New Types of Hotel Rates Ahead

Let’s face it, it’s just a matter of time before hotels start offering non-refundable rates to corporations.  And you thought the hotel RFP process was already a pain in the butt.

Just wait until buyers have to try comparing a 10-day advance booking for a 20% discount at one property to a 25% discount for a 14-day advance booking at the hotel across the street.

Will this really happen in the corporate space?  Oh yes.   Maybe not soon, but eventually.

Why? On the supplier side, blame revenue management. It simply works too well for hotels to ignore.  The key to revenue management is being able to offer a wide range of rates, each with their own fences around them.  Rates that change dynamically, depending on forecasted supply and demand and competitor pricing. Rates that can be bundled, depending on who’s shopping.

Sounds like airline lingo, right?  Exactly the point.  Hotels are learning to offer differentiated rates beyond season, room type and guaranteed availability. Non-refundability has been making its way into the sites for some time now. It’s been a part of the merchant model scene for a long time.

On the buyer side, the driver is procurement’s relentless quest for savings.  Especially in a market with rising prices. Travel managers may gag at the thought of trying to manage one more type of rate.

Tough.  Procurement will ask the basic question “Why not – especially if it saves us money at hotels we already stay at?” As they should.  It will be up to traditional travel managers to explain why non-refundability would cost too much. Or, (actually, better) they’ll have to (and a few will want to) find ways to integrate non-refundable rates into their preferred program.

Sure, it will complicate the annual RFP process…but if its saves the buyers enough money, then it’s the right thing to do.

Another change is coming –  the demise of fixed rates.  This will happen.  Buyers have forever thrown up the defense that their travelers need fixed rates to manage their travel budgets. I’ve never bought that line. Airfares move around like a neurotic elevator, courtesy of revenue management.  Hotels will be no different.  In any case, aren’t hotels effectively giving buyers dynamically-priced rates by opening and closing their fixed-rate inventory on a daily basis?

I’d go so far as to suggest that fixed-rate pricing may in fact be more expensive than year-round dynamic pricing, if only for one reason. Fixed rates carry more risk for the hotel than they do for the buyer, so the hotel is likely to price that risk into the fixed rate – a little insurance premium that the buyer never sees but always pays.

One thing is certain – the hotel RFP process will not get any easier anytime soon.

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19 thoughts on “New Types of Hotel Rates Ahead

  1. Nice synopsis, Scott. Agree, dynamic hotel rates will soon be part of the corporate mainstream lingo. Doing analytics on how often that corporation really got that inventory-based rate is always interesting already. Lots of potential for good analytic modeling – similar to air – and for the savvy corporations to stay ahead of the curve.

    “Airfares move around like a neurotic elevator” – love that line…I may steal that one at some point in time.

  2. Hi, Scott. Great post…For my hospital clients, I’ve been negotiating tiered lodging rates based on number of nights stayed in a year across all locations (after first assessing their travel for the last 12 months on the AP, including the amount booked to both corporate cards, the invoicing for travel by the nurse agencies and other vendors/employees). The hospitals use a lot of traveling nurses, and these nurses are often around for more than a month or two. Also, I’ve encouraged the hospitals to offer the rate to families of patients and employees/families of employees – this ups the number of nights and provides negotiation flexibility on the hotel’s part. In every case though, I’ve not committed the hospital to a fixed number/minimum number of nights; rather, getting to the tiers by the numbers lowers costs dramatically.

    • Hi Jeri, This looks interesting…can you define “AP”, and give an example of what you mean by tiers?

      • Hi, Scott. AP=accounts payable for direct pay purchases of lodging, and we got a detailed feed from the credit card/corporate card provider for all travel purchases across the organization. We would take all the information, remove any duplications, and create a spend cube out of it.

        A real client example: We had a corporate rate for the hospital of $120/night at one of the hotels in Portland. With negotiations and consolidating to two preferred vendors from the same parent company (from over 10 facilities in the area from different companies), we got the base rate down to $85/night. After 50 nights were booked under the hospital’s name (even if the hospital was not footing the bill), the price dropped to $79/night. After 75 total nights, the price went to $71 a night, after 100 nights the rate dropped to $65, and after 150 nights, the rate went to $60. We also negotiated the extended stays down to $50/night for 30+ continuous nights at the hotel.

      • Jeri – you hit one heck of a home run in this example! The tiers make perfect sense now…akin to a stair-step (or tiered) market share deal with an airline. Sorry to not have recognized AP for accounts payable…I’ve had too much advance purchase stuff on my mind lately! Thanks so much for sharing this with us here.

        Best regards, Scott

  3. HI Scott,
    Please note one important difference with airline tickets that are advance purchase. If an airline non-refundable ticket is purchased and cancelled, the value of the ticket is retained for a future ticket purchase. In the case of hotel advance purchase reservations, no modifications are permitted. If there is a modification or cancellation, the money is lost. This is not a good model for any corporation as corporate travelers change their plans to often.

    • Good point, Lisa. But what’s to stop a hotel from offering the same type of non-refundable rate as an airline? Meaning that while the hotel rate wouldn’t be refunded, it would be available as a credit against a future booking. Might mean a bit more accounting headache for the hotel and for the buyer, but the buyers are managing to deal with this on the air side, so it seems to meet a need in the market. Could you see anything like this working in your program?

