Dynamic
Pricing
Friend or Foe
A report on the state of dynamic pricing in the
contracted, corporate rate segment of the North
American hospitality industry.
Table of Contents
Section 1: Methodology, Definition, Objective
Objectives
3
Methodology
3
Section 2: How Did We Get Here?
The Evolution of the Hotel Pricing Practice
4
Section 3: Dynamic Pricing – a solution or a complication?
The Premise of Dynamic Pricing
5
Fairness, Acceptability and Rational Pricing
5
What constitutes a dynamic pricing agreement? 6
Last Room Availability
7
Rate Caps 7
The Manageability of Dynamic Pricing Agreements
7
What are hotels and clients saying about dynamic pricing?
8
Current Level of Traction
9
Demand Capture – The Challenge
9
Section 4: The Future
10
Section 5: Glossary of Terms
10
Section 6: References
11
Addendum 1 – Smith Travel Research Chain Scales 12
About the Authors
13
Acknowledgements
14
Copyright, 2007, bte tourism training and consulting, Buckhiester Management USA Inc., All rights reserved.
2
Section
1
Methodology, Definition,
be commended. Without such generosity it would have been
impossible to meet the goals of this report. The objectives of
this publication are to:
• Assist in defining dynamic pricing and it’s impact on the
travel industry
• Understand the circumstances which have led to dynamic
pricing, and which may impact on it’s evolution
• Clarify the challenges faced by each of the stakeholder
groups
• Allow the stakeholder groups to make informed decisions
when considering dynamic pricing models
Objective
AUTHOR’S OVERVIEW
Dynamic Pricing is becoming more prevalent in today’s
hospitality industry. Whether it is welcomed, tolerated or
rejected, varies by organization. There appear to be differences
of opinion on everything from the definition of Last Room
Availability to the applications of the various elements of
dynamic pricing. One thing all interested groups can agree
on is that dynamic pricing is being introduced, to a greater
or lesser degree, into the corporate, contracted hospitality
industry and that there are diverse opinions concerning this
strategy.
Methodology
The primary research for this report was conducted through
online surveys to Hotels and Corporate Travel Managers. To
a lesser degree, Travel Management Companies were also
surveyed online. Copies of these surveys are available from
the authors of this paper. The online surveys were distributed
in Canada and the United States through the Association of
Corporate Travel Executives (ACTE). The survey sampling
was augmented in the hotel sector through brand and hotel
management company participation. In total, there were
4035 surveys distributed and 240 surveys returned, with the
following breakdown.
For the purpose of this study we focused on North America
only, and used the following definition:
Dynamic Pricing is predicated on the fluctuation in supply
and demand in the market. In our study we are referring
to corporate contracted room rates that are discounted off
a benchmark rate. Best Available Rate (BAR) is often used
as the benchmark rate, however other rates (i.e. Corporate
Rate, Consortia Rate) may also be designated as the
benchmark rate. Either the benchmark rate OR the discount
off of the benchmark will fluctuate in response to supply and
demand, and therefore the term “Dynamic” Pricing.
This report was developed to assist all parties concerned to
understand the viewpoints and intentions of the three sectors
that are currently involved in or are considering becoming
involved in dynamic pricing. These sectors include hotels,
corporate travel managers and travel management companies.
Working with an advisory board representing the stakeholder
groups, quantitative research was conducted via online surveys
and qualitative research was completed through personal
interviews.
Sector
# of Surveys
distributed
# of completed
Surveys
Hotel
258
127
Corporate Travel Buyer
2587
94
Travel Management
Company
1190
1
The number of responses from the Travel Management
Companies was not significant enough to provide quantitative
data, however the comments that the respondents provided
were insightful and assisted in the development of the Travel
Management Company Interview Guide.
The reporting in this paper, reflects the opinions of the
respondents, as opposed to the opinions of the total population
of the stakeholder groups.
Objectives
In depth interviews were conducted with representatives from
all three stakeholder groups, which allowed for greater insight
into the topic.
This report was designed to be unbiased and as such is not
affiliated with any special interest group, sponsor or sector.
The generosity of the travel industry through time committed
by the Advisory Board, interviewees and participants is to
3
Section
2
How did we get here?
However, when it comes to strategic pricing the real key to
optimization is finding a balance. Thomas Nagel, pricing
expert and author of The Strategy and Tactics of Pricing states
that the “goal of pricing should be to find the combination of
margin & market share that maximizes profitability over the
long term.” If long term profitability is the objective, then is
dynamic pricing an appropriate practice for the corporate
segment?
The Evolution of the Hotel Pricing
Practice
In order to better understand all stake holder perspectives
regarding dynamic pricing, an overview of the fundamental
aspects of revenue management is beneficial. The travel
industry has practiced revenue management to some degree
for over 25 years. As we know, the airline industry is really the
grand-daddy or originator of the discipline.
Perhaps a better question is, how did we get to this point?
The answer to this question is two-fold. First, there has been
a confluence of variables that have meant that the discipline of
revenue management has had to evolve at a considerable pace.
Second, this confluence of variables created a “perfect storm”
effect which has shifted the focus of hoteliers. To some degree
the shift in focus has negatively impacted other areas of the
business.
