Procurement strategies & dynamic pricing

Dynamic pricing and new fare-tracking tools are creating a complex, fast-moving environment for travel procurement

Is the growth of dynamic pricing by suppliers, combined with the use of price-tracking technology, set to sweep away the traditional negotiated corporate deal?

It might be tempting to think that we are standing on the precipice of major change in the corporate travel world, and let’s face it, few would mourn the loss of the laborious and time-consuming RFP (request for proposal) process. But as with most things in the industry, these changes are likely to be more evolution than revolution.

A survey of buyers by the Institute of Travel Management (ITM) found that the vast majority (89 per cent) thought negotiated airfares and hotel room rates would “take a precedence” in their contracts with suppliers for 2017. Only 11 per cent of buyers said that “spot” buying would be more important this year.

But the ITM study also found that there is significant divergence between how buyers approach negotiations with airlines compared with hotels. Only 22 per cent of buyers said they were planning a full RFP process with airlines in 2017, with the majority (78 per cent) favouring “targeted” renegotiations instead.

The opposite was true for hotel contracts, with most buyers (64 per cent) focusing on an RFP strategy and 36 per cent looking at targeted renegotiations with hotel companies.

Real-time pricing
Airlines have been leading the way with use of dynamic pricing over the last few years as they have sought to eke out more revenue from seats – perhaps not surprising given how fiercely competitive and notoriously unprofitable the airline business can be.

Dynamic pricing, which is also known as real-time pricing, means that suppliers are constantly monitoring and changing their fares in response to market conditions, so there is never a fixed price or fare. This has obvious ramifications for negotiated airfares and can already be clearly seen in how air travel is now being purchased by corporates – particularly for short-haul flights.

One ITM buyer member says of dynamic pricing: “With airlines, this has been the case for some time, and we use lowest fare policy, so for intra-Europe flights – we use the dynamic fares a lot.”

Another buyer adds: “On air, lowest logical fares are in place, therefore dynamic fares are utilised more so than with hotel rates. But this depends on the route and supplier. In my opinion, dynamic pricing is of more benefit to the suppliers, for inventory management and maximum yield, rather than a benefit to the corporate buyer.”

While airlines have been leading the way on dynamic pricing, hotels are now clearly following, which will have repercussions for corporate travel procurement over the next few years – particularly with the wave of consolidation within the hotel sector, including Marriott’s acquisition of Starwood and other moves, such as Accor’s purchase of Fairmont Raffles Hotels International.

“These fluctuating rates sometimes work in favour of corporate buyers and some- times the opposite,” says Marwan Batrouni, senior director at BCD Travel’s research arm Advito. “This could potentially undermine the power of a preferred programme if the dynamic rate is lower than a negotiated preferred rate on a frequent basis.

This also underscores the importance of auditing best available rates and comparing them to preferred rates on a regular basis, to validate the competitiveness of a preferred rate throughout the year.”

Is the price right?
In any case, there is evidence to suggest that companies are not always getting access to their negotiated rates with hotels. Research by hotel booking specialist HRS and the Global Business Travel Association (GBTA) found that around 25 per cent of negotiated rates were listed incorrectly on systems or did not include the agreed hotel services, while 11 per cent of the prices analysed were higher than the rate negotiated between the corporate client and the hotel.

Major hotel chains are also increasingly targeting individual travellers to encourage them to book directly through their websites rather than managed travel channels, which could further weaken the effectiveness of negotiated deals.

“While the direct marketing is an irritant, as travellers aren’t aware of the different inclusions in the rate and that the price isn’t like-for-like, it is currently having a minimal impact,” says one UK-based buyer.

Of course, dynamic pricing can also have its advantages for buyers due to the potential for securing airfares and hotel rates that are lower than their negotiated prices, particularly if a significant amount of travel takes place during “shoulder” seasons when there is reduced demand for flights and rooms.

“Most corporates are setting policies based both on preferred supplier rates and the best buy of the day, so that their own negotiated rates are the highest they are going to pay on those routes and destinations,” says Nigel Turner at Carlson Wagonlit Travel.

In theory, negotiated rates can effectively create a ceiling on costs with dynamic prices helping to drive further savings when they are lower than the contracted rates. But all this still adds complexity to the process for buyers and their companies.

“The budgeting aspect gets challenging as it is difficult to understand the full financial impact of dynamic pricing – the actual spend with a supplier may vary considerably,” says Asif Bashir, director of consultancy Axcent Travel Solutions. “There’s also less control of the entire process by the travel buyer as it is much more dependent on market forces, which brings uncertainty and risk.”

Peter Snowdon, multinational account manager at FCM Travel Solutions, agrees: “A challenge for buyers with dynamic pricing is the ability to forecast. It gives suppliers the opportunity to gradually increase their rates year-on-year, whereas a fixed rate can provide buyers with more visibility and the ability to benchmark.”

On a positive note, Sean de Lacey, head of sales at Diversity Travel, says dynamic pricing can help organisations that do not have “sufficient volume to negotiate a set rate” to secure discounts.

“While there is currently uncertainty around the impact of dynamic pricing, making use of the data available helps you paint a full picture of how much dynamic pricing will cost the company and the client,” he adds.

New tools
Technology is already helping buyers to navigate this new landscape of travel procurement – we looked at the growth of corporate-focused online tools, such as Tripbam, Yapta and Fairfly, that can dynamically track airfares and room rates in the last edition of BBT (Tech Talk, Issue 85).

But what impact are these new platforms having so far? Some buyers have yet to engage with them but others can already see the advantages.

“The tools are working alongside traditional TMCs by helping drive further savings from travel programmes,” says one ITM buyer member. “It helps travellers feel they are bringing additional savings yet staying or flying as they want rather than as the company wants.

“For a procurement team with savings targets these add additional, unexpected savings. As the tools develop and become more prevalent, procurement will negotiate a ceiling rate and then the tools will find the lower rates – empowering employees to make the right decision.”

Adrian Williams, marketing and partnership director at Business Travel Direct, believes these corporate price-tracking platforms can help crack down on the ‘maverick’ traveller.

“With such tools at our disposal we are able to give our clients 20:20 insight into supplier pricing strategy,” he says. “It’s naive of a supplier to launch a yield-trashing special offer, claim it was aimed at the leisure market and then expect corporates to stay away.”

But the likes of Tripbam and Yapta are already facing some pushback from suppliers who have adjusted their cancellation policies and fees to reduce the potential savings of rebooking rooms and flights.

“These changes will make it tougher for corporate buyers to make frequent changes after a booking is made,” says Advito’s Marwan Batrouni. “We are seeing airlines increasing their change fees. This makes it tougher to justify rebooking a ticket if the change fee offsets the new ticket price.”

This particular battle has only just started and travel procurement is likely to become more complex and yes, dynamic – maybe the old-fashioned RFP process isn’t so bad after all.

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