NB: This is a guest post by Patrick Landman of Xotels.
I have come to think that we are on the brink of the dynamic pricing revolution in hotel revenue management.
Even though dynamic pricing was first introduced in the hotel industry by chains like Marriott, Hilton and InterContinental in the early 2000s, it seems we are only now starting to get onto the barricades in this hotel pricing revolution.
Just over a month ago, IHG announced at the National Business Travel Association convention that following the success of a test with dynamic pricing in Asia-Pacific over the summer, it now seeks global adoption of dynamic pricing.
They implemented the strategy worldwide this spring, but have met some resistance. Upon inviting corporate clients in the APAC region to adopt the dynamic pricing model, over 1,000 accounts signed up.
Now they want move away from the hybrid model of offering both dynamic pricing in secondary and tertiary markets and fixed pricing in key markets and offer complete dynamic pricing to all corporate accounts worldwide.
The key to achieve this, as IHG senior vice president of worldwide sales Stephen Powell puts it, is good forecasting.
If you can predict your results accurately, you can show corporate travel managers what they will be paying, essentially allowing them to budget travel expenses more accurately.
Okay, so that is the hotel side of the story. What does the travel buyer community have to say about it?
In a recent edition of Business Travel News, an article featured a survey of 221 travel buyers, two-thirds of which said they did not use a dynamic pricing system.
The dynamic pricing model has long been accepted on the airline side, but it seems in the hotel industry we are still behind.
The biggest challenge in gaining acceptance was blamed on the lack of transparency in hotel pricing. Hotels seem to have too much of a challenge controlling rates over the various distribution channels.
Rate parity and rate integrity are at the core of this dynamic pricing r-evolution.
Let’s look at the concept of dynamic pricing a bit closer. How does and should it really work? And what are the up and downsides for all parties involved?
Dynamic pricing simply means that you give your corporate clients a percentage discount of your BAR (best available rate) instead of a fixed (or seasonal) contracted rate.
The corporate rates, and all other rate planes, basically adjust as yield is applied (up or down) to the pricing of the hotel.
Here is how to visualize the mechanics of dynamic pricing.
The operational advantages of dynamic pricing for the hotel are quite obvious:
- The time-consuming RFP (request for proposal) process is simplified, resulting in time and cost savings.
- Rate loading into GDS (global distribution systems) becomes easier and more accurate.
- Rate management is simplified as dynamic rates apply discount on the public BAR year round on all room types.
- Tracking challenge of corporate accounts booking promotional rates will be eliminated.
From a strategic perspective, dynamic rates are ideal for revenue management – it allows you to perform the art of matching supply and demand at all levels.
It reminds me of a famous quote from a pioneer in yield management, Robert L. Crandal, ex-CEO of American Airlines:
“If I have 2,000 clients in a given route and have 400 different prices, obviously I miss 1,600 prices.”
For corporate clients there are important upsides as well:
- Time and cost savings due to easier RFP process and faster negotiations. It will give travel managers more time to add greater choice in hotel product.
- Chain negotiations are simplified.
- Guaranteed lower rate than the public BAR (best available rate) and possibly even lower than negotiated flat rates on distressed days.
- Increased availability and choice as no more black-out dates would apply and discount will be simply applied to all room types.
- Last room availability becomes the new standard.
- Ability to negotiate multiple year contracts.
- No more need for re-negotiation like during the 2009 crisis. Rates are automatically adjusted according to economic trends. Another huge time and cost saver.
Despite these advantages, travel buyers seem to prefer flat-rate contracts, especially when we are talking about high production volumes with and individual hotel.
CWT (Carlson Wagonlit Travel), published a briefing document in July 2008 (CWTVISION) stating:
“Overall resistance to dynamic pricing agreements stems from the fact that hotels have been slow to provide concrete evidence of fair or added value.”
Back then they advised travel buyers to continue to negotiate flat rates wherever possible.
One of the main points for advising travel managers to approach dynamic pricing with caution was that many hotels did not have the knowledge, skills and technical infrastructure to properly manage rates and availability.
“Although dynamic room pricing is said to mimic the sophisticated revenue management techniques used by airlines, few hotels, however, have access to the kind of revenue management technology employed in air pricing, as the investment is often too high for properties that function as individual cost centers.”