Prior to deregulation, the airlines used a relatively simple
allocation based fare-class model and measured its success in
terms of load factor. In other words, success was measured in
terms of the number of passengers per available seat on a single
leg trip. Today, the world of revenue management has become
much more complex for all of the vertical sectors including the
hotel industry.
If long term profitability is the objective, then is
dynamic pricing an appropriate practice for the
corporate segment?
The primary driving reason behind the utilization of a variable
pricing policy is capacity limitation or “hard constraints.” Hard
constraints are defined as ones that can not be violated by any
price. In the hotel world, this means that once an inventory is
completely sold, a higher price can not be accommodated. In
a world where supply is limited and demand is variable, hard
constraints present limited options for a seller. Basically the
seller’s options are:
The discipline of revenue management has been forced to
evolve very quickly because of changes over the past few
years in online distribution. Unfortunately, until recently the
educational efforts of the industry had not kept pace with
advances in technology. As a result, hoteliers were ill-prepared
for a transparent pricing environment. Managers did not fully
appreciate the impact of seamless connectivity or understand
its implications regarding strategic pricing. Rate integrity
became a major concern with many segments feeling that
they had not been treated fairly in the past. Additionally, this
lack of rate integrity led to significant past price reference and
eventual commoditization of hotel inventory.
1. the seller can do nothing and allow inventory to be sold
on a first come – first serve basis
2. the seller can allocate limited supply to specific
customers
3. the seller can slowly raise prices until demand falls to meet
supply.
At the same time that this was happening, the consumer was
becoming more sophisticated and computer literate. They
became more comfortable with booking online. Intermediaries
leveraged this opportunity and reservation bookings started to
shift away from the hotel company to Online Travel Agencies
(OTA). As hoteliers started to feel that they had less control
over their own inventory, they recognized a need to practice
better revenue management.
In addition, these types of constraints create potential
opportunity costs. Opportunity costs occur as a result of
a reduction in revenue contribution because of a capacity
limitation. The discipline of revenue management in the
hospitality industry seeks to maximize contribution and
minimize opportunity costs by effectively balancing rate and
occupancy (price and share). A PKF study published in March,
2003 found that that a 1% decrease in fixed cost expenditures
yielded an additional 2.3% in operating profit, whereas a
1% increase in price yielded an 11.1% increase in operating
profit.
This renewed focus on revenue management in the online
world has shifted the balance to some extent between sales,
4
marketing and revenue management. As John Burns, president
of Hospitality Technology Consulting observed, “We tell
ourselves that relationships are important but dynamic
pricing (in the corporate segment) is being driven by revenue
management at the expense of good customer relationship
management. Sales and marketing is constantly finding
themselves in the middle”
demand, static pricing across a wide range of segments was
not realistic. If all other segment prices were going to fluctuate,
both upward and downward with shifts in demand, and if the
corporate segment did not in turn rise and fall then there
would be occasions when corporate clients would be charged
more than unqualified business.
The practice of dynamic pricing was seen as a reasonable
solution. BAR (or best available rates) would be set to establish
benchmarks for unqualified business. All qualified business
would then be derived from these benchmark rates. Derivative
prices would then automatically raise and fall based on the
BAR rate on any given day.
Demand Capture
(Sales)
Sample Rate Plan – Deluxe Room Type
Demand Creation
(Marketing)
Rate Type
Demand
Management
(Revenue Management)
The profit optimization equation needs to be a balanced
and synergistic effort between the areas of demand creation,
demand capture and demand management. In the past,
demand creation and capture were part of the essential domain
of sales and marketing. Demand management was the primary
role of the revenue manager. The current online environment
has resulted in a blurring of these traditional roles. The real
world of publicly held hotel companies and REIT’s could
lead to further this imbalance. A long term approach needs
to consider micro-segment value and individual account
contribution.
Bar 1
Bar 2
Bar 3
$180
$160
$140
AAA = (10%)
$162
$146
$126
AARP = (15%)
$153
$136
$ 119
Weekend = (15%)
$153
$136
$119
B&B Pkg = (20%)
$144
$128
$112
Corp = (25%)
$135
$120
$105
Gov’t = (40%)
$108
$96
$ 84
Fairness, Acceptability and Rational
Pricing
Strategic pricing practices are still very young in the hotel
industry, with clients indicating that Marriott, Hilton, and
InterContinental have been leading the way over the past few
years. ACCOR and Hyatt are also participants in dynamic
pricing. In general however, the majority of hotels do not
practice strategic pricing in a rational and consistent fashion.
This in turn leads to consumer distrust and the perception of
unfair pricing practices.
Section
3:
Dynamic Pricing – a solution
or a complication?
As Hanks, Cross and Nolan (1996) point out “segmenting
customers solely on their knowledge of playing the system
may lead to short-term revenue gains but results in long-term
revenue loss as customer dissatisfaction increases.” Customers
need to understand and believe the reasonableness of a pricing
practice in order for the hotel to secure long-term customer
loyalty.
Based on the confluence of technology, market demand and
rate transparency, dynamic pricing was introduced into the
corporate, contracted rate segment.
