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Stress Your Value Proposition During Corporate Rate Negotiations

by Ed Watkins, Contributing Editor |

As hotel sales and revenue management teams engage in corporate rate negotiations this fall, they might find themselves at a disadvantage for the first time in a few years. To prevail, or at least to maintain their market shares, hotel negotiators need to stress the value they can offer that’s not available at their competitors.

“Hotels need to be even better this year at knowing what is their individual value propositions,” said Bjorn Hanson, clinical professor at the Tisch Center for Hospitality and Tourism at the New York University School of Professional Studies. “It could be their location, their particular set of services, their loyalty programs. It could also be the amenities they offer, whether they are food and beverage outlets, or recreation facilities such as fitness centers.”

In a recent forecast of this fall’s corporate travel rate negotiations, Hanson said the outlook is for a change in the balance of power from sellers to buyers. As a result, he forecasts corporate hotel contract rates to increase between 3.25% and 4%. That follows increases of between 5.75% and 7% increases for 2016.

Paradoxically, that sharp drop in rate increase comes in an environment of high occupancy for the hotel industry.

“Occupancy in 2016 in my best forecast is going to be the second-highest since 1984,” he said recently. “2015 was the highest, and it looks like we will finish 2016 a little bit lower than 2015. 2017 will be just a little bit lower, but tenths of an occupancy is not enough that people will sense different levels of availability.”

Bjorn Hanson of @nyuhospitality says hoteliers need to stress their value proposition during… Click To Tweet

We recent spoke to Dr. Hanson by phone to discuss his study and the state of the hotel industry:

Bjorn Hanson

Bjorn Hanson

What accounts for the sudden and profound shift in the balance of power between hotels and their corporate customers?

There are a couple of things driving it. The first is corporate travel managers are saying, ‘No one cheated, no one was dishonest and there was no misrepresentation, but we misread the market for 2016 and the rates we negotiated for 2016 were too high. Our corporate rates are boosting your average rates, whereas in the past we expected to be below the average rate.’ 

The second is the transparency of rates—especially so-called member rates and non-refundable rates. If you go to almost any branded hotel website and the sites of most independents there are some choices of rates, and most sites display standard rates, member rates for those in loyalty programs, and non-refundable rates.

Corporate travel managers are seeing information they didn’t see in the past and they’re saying, ‘We’re high-volume users and our travelers have a higher propensity to eat in your restaurants and order roomservice, use the business center and all those other revenue generators. Now you’re trying to get us to pay more than your (loyalty program) members. Many of our travelers are members too so, why shouldn’t they get as least as low as the member rates and, since we are a volume buyer, something even lower than that.’

What else can hotel negotiators and revenue managers do to maintain their share of business in this environment?

They might take a more holistic view of what it means to be in these corporate rate negotiations. If a company is booking 5,000 roomnights but also other things such as meetings, exhibitions, trade shows and product announcements perhaps you can do even more for them on rates.

It goes beyond that even to things like having direct billing for lunch. You can pitch it as instead of going to area restaurants, come to our hotel; by the way, that’s good for you because you will have visitors there, you may see people you know that you have relationships with.

It also enhances the burden of the hotels to measure the demand, meaning we had an agreement of 5,000 roomnights but it came in only at 3,000. We will negotiate with you but the negotiation has to reflect the reality of the number of occupied roomnights. It puts a burden on the hotels to know the value proposition and have even better data to be effective in negotiations. 

Do you think the managed travel model will become obsolete or otherwise change in the future?

The millennials are a bit of a challenge for corporate travel compliance because they have a sense of justice, meaning while they understand the purpose of the corporate negotiated rate is to get a lower rate they believe they can stay in other hotels they would prefer at even lower rates. I don’t think it is an adversarial relationship because corporate travel managers started three or four years ago to endorse alternative lodging models like Airbnb and independent hotels.

Travel is viewed as being a lot less satisfying than it was a decade ago, especially the air travel portion of it, so the whole trip becomes less appealing. The corporate travel manager isn’t there just to get lower prices but to have employee satisfaction because that relates to retention and other things of importance to them.

What kind of impact is Airbnb and other sharing economy sites having on corporate travel?

If you get a player like American Express Travel booking Airbnb, that’s an endorsement. Now the corporate travel manager can go to the CFO or perhaps the risk management department or the general counsel’s office and explain that since American Express and Carlson Wagonlit are booking these alternatives, it’s mainstream now. It allows the company to save money, and their travelers like it.

Do you think member-rate strategies will work for hotel companies to increase the number of direct bookings they receive?

The brands are having an effect, but it is just the beginning of a series of initiatives by the hotel organizations. More than 15% of reservations come through OTAs at those high commission rates for a reason; it’s because OTAs offer value. Maybe it is a real value or a perceived value to travelers to be able to compare prices at a number of hotels, of having guest feedback and have other features that enable the OTAs to add value to those travelers. Price is just one of several factors.

There will continue to be progress, but there is no confirmation taking place in the shift of reservations away from OTAs to either the brand websites or to hotels directly.

Occupancies for the industry are at all-time highs. Why has rate growth been so sluggish?

It shows the need for lodging companies to learn more about controlling rate in the new environment with OTAs and other lodging alternatives. It’s a challenge because the OTAs and the lodging alternatives have made a case; they are in play and operating from a position of strength, so trying to win back against that is an industry challenge.

Do you think overbuilding will be the thing that ultimately slows down industry performance?

We’re one tenth of 1% away from the long-term average rate of supply growth. The reason occupancy is as high as it’s been is not because of good demand growth; it’s because supply growth has been so slow. Going forward, there is some peril as supply growth gets back to where it traditionally has been, and it looks like demand growth may have peaked.

How do you see the business travel landscape changing in the future?

The old world in which the seller must spend face time with the buyer hasn’t ended but it’s less important than it was in the past. Younger travelers have been using different types of media with their friends; they might be sitting next to their best friend and texting rather than talking.

We’re seeing business travel happen for different reasons than that traditional face time between the buyer and the seller, and that has implications for length of stay, prestige of where to stay, the amenities that are required and so on. It’s playing out as we look at what supply growth is. It’s not happening in luxury hotels and upper upscale hotels; it’s happening in upper midscale and midscale.

But the real question is about group. The good news is a very small percentage of new supply is targeted to the group market. While that market continues to shrink, that percentage of supply is also shrinking.

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Ed Watkins, Contributing Editor

Ed Watkins, Contributing Editor

Contributing editor at Duetto
Ed has been covering the hotel industry for more than 40 years. He was editor-in-chief of Lodging Hospitality from 1980 to 2012. He then joined Hotel News Now as an Editor at Large, until his retirement at the end of 2014. Ed still contributes to several publications and is a member of the advisory boards for the hotels schools at Michigan State and Penn State.
Ed Watkins, Contributing Editor

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Ed Watkins, Contributing Editor

Ed has been covering the hotel industry for more than 40 years. He was editor-in-chief of Lodging Hospitality from 1980 to 2012. He then joined Hotel News Now as an Editor at Large, until his retirement at the end of 2014. Ed still contributes to several publications and is a member of the advisory boards for the hotels schools at Michigan State and Penn State.