Those days are long gone. The hotel industry and technology have moved forward since, and is extremely capable of offering the right room at the right time at the right price through dynamic pricing.
So what do we need to do as hotels to finally unleash this revolution of dynamic pricing?
We need to create trust, take away fear, and offer a feeling of security.
We need to become a partner of our travel buyer and be able to tell him if he produces the same in 2011 as in 2010, what it will cost him.
But, essentially, it boils down to effective and efficient revenue management.
If we can forecast accurately what our business will do in the year to come, we can tell our partners easily what the rooms will cost.
We have to convince them with number, stats and graphs. By showing them what they will be spending on a monthly and annual basis, you will allow them to budget better their travel expenses, and become a valuable strategic partner.
Travel buyers tend to request a ceiling or cap rate, as they are afraid to dive into the unknown. A hybrid rate structure however is counter-effective for the hotel.
With ceiling rates nothing actually changes from the old fashioned flat rate system. You would not save costs; actually it would signify a cost increase.
So you have to move to 100% dynamic contracts right away. To convince the travel buyer you need to be able to present detailed cost forecasts, and offer incentives like LRA (last room availability) and Best Rate Guarantee. Offer a long-term strategic relationship, possibly through a multiple year contract.
All talk and theory you might think. We are on the brink of the Dynamic Pricing revolution. Let’s see who the real leaders of this rebellion will be…
Next step, dynamic rate for wholesalers, or are we moving too fast now?
NB: This is a guest post by Patrick Landman of Xotels. Read his blog.
About Special Nodes
It would have enhanced my insight if Patrick would have explained a bit what dynamic pricing actually is….
@happy – this comment from Patrick captures dynamic pricing for me; “it allows you to perform the art of matching supply and demand at all levels”.
@patrick – i dont know much about hotel aggregation; hence i wonder how aggregation sites maintain both dynamic prices (from the likes of IHG) and less than dynamic from independents? (is that where channel mngt kicks in?)
and if a site was accessing “live dynamic prices” from 50 chains in New York, surely that would be a pretty slow search? (unless cached) is this a shortcoming of dynamic pricing, or have i missed something?
hotel aggregators work as you imagine, they cache rates that they receive either through a datafeed or through scrapes. thus, if the price or availability has changed in the meantime, the user will see a different result on the supplier site. it all depends on the cache intervalls.
@Guido for the careful reader
‘Dynamic pricing simply means that you give your corporate clients a percentage discount of your BAR (best available rate) instead of a fixed (or seasonal) contracted rate.’
@Steve, here we are not so much referring to public website, this is already being managed dynamically in terms of rates. Where hotels have challenges, is with corporate buyers and wholesalers requesting / demanding fixed rates to be contract (by season). It blocks hotels from revenue optimization.
Cheers,
Patrick
“Rate parity and rate integrity are at the core of this dynamic pricing r-evolution”.
Exactly, price fixing is core to this nonsense.
Dorian,
This has nothing to do with price fixing… We are talking about making corporate rate dynamic instead of fixed prices on contract…
I think there are a thing or 2 about the industry that you still need to pick up on
.
I am eager to be educated.
“The biggest challenge in gaining acceptance was blamed on the lack of transparency in hotel pricing”.
What’s less transparent than ‘opaque pricing’?
“Hotels seem to have too much of a challenge controlling rates over the various distribution channels”.
Yeah, well maybe they shouldn’t be. That’s the nature of distribution as well as the law.
“Rate parity and rate integrity are at the core of this dynamic pricing r-evolution”.
Exactly. Let’s not add to the problem.
we are talking about corporate rates… has nothing to do with public rates…
so it has nothing to do with your obsession on price fixing…
there is more to hotel sales then online travel agencies
It has everything to do with public rates. You said it yourself:
“Dynamic pricing simply means that you give your corporate clients a percentage discount of your BAR (best available rate) instead of a fixed (or seasonal) contracted rate”.
You’ve actually connected the two.
I will make it easier for you, what do corporate rates have to do with price fixing?
why do you relate everything to the challenges you face in your company?