The Premise of Dynamic Pricing
In fairness to the area of revenue management, the introduction
of dynamic pricing was seen as an answer to rate integrity
issues. In an environment of constrained supply and variable
Hotel companies have sought to provide a rational pricing
structure, that is, one that makes sense to the general consumer
5
and Corp). However, other hotels define BAR as their “lowest
price guarantee”. These hotels stipulate that customers making
a reservation through certain channels will be guaranteed the
lowest non-blended rate per night.
The survey results of this study indicated very
clearly that there is a disconnect between the
hotelier and the corporate buyer or TMC.
What constitutes a Dynamic Pricing
agreement?
A hotel and client may enter into a dynamic pricing agreement
one of 2 ways.
by applying rate fences to their products. Fences are conditions
that apply to certain rates that qualify an individual for a special
rate or product. The fences traditionally applied to hotel rates
fall into 4 basic categories: product (i.e. standard room only),
membership (i.e. AAA rate), transaction (i.e. 14 day advance
purchase), and duration (i.e. min 3 night stay).
OPTION ONE:
Specific Location/High Volume Dynamic Pricing Agreement
In the purest form of the dynamic pricing model, a client with
significant volume for a hotel will negotiate a one-on-one
agreement that is specific to that hotel only. The amount of
discount off of BAR, or “BAR derivative rate”, will reflect the
significant volume of business that the client is bringing to the
hotel as well as the client’s travel patterns. These agreements
are carefully monitored by both hotel and client with both
parties monitoring the client’s expenditure and the volume of
room nights generated.
The issues of fairness and acceptability are extremely important
with respect to dynamic pricing in the corporate segment.
Generally speaking, all consumers expect that a business
should make a profit. However, when prices increase and there
is not a perceived increase in the value to the customer, the
extent to which the price has increased will play a key role in
whether the new price is perceived as fair. A pricing practice
is deemed unacceptable when there appears to be a significant
change in or imbalance between the buyer and the seller’s
bargaining position.
OPTION TWO:
Multi Location/Minimal Volume Dynamic Pricing
Agreement
In this instance, the client has minimal business for many
locations. In order to capture this business, a hotel chain will
offer the client a minimal discount off of BAR at many locations.
This type of dynamic pricing agreement has certainly gotten
some lift over the past few years, and in many cases is not
regarded by the Buyer as being a dynamic pricing agreement.
At the risk of stating the obvious, there is minimal risk with
these low-volume dynamic pricing agreements. The volume
being funneled into these hotels may not even be tracked by
the Buyer.
The survey results of this study indicate very clearly that there
is a disconnect between the hotelier and the corporate buyer
or TMC. The buyer sees the practice of dynamic pricing as
opportunistic and unfair and the hotelier sees it as simply a
case of revenue optimization. The significant difference in
perception between the parties is likely owing to a shift in
perceived bargaining power.
In addition, a corporate account is not likely to understand the
rationale behind this approach as they base their negotiating
approach on annual volume and/or annual revenue to the
hotel company. The hotelier is seen as not properly assessing
their long term account contribution.
These two versions of dynamic pricing agreements are oversimplified for the purpose of illustration. It is possible for hotels,
hotel chains and clients to participate concurrently in a blend
of both types of agreements. As an example a hotel chain may
negotiate a Specific Location/High Volume agreement with a
client for one or several hotels where the client has frequent
travel, AND at the same time offer that same client the Multi
Location/Minimal Volume agreement for the remainder of
the hotel chain. The second, low-risk type of dynamic pricing
agreement, as outlined above, remains an attractive point
of entry for hotels and corporate travelers into the dynamic
pricing environment.
Further complicating the issue of rational pricing is the
relatively recent introduction of BAR rates. Definitions of
BAR rates appear to vary from one company to another. Is
the “Best Available Rate” really the best available rate? Many
hotels define their BAR rate as the “prevailing rate of the day”
or the best “unqualified” rate. In other words, it is the best
rate a hotel can offer given the demand for that particular
day if you do not qualify for another rate (e.g. AAA, AARP,
6
Last Room Availability
Clearly, if this were a large hotel with a number of accounts
the opportunity cost could be significant over the course of
the year. It should be stressed however, that this is a concern
for a hotel if the account does not produce in need periods. If
the account were also a good producer during soft demand
periods the value of incremental business in the slower time
would offset this risk. This approach does not look at total
spend or net contribution per account.
Last Room Availability (LRA) plays an integral part in the
dynamic pricing model. Hotel companies that want to make
dynamic pricing a more attractive option are reserving a
preferred LRA policy for dynamic pricing agreements. An
example of this would be an LRA policy which is available in all
room types, 365 days a year, as opposed to a static agreement
where LRA is offered in only 2 room types. Since dynamic
pricing may allow clients to book into more room categories,
with LRA available in each category, clients may have a more
beneficial LRA policy under dynamic pricing.
As mentioned above the option of dynamic pricing with LRA
across all room types is being considered by some hotels.
Fixed rates may also be applied to some contracts but with no
option for LRA or limited room type LRA. Another option
may be rebates based on performance guarantees. These
options address only the issue of perceived fairness of price
however; they do not address the issue of manageability for
the corporate buyer or the TMC.
This type of policy can assist both the hotel and the buyer.
