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11/03/2022

Demand or Decline: Business Travel Contracting in Uncertain Times

With so much uncertainty surrounding the future of business travel, sophisticated sourcing platforms that can analyze real-time market data and determine fair market rates will be of the utmost importance.
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In the hospitality industry, we are seeing divergent opinions from experts on what the future holds for business travel. Some projections offer great news, both about the current state of the industry and what the coming years will hold:

According to Knowland’s Q3 U.S. and Top 25 Markets Meetings Recovery Forecast (October 12, 2022), Q3 performance pushes head of the previous forecast and positions 2023 to be a year of growth for hospitality meetings and events… Since the forecast in July, the outlook for the U.S. has been raised from 72.6 percent recovery by the end of 2022 to 73.1 percent recovery… Meeting levels will recover to 106.4 percent of 2019 levels in 2023 and 129.2 percent in 2024.”

But at the same time, other sources are saying the complete opposite:

According to Global Business Travel Association’s latest Business Travel Index, “A perfect storm of factors [including]… inflation, energy prices, supply chain challenges, labor shortages and regional developments… will add 18 months to the association’s previous recovery forecast. Rather than the end of 2024, annual business travel spending is projected to reach pre-pandemic spending levels of $1.4 trillion in mid-2026.”

No matter which forecast you believe, underscoring all these projections is a data gap of almost two years’ worth of recent travel numbers, the result of COVID-related shutdowns. This leaves both the buyers and sellers who depend upon reliable data to negotiate annual contracts for hotel accommodations in a difficult spot: how do you develop an effective strategy when you are unsure of the future?

Good news: sophisticated sourcing platforms can analyze real-time market data and predictive price trends to quickly determine the fair market rates and rate type to quote for any RFP. This enables both hotels and business travel managers to easily weigh the advantage of fixed rate versus dynamic or hybrid pricing to determine which will be more financially advantageous based on actual usage.

Here’s how these two rate types can be best leveraged, both for hotels and for business travel managers:

Fixed Rate Annual Contracting

Until recent years, all hotel contracts for annual rates (a.k.a. “Corporate Rates”) were fixed. Large corporations and travel management companies, who represent significant annual business travel volume, negotiate annually for fixed, discounted rates from hotels or hotel brands in exchange for guaranteeing a certain number of sleeping rooms; however, in the real world, hotel rates tend to be very responsive to the market dynamics of supply and demand, fluctuating throughout the year based upon seasonality, occupancy and a myriad of other factors.

Annual contracts have advantages for both parties: hotels get a guaranteed number of room nights per year and build customer loyalty; the buyer enjoys predictable rates all year round, regardless of market fluctuations, which makes managing their travel spend easier. There are also downsides to the practice; for example, during times of high occupancy, hotels may have to honor deep discounts and turn away more lucrative transient business. On the flipside, during periods of low demand, companies may find themselves paying rates that are well above the current market value. Regardless of their drawbacks, negotiated corporate rates have long been the standard practice, and will continue to have a place in hotels’ corporate travel programs.

But they aren’t the only option; new technologies are making it easier than ever to manage the annual renewal process and allow for a more flexible pricing model…

Dynamic Sourcing

Dynamic sourcing lets hotels quote multiple rates over the course of a year, tied to the applicable prevailing market dynamics, typically expressed as “Best Available Rate +/- %” (BAR +/- %). The dynamic sourcing model can offer distinct advantages for all parties.

Hotels can quote rates that are more in line with prevailing rates for other types of business, including rates for peak/high/shoulder seasons, rate by day of the week pattern, or even designating specific “blackout dates.” 

Buyers also benefit from dynamic sourcing; they can still show overall savings, while aligning their travel policy to take advantage of the available best pricing and reduce their total spend.

Of course, dynamic sourcing adds a layer of complexity to the already cumbersome process, but that’s where innovative, advanced technology ­­can help.