Corporate rates are connected (by you) to B.A.R.
B.A.R. are connected to rate-parity.
Rate-parity is connected to the price fixing (you might spot a similarity between the two expressions).
“why do you relate everything to the challenges you face in your company?”
I wish they weren’t connected. My business and my pricing shouldn’t be in any way connected to your ill thought out proposals. But as long as you’re pushing rate-parity you’re making the connections yourself.
so if a hotel wants to give 2 companies the same rate, you think its illegal…
basically, you are saying hotels are not allowed to give the same rates to anyone…
you might want to rethink your approach…
I guess you haven’t done your homework well enough…
dynamic pricing does not mean rate parity…
also read this article http://www.xotels.com/en/revenue-management/rate-parity
@dorian – to me price fixing is when competing brands collaborate in secret to fix prices.
therefore if an individual hotel chain chooses to manage their rates “in a dynamic fashion” i.e. based on supply and demand – im not convinced that is related to the dishonest intent of “price fixing”.
if rate parity meant across the whole market, then you might have a point. but generally, as far as im concerned, rate parity relates to a chains “own rates” across their chosen channels. which i think is fair enough, given its their inventory, and is the norm now in the online car rental space.
btw: you’ll notice my language is adjustable i.e. i think, my view, as far as im concerned etc…perhaps if you and Patrick tried this sort of language on for size, you might actually have a productive discussion rather than a fight. (just my observation
Hi Steve,
“to me price fixing is when competing brands collaborate in secret to fix prices”.
That’s one way – collusion. But it can be effected in different ways one of which is to force your distributors to sell at a particular rate.
“therefore if an individual hotel chain chooses to manage their rates “in a dynamic fashion” i.e. based on supply and demand – im not convinced that is related to the dishonest intent of “price fixing” – ”
I like the concept of dynamic pricing but on the buying price, not the selling price which goes back to the point above.
“if rate parity meant across the whole market, then you might have a point”
It does, that is my point. I don’t care what others do – but this is being enforced across the board.
“btw: you’ll notice my language is adjustable i.e. i think, my view, as far as im concerned etc…perhaps if you and Patrick tried this sort of language on for size, you might actually have a productive discussion rather than a fight. (just my observation”
For sure, I much prefer this sort of reasonable discussion. Frankly, I was tetchy with Patrick because I thought he was being disingenuous. I’ve now realised that he genuinely doesn’t get it.
@ steve, absolutely right
@ dorian, so, to rephrase my question, if hotels offer the same rate to various channels, you consider it ‘price fixing’… don’t you think hotels have the right to set their pricing as they see fit?
dynamic pricing is based on price segmentation, not on one rate serves all…
@patrick The hotels can do what they like with the prices they give to their distribution partners. I have no problem with that and it makes sense for those prices to by dynamic. Long overdue I’d say.
The issue I have is with the sales prices to the consumer. That’s to say hotels distributing rates to partners and insisting that they sell at a specific rate to the public. It’s both disastrous for business and illegal.
@ dorian so this strategy for dynamic rates on corporate accounts we described is not related to price fixing…
please in future be more careful with making an allegation like you did that we are inciting / stimulating price fixing…
we are talking about revenue management strategies for hotels, and how they should set their rates
“Rate parity and rate integrity are at the core of this dynamic pricing r-evolution.”
– Patrick Landman
@ Dorian, come on, whenever and wherever you see the word rate parity, you are thinking about price fixing
don’t you think you are going a bit overboard?
rate parity is can be used in many different contexts, and to put it all under same umbrella would be dangerous, no?
I do indeed always make that connection.
If you had any idea how aggressively rate parity is enforced in this industry you’d be embarrassed to be connected to it.
I am confident that one day we’ll turn around and wonder what induced such collective insanity.
In the meantime, I’m happy to agree to disagree.
@ dorian, so we agree on as you stated ‘The hotels can do what they like with the prices they give to their distribution partners. I have no problem with that and it makes sense for those prices to by dynamic. Long overdue I’d say.’
But let us understand your position in more detail. You think hotels have no right to contract net rates with distributors with a minimum mark-up? They are not allowed to protect their price integrity?