“Last room availability is a devil on fixed rates” said James
Ruttley, VP Client Services, IDeaS revenue management
software vendor. This is particularly true “if the client does not
deliver business volume in need periods”. Having last room
availability on contracts that book the bulk of their business
during high demand periods means that the hotel has a
significant opportunity cost.
Rate Caps
Discounts are primarily negotiated off the Best Available Rate
(BAR) at the time of reservation. Hotels establish a series of
BAR’s, per room type and apply the appropriate BAR based
on market demand. For example a hotel may have a series of
10 rates (BAR 1, BAR 2, BAR 3, etc.) per room type, with BAR
1 being the highest rate, and BAR 10 being the lowest rate.
If the hotel has 3 room types, they would potentially have 30
different BAR’s. A very simple example of this would be as
follows:
IDeaS latest software release measures last room value (LRV)
in order to set suggested hurdle rates in a hotel system. LRV
is defined as the maximum amount of revenue a hotel could
get from its last available guest room. This value is calculated
for each room type based on what is found in the transaction
system. This is not a rate but rather a fluctuating value that
changes as bookings come into the system.
Obviously the LRV is much higher when demand is
high and average length of stay (ALOS) is longer. By
way of example if a hotel were to enter into a LRA
fixed price agreement with a corporate account and
that account produced the majority of their booking
volume during the peak months, the opportunity
cost to the hotel would be very high. The table
below illustrates this point.
Forecasted Demand
Bar Rate Type
LRV
Corp Rate Fixed
with LRA
Opportunity Cost/
RM
Total Corp Rooms
booked
Revenue Cost
Tues
June 5
106%
BAR 1
$250
$217
$139
Wed
June 6
112%
BAR 1
$250
$238
$139
$ (111)
$( 111)
$ 14
$ 40
11
14
9
3
ROOM
BAR BAR BAR BAR BAR BAR BAR BAR BAR BAR
TYPE
1
2
3
4
5
6
7
8
9
10
Standard
210 200 190 180 170 160 150 140 130 120
Deluxe
240 230 220 210 200 190 180 170 160 150
Corporate 270 260 250 240 230 220 210 200 190 180
floor
While hotels do not generally offer to place a cap on how high
a client’s rate will go, the hotel knows what their BAR’s will be
for the next year and therefore a client will be able to ask for
the range of rates from which they can expect their discount to
be calculated. In some cases, the hotel may limit the range of
BAR’s they will offer to the client. In the example above, a hotel
may commit to a client to offer BAR’s 3 to 8, thereby mitigating
the exposure to both hotel and client.
Thurs
Fri
June 7 June 8
95%
77%
BAR 2 BAR 3
$195 $165
$170
$0
$139 $139
$ (1,221) $ (1,554) $ 126
$ 120
The Manageability of Dynamic Pricing
Agreements
$ (2,529)
7
Even if a case can be made for the reasonableness of dynamic
pricing in the corporate segment, respondents were quick to
point out that dynamic pricing in theory and in practice are
two very different things. Chief among the concerns with most
buyers was the issue of manageability from RFP to budget to
corporate compliance and audit.
Hotel Participation in Dynamic Pricing
The RFP process is primarily set to serve the static-rate
agreement environment and has not been adapted on a
large scale for dynamic pricing agreements. Additionally,
buyers that book volume in multiple cities with numerous
hotel companies would have a very difficult time accurately
budgeting travel expenses based on a dynamic rate structure.
The ability to accurately forecast expenses is seen as a major
obstacle in accepting these types of agreements.
Although hotels have been aware of dynamic pricing in the
corporate contracted rates segment for quite a while, over 65%
of respondent hotels have only begun participating in dynamic
pricing in the last 2 years, primarily in the Multi Location /
Low volume type of agreement.
Respondents were quick to point out that
According to Kent Bennett, Manager, Member Benefits for
the Canadian Professional Sales Association, “We introduced
dynamic pricing into our hotel program on a limited basis
about 2 years ago, and thought that there may be some issues
with communicating to our members just how dynamic
pricing works. Interestingly enough, we haven’t experienced
any problem with members not understanding how dynamic
pricing works”.
dynamic pricing in theory and in practice are
two very different things.
Finally, most hotels based these types of agreements on the
BAR rate at the time the reservation is made. If BAR rates
potentially fluctuate by the day and dynamic pricing is a
derivative of a hotel’s BAR rate, how does a buyer know that
the rate that was charged was the correct rate? There is also
an ongoing debate regarding whether it is better to offer a
‘blended” BAR rate (or BAR derivative rate) for the entire stay
based on arrival date and LOS, or whether it is preferable to
charge the BAR rate in place for each night of the stay. This can
further complicate the auditing process. With Sarbanes-Oxley
legislation complicating every company’s accounting protocol,
the inability to audit rates after check-out was seen as a major
obstacle to working with dynamic pricing.
Communication and manageability of dynamic pricing aside,
Bennett goes on to explain, “It is important to remember
that dynamic pricing constitutes a small portion of our
hotel agreements. Unless there is further evidence to show
the savings potential to our membership, we do not foresee
implementing dynamic pricing into our mainstream.”
Hotel concern over the laborious and time consuming RFP
process is further exacerbated by dynamic pricing. The RFP
process which is used for corporate, contracted hotel rates
continues to function largely as it did in the pre-internet days.
