1. On the Brink of Revolution: Dynamic Pricing in
Hotels!
http://connect.phocuswright.com/2010/10/on-the-brink-of-revolution-dynamic-pricing-in-hotels/
November 24, 2010
Even though dynamic pricing was first introduced in the hotel industry by chains like
Marriott, Hilton and InterContinental in the early 2000’s, it seems we are only now
starting to get onto the barricades in this hotel pricing revolution.
Just over one 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 1000 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 Stephen Powell, SVP of worldwide sales, put it, if good
forecasting. If you can forecast your results accurately, you can show corporate travel
managers what they will be paying, essentially allowing them to budget travel expenses
more accurately.
Ok, so that is the hotel side of the story. What does the travel manager community have to
say about it?
On September 6, in a publication of Business Travel News, I came across and article titled;
‘Dynamic Hotel Pricing Making Limited Inroads among Buyers’. It featured a survey of
221 travel buyers of which two-thirds said they did not use a dynamic pricing system. The
dynamic pricing model has long been accepted on the airline side, it seems in the hotel
industry we are still behind. The biggest challenge in gaining acceptance was accredited to
the lack of transparency in hotel pricing. Hotels seem to have too much of a challenge
controlling rates over the various distribution channels.
So it seems our earlier articles and discussions on rate parity and rate integrity are at the
core of this dynamic pricing r-evolution.
Before we go any further with recent news, let’s look at the concept of dynamic pricing a bit
closer. How does and should it really work. 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.

2. Below a simple graph 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 truly
allows you to perform the art of matching supply and demand at all levels. It makes me
think of a famous quote of a pioneer in yield management, Robert L. Crandal, Ex-CEO -
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 brief back in July of 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

3. 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 has moved forward since, and
is extremely capable to offer the right room at the right time at the right price to the right
client 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.
It basically 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 really changes from the old fashioned flat rate system actually. You would not
save cost; 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 actually tried with one of our client hotels that we
manage. A large phone company was completely open to dynamic pricing when presented
with credible numbers and a clear financial outlook.
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?