If this is the case, aren’t you advocating the downfall of your own model? Do you really think hotels would like to see their net rates with a low mark-up on online travel agency websites?
What would be the incentive for a hotel to contract with a distributor, resulting in very low rates appearing online for their hotel, if the same hotel can be sold at higher rates through their own website or OTA websites…
Soon hotels will realize this is not a smart strategy, and no longer contract with these distributors. They will favor commisionable websites only. Where they can control their rate directly. And as a result they will only contract net rates with distributors for offline sales or as packaged deals.
It seems to me you are pitching for the acceleration of hotels catching on to your (mid you though smart) model of getting net rates from wholesalers and publishing them online with low mark-ups.
@patrick
If hotels could exist working with commissionable agencies alone they would have done that a long time ago and I’d say good luck to them. I want hotels to earn the highest revenues they can. The more they earn the better their properties will be and that’s good for everyone.
However, they can’t because distributing hotel rooms is a hugely complex marketing business with or without the internet. The wholesalers play a huge role in distributing hotel rooms. I know they can be horribly aggressive and there would be great benefits if they worked with a dynamic pricing but, in any case, they are vital to the industry.
The likes of Skoosh don’t challenge the integrity of the hotels’ brands. We make it very clear that we sell excess capacity. We’re called ‘Skoosh discount hotels’ and we sell ‘discounted’ rooms – rooms discounted from the rack rate in the same way it’s cheaper to buy a Sony TV from a retailer on the high street than it is from Sony direct. Consumers need that point of reference and expect it. Some still buy direct from Sony because they want to get it direct from the manufacturer.
Rate parity throws commerce into a state of confusion because suddenly everyone is selling at the same rate. Brand integrity goes out the window because there is no rack rate any more. The rate of the hotel and its associated brand value is now whatever rate the hotel is selling it for at the time. When they’re nearly full they’ll sell at $200 and when a large group cancels for next Wed they’ll sell at $100. This way the hotels have become exactly what they always feared they’d become – a commodity. Demand and supply.
You proposed that hotels should take their pricing lead from the airline industry:
‘The dynamic pricing model has long been accepted on the airline side, but it seems in the hotel industry we are still behind’.
Airlines and hotels are both travel industry but flights really are a commodity. I don’t care who I fly with because I get a seat and a nasty sandwich and I’ll get from A to B. But when I book a hotel I search for one which suits me on a range of requirements and try to gauge what sort of deal I’m getting. I want to see the rack rate behind the reception and think: wow, it was worth all that shopping around.
Rate parity is wrong in so many ways. It is responsible for the absurd ‘Best Rate Guarantees’ that every chain and O.T.A. seems to offer at the moment. How is the consumer supposed to understand that? It’s also responsible for its counterpart – opaque pricing. You know something is seriously wrong when you start marketing a product that the customer isn’t allowed to see until they’ve paid for it. I’m embarrassed to be in an industry that came up with that as a solution to anything.
Have you noticed who is enforcing rate parity and how? I’ve just come back from contracting hotels in Prague and they’ve literally been bullied into submission by Booking.com. Last year Choice capitulated into agreeing rate parity with Expedia. Sabre’s hotel contract states that hotels ‘in violation’ of rate parity will be put ‘on probation’. They’ve created their own legal system. Do you think these guys are really interested in the hotels’ welfare? Can you imagine what sort of commissions they’re going to demand when the wholesalers have been kicked into touch?
I understand why you think this is about Skoosh and me protecting my own interests but I can operate in any economic environment. As it stands though, I’m watching the industry – my industry – descend into chaos. Everyone is shouting at everyone and threatening withdrawal of supply and / or legal action. And I know that it doesn’t help my vilifying you. We need to talk.
We need to work out a way to price hotels that suits everyone. Consumers, hotels, distributors. If it’s decided that wholesalers are a drain and are no longer necessary, I’m fine with that. I’m not one to protect a dying industry. I just don’t think that’s the case and trying to squeeze them out with price parity is no way to come to a decision.
@ Dorian, thanks for the long and open reply
The RACK rate you are referring to is like a dinosaur from another era. This concept has been long thrown out of the window. Hotels nowadays work with a BAR (best available rate). BAR is the new standard and works on the principle of supply and demand, just like the stock market and the rest of the free economy.