Although the process has been streamlined using web-based
technology with a push towards standardized forms and prepopulated fields, the fundamental RFP process does not reflect
the challenges presented by the transparency of rates which
can be viewed by one and all on the internet.
What are hotels and clients saying
about dynamic pricing?
Our research revealed that dynamic pricing is prevalent
throughout most levels of North American hotels. Using the
2007 Smith Travel Research Chain Scales (Addendum 1) ,
respondents to the online survey reported that they offered
dynamic pricing in Luxury, Upper Upscale and Upscale
properties as well as Mid-scale properties with F&B and Midscale properties without F&B.
Jill Cady, Vice President, Worldwide Sales Strategy,
InterContinental Hotels Group comments: “The hospitality
industry is still negotiating contracts the same way they were
negotiated in the pre-internet days. It is difficult to maintain
rate integrity when customers can see specials on the web
and are then tempted to book outside the managed travel
program, which in turn negatively impacts on compliance.”
8
The depth to which hotels are involved with dynamic pricing
agreements varies by hotel company. Most of the hotels we
interviewed had entered into the dynamic pricing world
using the OPTION TWO type of agreement. Forays into the
OPTION ONE type of agreement tend to be more guarded.
While some hotel companies have adopted a strategy of
carefully migrating the bulk of their corporate accounts to
dynamic pricing, with the objective of getting all or most of
their accounts onto this pricing model, other companies have
allowed the client to select between a traditional static pricing
agreement or dynamic pricing.
The main challenge with dynamic pricing is
the Buyer’s inability to accurately budget their
accommodation expenses.
Under dynamic pricing, the rate is entirely market driven.
While the percentage of discount off of BAR may vary from
year to year based on factors such as volume, the actual rate
will be dictated by the demand in the market on any given
day. The partnership between the client and the hotel sales
person has been moved to a different plane where sales people
are put in the position of presenting a market-driven pricing
model to their clients. According to both the online survey
and the interviews we conducted, clients find that the sales
departments of hotels do a poor job of presenting this pricing
model, whether this is because the sales people are ill-prepared
to present a compelling business case for dynamic pricing or
because the pricing model itself is flawed.
Current Level of Traction
Although 20% of the Corporate Travel Buyers who responded
to our survey indicated that they did have dynamic pricing
agreements in place, comments collected through the online
survey and during the interviews would indicate that most
of these agreements are in fact the Multi Location/Minimal
Volume dynamic pricing agreements. Comments from
corporate clients indicate that Buyers believe the current
situation where the demand for hotels is greater than the
available inventory, has placed hotels in a powerful position.
This situation has allowed hotels to introduce dynamic pricing,
despite the Buyer’s reluctance to adopt this pricing model. The
implication is that dynamic pricing will continue only under
certain circumstances such as a continuance of the current
demand-to-availability ratio or if all hotels were to adopt
dynamic pricing
Challenges
Buyers repeatedly told us that the main challenge with dynamic
pricing is the Buyer’s inability to accurately budget their
accommodation expenses. Although hotel sales personnel are
telling buyers that “some times the rate will be more than if a
static agreement were in place and sometimes the rate will be
less” there seems to be an inability to prove this point.
Demand Capture – The Challenge
As was mentioned earlier, dynamic pricing is in danger of
pushing the trinity of Demand Creation (Marketing), Demand
Generation (Sales) and Demand Management (or Revenue
Management) into an imbalance. This imbalance is the result
of Revenue Management overshadowing the Sales function. In
stagnant or static pricing, rates were established recognizing
pure volume with minimal emphasis on travel patterns.
Additionally, to a certain extent client loyalty was factored
into the equation as both client and hotel would always be
cognizant of what the corporate, contracted rate was last year.
By having the ability to look into the rear view mirror, both
parties were always aware of how the rate increased relative
to last year’s rates. Under static pricing a client who had been
with a hotel for several years, could theoretically expect a
different outcome during rate negotiations than a client with
the same volume who was using the hotel for the first time.
The new client would have no point of reference based on the
previous year’s rate.
Virtually all respondents to the online survey have not made
any adjustments to post-trip expense audits in order to
accommodate dynamic pricing. It is clear that Buyers, TMC’s
and Hotels will need to work together if any sort of tool is to be
produced that will allow the Buyer to verify rates.
This leads to one of the core premises of dynamic pricing. As
a corporate Buyer stated, one of the objectives of dynamic
pricing is to provide an incentive to travelers to change
their travel habits. By encouraging travelers to book their
accommodations further in advance or having travelers avoid
travel during certain peak periods or on specific days, hotels
are able to offer more attractive prices. The question remains
whether or not this is a reasonable expectation on the part of
the hotel industry. Based on past experiences with the airline
industry, it would appear that there is a precedent for this
pricing model and that travel behavior can be modified if the
incentive is great enough.
9
Section
4
The Future
One area that is less clear is just how Travel 2.0 will impact
the future of such agreements. The trend with both leisure and
business travelers seems to be mass customization. Consumer
generated media means that all travelers are taking control
of what is important to them both in terms of price and
product. They are re-defining the value proposition across all
segments.
