Negotiating hotel rates is often overshadowed by air contracting, the biggest single travel category corporate buyers generally deal with. However, dynamic hotel sourcing is increasingly gaining momentum and moving up travel managers’ priority lists.
Multinational professional services firm EY created a precedent when it launched its dynamic hotel sourcing model in 2018. Its innovative approach replaced the time and resource consuming RFP process, that many in the industry have been calling dysfunctional and archaic for a long time.
So, what are the differences between the traditional RFP process and dynamic sourcing?
Tactical by nature, traditional RFPs are defined by lengthy rate negotiations between corporate buyers and their hotel partners. Depending on size and travel patterns of an organisation, time periods of up to six months of intense to-ing and fro-ing are not unusual.
In addition to the immense toll RFPs take on travel managers’ time, other big downsides of fixed hotel rates are hotel black out days, unavailability of a negotiated room category, constrained inventory in popular locations and leakage, where travellers don’t comply with their company’s travel policy. The consequence often is that corporations miss their travel cost budgets.
Initiated by the hotel industry, following the airline distribution model, an increasing number of savvy travel managers and buyers across the globe have realised the advantages of a dynamic approach.
Typically, dynamic rate models are structured as multi-year, evergreen agreements, where dynamic discounts are calculated as a percentage off the best available rate (BAR), reflecting real-time market conditions. A reported industry benchmark is 20%, but different levels are possible, depending on a corporation’s buying power and scale. Dynamic rates are non-commissionable, but may include value-adds.
The question arises whether dynamic contracting benefits both parties equally. The rule of thumb is that dynamic models are advantageous for hotels when the occupancy is high. During trough periods though (assuming they do occur), corporations can achieve significant savings compared to fixed negotiated rates, when the best available room rate hits rock bottom. Undeniably both parties are winners equally, when considering the time saving and positive impact on resource utilisation, that were painful attributes of the lengthy, traditional RFP model.
Companies that have implemented dynamic sourcing also report increased traveller satisfaction and heightened compliance as positives. Travellers’ feedback is consistent across corporations that have started using dynamic sourcing. Travellers advise that the dynamic model makes it easier for them to book within policy, as it mirrors true market and pricing realities.
But, a downside of dynamic sourcing is the inability to track rates against a fixed benchmark rate; the conventional approach used by travel managers to measure their hotel programmes’ effectiveness. In the new world of dynamic pricing, corporations need to implement more sophisticated analytical capabilities to measure performance. Help is on hand, with the emergence of corporate price tracking platforms.
EY, for example, partners with Tripbam. This technology compares room rates and rebooks the property if a rate emerges that is below the one used for the initial booking. EY’s dynamic discount is then automatically applied to the new, lower rate. Yapta and Fairfly offer comparable tools for air and hotel procurement, using AI models and advanced data analysis. This is a growth area.
Smaller corporations that lack the budgets to hire price tracking specialists or may be located out of their geographic reach, have reported that their TMCs play a vital role in comparing, monitoring and analysing rates and conducting program audits on their behalf.
Consensus among corporations of all sizes that have adopted dynamic hotel sourcing to varying degrees, is that there is no one-size-fits-all formula. The effectiveness of dynamic sourcing is largely dependent on a corporation’s specific travel needs and spread of destinations its employees travel to. Some companies set ceilings for certain cities, keeping a lid on their expense budgets during peak periods, while others continue with fixed, negotiated rates for selected properties and dynamic pricing for others. It is also not uncommon for corporations to combine dynamic sourcing with additional TMC and chain-wide discounts to ensure they cover all bases.
It is clear dynamic sourcing is a major step change in hotel distribution – and one which an increasing number of corporations will surely embrace.