Logically hotels want to have the best available rate, or at least an equal rate on their own website. Lower rates on other website actually only drives down overall revenues for a hotel.
From our experience, hotels do not need wholesalers for online sales, it merely dilutes the market and drives down rates overall. Hence for the hotels we manage, we have stopped working with wholesalers who distribute offline inventory to online channels. We have found that our results increased.
We do distribute distressed inventory at increased margin through OTA / IDS by increasing margin when needed, or offering package rates.
You will see a trend happening where hotels will contract net rates to offset distressed inventory under conditions in order not to dilute their overall positioning:
- offline sales through tour operator brochures
- offline sales throu special advertising promotions
- online if it is packaged, in order not to show the hotel price component
- online if the hotel name is opaque
Hotels will also can also special rates for groups and other segments like corporate which are not public online to sell inventory according to their need.
I could think of a last one that would work online if hotels need and extra occupancy push, it would be if it is outside their regular booking window.
Of course from time to time hotels decide to offer promotions on OTA / IDS channels, but they need to be able to control when and where, in order not too loose business from other distribution channels.
In this day and age, there is no difference between one website or another. Especially with meta-search engines like HotelsCombined, Kayak, Bing Travel, and soon Google Maps (travel) , the transparency of the market increases. So hotels have the need to distribute more smartly and consistent pricing. If they don’t they merely let low rated segments displace higher rated ones.
The above strategy we describe we have implemented in many hotels, and results have increased.
I totally agree hotels should not allowed to be bullied by OTA. And will dedicate a blog post to this. You have to hold the line at all times and be in control of your strategy. Hence my favorite song is by TOTO http://www.youtube.com/watch?v=9f-cEM1l7Ks
We think the next step is to the hotels and to take control of their inventory again. Hotels should offer a pricing model, which works for them…
And models which don’t work for them, they should not contract with…
@ Patrick
If that’s your favourite song, we’re not going to agree on anything
Indeed, we’re really not going to agree anyway. I think I’ve understood your point of view now. It seems that you want hotels to:
a) Have their rates purely connected to demand and supply. Maybe that will happen one day but I think it’s a long way off and needs to be properly thought through rather than enforced.
b) Restrict wholesalers from selling to online agents. As you know, this is under a legal challenge.
c) Move towards selling mostly direct to the consumer. I think that’s impractical unless we develop a whole new form of commerce.
I’m going to leave things there. There were always going to be segments of the hotel industry which defended rate parity for various ends and I’ve now heard the counter argument from every direction.
Thank you for taking the time to discuss this with me publicly.
Best of luck,
Dorian
@ Dorian thanks! good sparring of different points of view…
Having built one of the first dynamic packaging platforms – one that provided true dynamic pricing, sadly, I must advise you all that you are grossly over-simplifying dynamic pricing.
Dynamic pricing requires a rules layer that adjusts the pricing of a particular product, in real time, based on a variety of factors.
These factors go far beyond a basic discount percentage applied to a particular distributor or distribution channel; or simple hurdle rates associated with specific occupancy levels.
Certainly offering a fixed discount percentage off the BAR for specific clients can be beneficial in some instances, but detrimental in others. Offering a static fixed price can similarly provide benefits or challenges depending on the distribution channel, partner and traveler.
True dynamic pricing takes into consideration many characteristics of the itinerary, arrival-departure patterns, party composition, ancillary revenue capture, frequent traveler status and various promotions that my be offered at the property, brand or aggregator level, among others.
To answer the question posed by the article, “Are hotels ready for the dynamic pricing revolution?” The answer is clearly no.
Hotel platforms currently lack the rules-based decision layers, business intelligence, real-time connectivity and visibility into related systems necessary to perform true dynamic pricing.
Ultimately management lacks a dynamic pricing business strategy to leverage a technology platform capabilities to properly execute without sustaining self-inflicted damage from unintended consequences (channel leakage, RevPAR erosion.)
I would realistically estimate 5-7 years before most hotel groups or properties start benefiting from true dynamic pricing technologies.