What the future holds for dynamic pricing in the corporate
segment remains to be seen. As previously mentioned,
hoteliers and buyers are on opposite sides of the fence in this
regard. Over 65% of buyers believe that the practice will never
gain traction while over 90% of hoteliers are convinced that it
is here to stay.
As we look at business on a more and more granular level
and segmentation continues to blur across all channels, will
we continue to look at corporate business the same way? The
answers to these questions will unfold over a very short period
of time as the distribution landscape continues to evolve.
The future of the practice will likely depend on three issues; the
ability of the hotel industry to articulate the value proposition
to the buyer, broad based access to technology to simplify the
management of such a process and the issue of where Travel
2.0 will take the world of market segmentation.
Section
5
Glossary of Terms
It is clear that the hotel industry has not to date, done a good
job of illustrating the value proposition to the customer. As
long as the buyer sees the practice of dynamic pricing as unfair
they are not going to be receptive to the practice. Hotels may be
better served by looking at the long term value of a customer.
After all, dynamic pricing does not consider the total spend
of a guest.
ALOS – Average length of stay. As hotels operate with high
fixed costs and low variable costs, a longer stay is more
profitable. Example: it is more profitable to have 1 guest stay
for three nights than three guests for one night if the rate is the
same in both instances
BAR rate – Also known as the prevailing rate or the rate of the
day. This rate is generally accepted to be the best non-qualified
rate available on a given day. In other words, if a person did not
qualify for a special rate such AAA, AARP, Gov’t or corporate
they would be quoted the BAR rate. BAR rates are used as
benchmark rates for dynamic pricing.
Using revenue per available client/customer value (RevPCV)
would provide a better foundation to a pricing structure. This
approach would not only look at total spend per stay but also
consider acquisition costs of the business over the lifetime of
the guest.
From a technology perspective, the Open Travel Alliance
(OTA) and Hotel Technology Next Generation (HTNG) have
made great inroads over the past few years in establishing
an open source approach to new hospitality software. This
approach will help the industry overcome the significant
issues of legacy technology and a general lack of integration
and interoperability between industry systems.
Best Rate Guarantee – Sometimes confused with BAR rates,
the Best Rate Guarantee offers a guest a qualified guarantee
that they will not find a lower rate for the same product
through any other channel. If they do find a lower rate the
hotel matches the rate and provides additional incentives.
These rates are generally used to direct bookings to a hotel’s
proprietary website.
In turn, this will eventually address the manageability issue
associated with the practice of dynamic pricing. Many Property
Management System (PMS) vendors now provide dynamic
pricing structures within their system configurations. Revenue
Management System (RMS) suppliers such as IDeaS and
Optims have the ability to determine last room value. Central
reservations systems such as SynXis RedX have extensive user
defined rate configuration and tracking reports. Tools for
the travel manager are also becoming highly customizable.
Travelocity’s corporate travel tools provide a very useful
dashboard for travel managers.
Constrained Supply: Unlike some other industries, a hotel
has a perishable inventory. The inventory is also fixed or
constrained meaning that even if the hotel has very high
demand and could sell more rooms, it can not. That is, unlike
the manufacturing industry it can not create additional room
supply based on a spike in demand. Once the hotel is sold out
it must stop selling.
Derivative Pricing: Discounts that are applied use BAR rates as
an anchor. Example AAA = BAR – 10%, AARP = Bar - `15%
10
Section
6
References
Dynamic Pricing: Pricing that fluctuates according to demand.
Example a Corp rate that is $125 on Monday $145 Tuesday
$105 Wednesday subject to increases and decreases in demand
for that particular property.
Fences: Conditions or parameters applied to rates to control
booking patterns and segment attrition and to discourage
“trade-downs” from a higher to lower rate or product.
Typically there are 4 classes of fences: product (i.e. available
in standard room only), membership (i.e. AAA discount must
show membership card at check-in), transaction (i.e. 14 day
advance purchase) and duration (i.e. minimum 3 night stay).
1. Engelson, MorrisPricing Strategy – An
Interdisciplinary Approach
© 1995 Joint Management Strategy
2. Nagel, Thomas The Strategy & Tactics of Pricing
Holden, Reed ©2002 Prentiss Hall
Last Room Availability: A condition attached to some corporate
contracts which stipulate that the company’s corporate rate
must be available even if the booking is being made for the
last room in the hotel. Last room availability is sometimes
yieldable by room type.
Last Room Value: A fluctuating value that defines what a hotel
should be getting for its last room based on the pace and type
of reservations coming into a transaction system such as a
PMS or CRS.
3. Kimes, Sheryl E A Retrospective Commentary on
“Discounting in the
Hotel Industry: A New Approach
Cornell Quarterly, August 2002
4. Phillips, Robert Revenue and Pricing Optimization
© 2005 Stanford University Press
5. Rohlfs, Kristin Customer Perceptions of Best
Available Rates
Kimes, Sheryl Cornell Quarterly, May 2007
Opportunity Cost: Potential revenue displaced as a result of
not optimizing price and share based on demand.
Rate Integrity: A pricing structure is said to have rate integrity
when it properly recognizes the value of each segment and
offers rates and products that meet the needs of that segment.