      • HI Scott,
        You have proposed an interesting idea. First, the hotels would have to agree to this concept of “non-refundable, credit redemption available”. Second, the TMC’s would have to have an interface built to manage these credits, and the TMC would have to work with the online booking tool provider to integrate this “credit available” service into the booking tool. There are many moving parts to a concept such as this. The “headache” would not rest with the buyer, but the TMC and online booking tool provider.

      • Hi Scott and Lisa,
        Another point to remember and thing to watch here when comparing non-refundable hotel rates with non-refundable airline tickets and applying the value for future use. The airline allows that value to be used on the next ticket purchased regardless of destination. So you could be traveling to Chicago using the value on a ticket originally purchased to go to New York. Seems this would be different with the value of the original non-refunable hotel. The value would only good at the hotel where the original non-refundable purchase was made? Could be more difficult to manage if i isn’t a destination the traveler makes frequently?

      • Thanks, Laurie, for the very practical question. OK, you hoteliers, what do you think – how would/could/should this work?

  4. Scott & Lisa, remember that “non-refundable but keep the value for future use” is only in the US. Elsewhere around the world non refundable really means non refundable. If I was a hotel owner I’d have all non-refundable rates! What other perishable goods industry allows you to reserve something and cancel at the last minute without charge leaving the goods to expire? I can’t think of any other industry? Now of course with my corporate travel buyer hat on I want to do all possible to manage my company’s travel budget effectively so will watch this debate with interest. Thanks as always for the insightful comments Scott.

  5. HI Caroline,
    The challenges of managing an effective global corporate hotel program have never been greater. The hotel industry is making investments in yield revenue systems, while developing strategies around booking channel management. Further, they continue to invest in CRM programs like their frequent stay loyalty programs and direct traveler engagement through social media concepts. As corporate travel managers, we need to stay focused on delivering the best value to our companies, be strategic in our approach, and continue to engage our hotel partners on developing programs that are of mutual benefit. Like you, I will watch this debate with interest. Get ready for an interesting RFP season!

  6. I couldn’t agree more with the perspective that hotel rates will become more dynamic and % rate discounts will replace flat rate pricing. Hotels are already pushing on corporate clients and many are saying “no thanks”. Time will tell on who breaks rank first. My bet is on the hotel suppliers as long as occupancy rates stay high. First sign of a dip, then they fold like a cheap suit.

    Regarding the comment from Lisa, we are already there. A new product in the market for corporations is the pay in advance, fully refundable rates that seem to be spreading across the market in a big way. Merchants take advantage of the cash flow and breakage on cancellations. Rates are exceptionally good (as good as the opaque rates from Priceline and others). Return on these rates to the TMC is a lot better than standard commission.

    In the end, travelers have become a lot smarter as to where to find the best hotel rates and its not through their corporate travel agency. Bookings through the TMCs have dropped by 30% or more due to market rate flexibility. Until the travel manager and TMC figure this out, they’ll continue to feed the beast.

    • Steve, can you clarify how this new rate is being used in the market today? Does the hotel sell a bunch of rooms to the TMC, in advance and non-refundable, for the TMC to mark up and take the inventory risk?

      • I’m not privy to what the hotel has given the TMC in return for the discount. Negotiations behind closed doors. I do believe that a markup is possible along with all the value of having a pre-paid rate. Corporations are buying due to low rate and ability to get a refund.

  7. One more thing. Has anyone done the analysis to determine whether the costs to RFP 100’s of hotels to obtain a fixed rate discount is actually worth it anymore? Seems intuitive that it would but to Scott’s point, allowing travelers the flexibility to book the lowest market rate versus having to follow corporate policy couldn’t be costing you money. I’d carve off a small team of traveling complainers and see what happens.

    • Interesting and timely question, Steve. Would love to hear from anybody who has taken a look at this.

      One approach that might yield similar results would be to use a combination of a city cap rate, and selecting a very few, well-chosen properties to offer rates below the cap in return for sufficient room night volume. Maybe combine this with Jeri’s (see comment above) tiered rate/volume concept?

  8. Another thought…I’m on a roll. Has anyone committed to a block of rooms that varies by night by committed a year in advance? In other works, 5 rooms on the 1st, 6 on the 2nd, 4 on the 3rd. etc. for the entire year It’s a common practice in the airline market where they send crews into cities on a regular basis. I’ll bet the large corporate market could make a similar commitment with the right analytics. The company has the ability to give back a room if the hotel is told in advance. Discounts from the hotels are huge 30% or more due to hard commitment and volumes.

  9. Hi Scott/Steve, that’s quite normal practise this side of the Atlantic (Europe) We have a plethora of hotel booking agencies who specialise in these “allocations”. You’re right its very easy to predict what volume of allocation you might need. The trick is to buy market rooms and then use your allocations at the last minute before the release time. I think this is a nuance of European based programmes with such a high majority of non-gds hotels there was a gap in the market for real specialists to make non-gds access easier and to innovate with items such as allocations. I have to say allocations in high demand cities are a lifesaver! I hope this helps.

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