Dynamic pricing, a percentage discount on a hotel's best available rate (BAR), first emerged around 10 years ago as a solution to the lengthy RFP process, which has largely remained the same since its introduction and requires a massive commitment in terms of cost, technology and time.
Is dynamic pricing more beneficial than a corporate negotiated rate?
From a global perspective, in cities where a company does not have significant volume, it appears negotiated rates offer better benefits in low occupancy, buyers' markets. Meanwhile dynamic pricing could be the best option in high occupancy, sellers' markets.
Our research suggests even with small volumes, hotels need to offer a minimum of 21.3% off BAR in order for dynamic pricing to be a more competitive option than the traditional negotiated rate. This discount could increase to 29.5% for corporates with higher volumes. Before you decide whether to include dynamic pricing in your hotel programme, it's worth weighing up the pros and cons.
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When should you choose dynamic pricing?
In high occupancy markets, such as New York, Paris and London, hotels don't need to offer significant corporate discounts to attract business, so dynamic pricing with a 10-15% discount could bring great savings. It's worth investigating if you do not have a high number of room nights in these cities.
For cities where you only have occasional demand, dynamic pricing could be worthwhile and potentially more beneficial than negotiated rates when it comes to the budget sector, with typical savings of 15%. However, you'll need to judge this on a market-by-market basis as each hotel, rather than each hotel chain, will offer its own discount.
When should you choose negotiated rates?
For companies with a fixed budget based on previous years, negotiated rates provide a safer option than dynamic pricing. For example, during high-occupancy events (such as the Olympics), there will be no need for hotels to offer a dynamic pricing discount on the BAR, as the hotels will likely already be full to bursting. However, a corporate rate that encourages repeat business once the event is over would have a greater chance of being honoured.
Negotiated rates offer a fixed price per hotel, which is the capped rate paid, subject to the contracted room type availability. This is not the case with dynamic pricing which can fluctuate, as occupancy affects the best available rate.
And what about combining the two?
There is a place for a model that's a hybrid of the two, but it does involve a lot of research and analysis. While this wouldn't eliminate the RFP process completely, it would limit the negotiation needed and permit more focus on the bigger negotiating opportunities.
But before making a decision, consider these factors
- How strong is your programme?
- Do you know exactly where your buckets of spend are?
- What is the level of compliance to your programme?
- Where are your travellers going, what makes the most sense in these cities? Dynamic pricing will not work in some areas due to the supply/demand ratio
- What sort of hotels are your travellers booking? Dynamic pricing works best in the budget market, while negotiated rates are more attractive when it comes to luxury properties.
- How important is this hotel to the programme?
You will need a mature programme to understand if dynamic pricing, negotiated rates or a hybrid option is best for your business. The most important thing to remember is that the hotel landscape continues to vary wildly market by market, so you'll need to approach your hotel on a market by market basis too — one-size-fits-all won't always apply.