In other words the best rates and products should be offered
to the hotel’s best customers. A hotel that offered lower rates
to unqualified guests than those rates offered to their best
corporate accounts, would not be exhibiting rate integrity in
the offering.
Transparent Pricing: Traditionally, the hotel industry offered
some rates that were published and other that were not. As
onward distribution evolved rates became visible to the general
public which they would not have previously had access to.
11
UPPER UPSCALE
AFFINIA HOSPITALITY
CAESARS
CONCORDE HOTELS
DORAL
DOUBLETREE HOTELS
EMBASSY SUITES
EMBASSY VACATION RESORTS
GAYLORD ENTERTAINMENT
HELMSLEY HOTEL
HILTON HOTELS
HILTON GAMING
HYATT
JURY’S HOTELS
LANGHAM HOTELS
LE MERIDIEN
MARRIOTT
MARRIOTT INTERNATIONAL
MARRIOTT CONF. CENTER
MILLENNIUM HOTELS
NEW OTANI HOTELS, THE
NIKKO
OMNI
RENAISSANCE
SHERATON HOTEL
SONESTA HOTEL
SWISSOTEL
WESTIN
LUXURY
COLONY
CONRAD
FAIRMONT HOTEL
FOUR SEASONS
HOTEL SOFITEL
INTER-CONTINENTAL
LOEWS
LUXURY COLLECTION
MANDARIN ORIENTAL
PAN PACIFIC
PREFERRED
THE PENINSULA GROUP
PRINCE HOTELS
ST. REGIS
REGENT HOTELS
RITZ-CARLTON
STARHOTELS
W’HOTELS
THE WALDORF=ASTORIA
COLLECTION
12
MIDSCALE W/ F & B
BEST WESTERN
CLARION
DOUBLETREE CLUB
GOLDEN TULIP
HARVEY HOTEL
HAWTHORN INN & SUITES
HOLIDAY INN
HOLIDAY INN SELECT
SUNROUTE CO LTD
HOWARD JOHNSON
JOLLY HOTELS
LITTLE AMERICA
MARC
OHANA HOTELS
PARK PLAZA
QUALITY
QUALITY INN SUITES
RAMADA
RAMADA PLAZA
RED LION
ROMANTIK HOTEL
WESTMARK
SUNSPREE RESORT
WESTCOAST
WYNDHAM GARDEN HOTEL
UPSCALE
ADAM’S MARK
ALOFT
AMERISUITES
ASTON
AYRES
CAMBRIA SUITES
CHASE SUITES
CLUB MED
COAST HOTELS USA
COURTYARD
HILTON GARDEN INN
CROWNE PLAZA
FOUR POINTS
HARRAH’S
HAWTHORN SUITES
HAWTHORN SUITES LTD
HOMEWOOD SUITES
HOTEL INDIGO
HOTEL NOVOTEL
HYATT PLACE
OUTRIGGER
RADISSON
RESIDENCE INN
RESORT QUEST HAWAII
SIERRA SUITES
SPRINGHILL SUITES
STAYBRIDGE SUITES
SUMMERFIELD BY WYNDHAM
WOODFIELD SUITES
WOODFIN SUIRES
WYNDHAM HOTELS
XANTERRA PARKS & RESORTS
2007 STR Chain Scales
ECONOMY
1ST INTERSTATE INN
ADMIRAL BENBOW
AMERICA’S BEST INNS
AMERICA’S BEST SUITES
AMERICA’S BEST VALUE
BAYVIEW INT’L HOTELS
BUDGET HOST INN
COUNTRY HEARTH INN
CRESTWOOD SUITES
CROSS COUNTRY INN
CROSSLAND SUITES
DAYS INN
DOWNTOWNER MOTOR INN
E-Z 8
ECONOLODGE
INNS OF AMERICA
EXEL INN
EXTENDED STAY AMERICA
FAMILY INNS OF AMERICA
GOOD NITE INN
MIDSCALE W/O F & B
AMERIHOST
AMERICINN
BAYMONT INNS & SUITES
BRADFORD HOMESUITES
CABOT LODGE
CANDLEWOOD HOTEL
CLUBHOUSE INNS OF AMERICA
COMFORT INN
COMFORT SUITES
COUNTRY INN & SUITES
DRURY INN
DRURY LODGE
DRURY PLAZA HOTEL
EXTENDED STAY DELUXE
FAIRFIELD INN
HAMPTON INN
HAMPTON INN & SUIRES
HEARTLAND INN
HOLIDAY INN EXPRESS
INNSUITES HOTELS
LA QUINTA INNS
LA QUINTA INNS & SUITES
LEES INN OF AMERICA
MAINSTAY SUITES
PHOENIX INN
RAMADA LIMITED
SHILO INN
SIGNATURE INNS
SILVER CLOUD
SLEEP INN
TOWNPLACE SUITES
WELLESLEY INN
WELLESLEY SUITES
WINGATE INN
Copyright 2007. Smith Travel Research
Publishing or reproducing this information is
strictly prohibited.
