid the annual super-expensive, time-consuming RFP process.

“A dynamic discount in our world is taking a percentage off some benchmark rate. Typically, they say the best available rate, and you’ve negotiated a deal at a property level, and it includes some amenities – a day-of check-in cancellation policy, it might have breakfast, WiFi, parking – and the average discount that we see companies get right now is around 25-28 percent off BAR,” he says.

“The expectation is you’re going to get LRA 100 percent of the time, there’s no blackout dates, there’s no seasonality, it applies to every room in the hotel,” Reynolds notes. “One should expect at least a 27 percent discount on every single booking at the hotel.”

Ultimately, this trend can be a good thing for travel buyers as long as their strategy incorporates the understanding that hotels have invested heavily in pricing technology and there is significant focus on managing pricing for each day.

“A progressive buyer will see that their client rates provide an excellent hedge to this increased volatility in pricing, while simultaneously working with their TMC on ways to capture additional savings opportunities that are available through aggregator or unique content programs,” Hyland says. “This will be especially important in a potential recessionary environment as hotels get more aggressive with their pricing; a progressive strategy can help capture additional savings than was seen when hotels were largely fixed rates.”

Phillips notes flexible pricing has opened the door for buyers and suppliers to work more closely together to determine the best possible pricing solution that is mutually beneficial.

“It also eliminates the fear of trying to keep the static rate as high as possible to account for sell-out dates, and in turn, it broadens a buyer’s capability to focus on more destinations and not less,” she says. “It’s a market-driven solution that delivers much desired last room availability, and significant efficiencies.”

Chainwide Deals 
Another facet to dynamic pricing is the rise of chain deals and how they are being marketed to corporate travel programs.

“First, chain deals are shifting to brand deals and the pros are that buyers can target brands that best align with their travel policy while excluding brands that are not in-line because they are too high-end or expensive for their policy,” Guilbeaux says. “Second, they provide supplemental savings in low volume markets while providing loyalty program options for business travelers which helps drive usage.”

The downside, Guilbeaux says, is brand deals that are poorly implemented can be costly. A lack of communication about hotel booking preferences or clear policy about the use of such brand properties can dilute volume at primary hotels and put discounts at risk.

Chain deals can be more desirable because they can layer dynamic with static, preferred and non-preferred markets, Phillips notes.

“They are also generally a pricing solution for customers who still want to capture savings in non-preferred hotels or those less traveled cities,” she says. “A chainwide discount is a viable solution that gives them coverage in markets where they’re not optimizing or managing their program or where they just don’t have enough volume to negotiate individual market pricing.”

The two big differences between chainwide and dynamic, Kusto says, is that dynamic discounts are meant to serve secondary markets, where you will still have decent buying power, while a chainwide discount is almost always non-LRA. A second differentiator there is that chainwide will have a lower discount.

“We always encourage our clients to negotiate every dynamic property individually because spend in one secondary market will have a slightly different buying power than it might in another,” she says. “Dynamic rates are also LRA. What that means is that when hotels give you an LRA dynamic rate, they are guaranteeing that they’ll always give you that discount up until the last room they have available for sale.”

Moreover, a hotel with a non-LRA chainwide discount, if they start to get really busy and can sell more rooms at BAR versus the discount, they’ll just shut the chainwide down, Kusto explains. “We’ve done some analysis for our clients on the competitiveness of their chainwides, and almost never do we see a chainwide actually performing at the discount, and the big reason there is because of that LRA factor,” Kusto says.

“Dynamic pricing may have its place for destinations with minimal volume, but for the vast majority of destinations the data proves that companies are best served by getting a negotiated deal in place. There are also downstream benefits for corporations when it comes to budget projections, accrual, etc.,” Benakis adds.

“The con of chainwide discounts is that they can be limiting when it comes to program performance,” she says. “They can be easy to negotiate, but that simplicity all too often can result in lost savings if they are used too often or in too many locations.”