ECONOMY Cont’d
GREAT WESTERN
GUESTHOUSE INNS
HOMEGATE
HOMESTEAD STUDIO SUITES
HOWARD JOHNSON EXP. INN
INNKEEPER
INNCAL
INTOWN SUITES
JAMESON INN
KEY WEST INN
KNIGHTS INN
LEXINGTON HOTEL SUITES
MASTER HOSTS INN
MASTERS INN
MCINTOSH MOTOR INN
MICROTEL INN
MOTEL 6
NATIONAL 9
PARK INN
PASSPORT INN
PEARTREE INN
RED CARPET INN
RED ROOF INN
REOADSTAR INN
RODEWAY INN
SAVANNAH SUITES
SCOTTISH INN
SELECT INN
SELECT SUITES
SHONEY’S INN
STUDIO 6
STUDIO PLUS
SUBURBAN EXTENDED STAY HOTELS
SUN SUITES HOTELS
SUPER 8
THRIFT LODGE
TRAVELODGE
VAGABOND
WANDLYN INN
Addendum 1
About the Authors
Victoria Edwards
Victoria Edwards is the Vice President,
Strategic Development of Buckhiester
Management USA Inc., the leading
Revenue Management consulting firm
in North America for the hospitality industry. Founded in
1995, now with offices in Seattle, Vancouver and Washington,
DC Buckhiester Management specializes in developing
customized Revenue Management (RM) solutions at the
corporate and property level. The company offers RM
program development for all staff levels using a process
driven approach and practical application rather than theory.
This approach has yielded extraordinary incremental revenue
and profit results for over 375 different hotels.
Leslie Anne Palamar
Born in Toronto , Ontario , Leslie
Anne joined the tourism industry
in the travel agency retail sector,
then moved into hospitality. She
amassed extensive experience in the
property-level sales and marketing
departments of the hotel industry, working with some
of the most respected brands in the business including
Sheraton and Delta. With a keen desire to further develop
her expertise, Leslie Anne moved into regional sales and
marketing in the hospitality franchise and management
area. Working at a national level with brands such as
Howard Johnson and Ramada, she attained the position of
Vice President of Sales and Marketing, before moving into
brand management.
Ms. Edward’s career in travel, tourism and hospitality
spans over 23 years with considerable experience in both
the Rooms and Food & Beverage sides of the business. As
a senior manager with Delta Hotels and Fairmont Hotels &
Resorts, as well as General Manager for both Marriott and
Westin properties, she brings first class, multi-market hotel
experience to her role. She is also co-founder and co-owner
of Buckhiester Management.
As Senior Vice President of Ramada Franchise Canada,
Leslie Anne worked with regional sales and marketing
directors and a team of centralized resource specialists. Over
a period of five years, the chain doubled in size, franchisesupport services were improved and an invigorated focus
was placed on reservation productivity and the quality of
the individual hotels.
In addition to her hotel general management experience,
Victoria is the creator of the REVRoadMap™ business process
as well as the online interactive REVRoadMap™ Diagnostic,
co-creator of the comprehensive revenue management
learning product REVolution™, and the co-producer of
numerous web-series on the subject of revenue management.
As a seasoned, versatile hotelier Ms. Edwards is also trained as
a Chef and leads the Food & Beverage revenue management
practice at Buckhiester Management.
In 2003, Leslie Anne formed her own company, BTE
Tourism Training and Consulting, to provide sales,
marketing and training support to the tourism industry.
Working with clients such as Algonquin College, Ramada
Hotels, the Canadian Human Resource Council, and the
Tourism Industry Association of Canada, she has developed
programs and implemented strategies in the field of public
relations, corporate development, protocol and marketing.
She is also Executive Director of the Canadian chapter of
Hospitality Sales and Marketing Association International.
BTE offers to the tourism industry, a variety of project
management and training services and can be found online
at BuildingTourismExcellence.com.
Ms. Edwards holds a B.A. (hons) in psychology from the
University of Victoria, a graduate diploma in Applied
Linguistics and a professional culinary certification from
DuBrulle French Culinary Institute.
Buckhiester Management offers a wide variety of revenue
management support products and consulting services. The
company has offices in both the US and Canada and can be
found online at www.buckhiester.com.
Leslie Anne is on the board of Meeting Professionals
International, Ottawa Chapter. She is a member of the
Canadian e-tourism Council and is a member of the
planning committee for the World Partnership Golf
tournament, a fund-raising initiative for the Aga Khan
Foundation Canada.
13
Acknowledgements
Dr. David Martin, Director, Ted Rogers School of
Hospitality and Tourism Management Ryerson University.
Thank you to ACTE for their assistance in distributing to their
membership the online survey component of our research and
for providing a platform from which to distribute the results
of the research.
Ms. Maria Chevalier, Vice President, Hotels, Advito
Ms. Jennifer Hendry, Research Manager, Tourism
Industry Association of Canada
We are grateful to our advisory board members who gave
generously of their time and who contributed their expertise
to this report.
Mrs. Ellen Muir, Director of Sales and Marketing, Novotel
Toronto Centre
Mr. Bruce Finch, Senior Manager, Global Travel Services,
Autodesk, Inc.
Mr. Todd Arviso, Senior Corporate Director of Sales,
Catering and Revenue Management, North America,
ACCOR
Ms. Melanie Wendeler, Executive Director, Revenue
Management, Fairmont Hotels and Resorts
14