By Laura Kusto, Global Hotel Practice Leader
There’s an old saying, “every cloud has a silver lining” – and while the COVID-19 pandemic presented significant challenges to everyone in the industry, it also provided travel managers with an opportunity to take back the wheel of their hotel programs.
We’ve been recommending a “reduce and diversify” hotel strategy for some time now, and it’s only become more relevant for travel managers trying to deal with the impacts of the pandemic. During last year’s sourcing season, Advito’s clients reduced the number of hotel RFPs sent by 36% and reduced their program size by an average of 24%. We’re helping clients continue that trend this year with our 2022 hotel RFP strategy.
Nearly everything about travel management has changed, and our hotel approach will be more important than ever as business travel resumes. Travel managers can’t just rely on traditional sourcing anymore, they need to reduce their program size, diversify rate types, and implement rate targets. Here’s why that’s important, and how it works.
1. Reduce hotel program size
When we look at hotel sourcing trends, it’s clear that the Pareto Principle is in full effect: clients have focused on sourcing 20% of the hotels they’ve used, and their activity covered 80% of their total spend and room nights. Since clients are continuing to downsize their hotel programs, reducing these by 28% on average for 2021, a smart approach is to trim their programs even further. Savings achieved through the traditional labor-intensive sourcing process have continued to diminish every year. Reducing the time spent on hotel sourcing not only frees up time but also resources and money to focus on other ways to optimize travel programs.
We recommend that travel managers cut sourcing in half, reducing the number of preferred hotels. Our stats show that by sourcing 10% of the hotels used, travel managers can still cover 65% of the spend and room nights. This is a smart trade-off because travel managers don’t spend time on the least competitive rates and focus instead on those that offer the best value.
2. Diversify your hotel program
Within that 10%, our next recommendation is to diversify your hotel program, starting with the rate mix. Ideally, the top 5% would be dedicated to negotiating static rates, as this is where you have the most leverage and can achieve the best value. This will cover about 50% of your spend. The next 5% should be dedicated to dynamic evergreen rates, which our research shows are important to 83% of clients. This will cover the remaining 15% of the 65% we referred to in the previous section. We believe a good dynamic rate should offer a discount of at least 30% off BAR (best available rate).
You can also further supplement your program by leveraging BCD’s Global Hotel Program for the properties you are no longer sourcing. Our data shows that many clients get a better discount that way than if they negotiate directly with those low-volume properties. This also cuts down on RFP costs, which is a significant advantage.
3. Implement rate targets
With a smaller program, the obvious question is – how will my travelers know what to book if there aren’t preferred hotels? First, keep in mind that this isn’t a new situation and your travelers book non-preferred hotels all the time. You have markets without preferred hotels today and there are also instances where preferred hotels are sold out or otherwise unavailable.
But you can – and should – be doing things that positively influence their behavior at the POS to drive the results you desire.
Historically, influencing travelers has been done via rate caps – setting a value by market of the maximum rate that can be booked and communicating this to your travelers via the policy and/or presenting them in the booking tool. However, we’ve learned that it’s a better strategy to present rate targets versus rate caps. Rate caps are high values – in preferred markets, for example, they’re set to the highest negotiated rate in that market. Rate targets are more competitive values and are closely aligned to the average booked rate in the market – regardless of if it has preferred properties or not.
Why you need to switch from caps to targets can be explained by behavioral economics, and how you present the rate targets makes a big difference to both traveler behavior and program spend. Rate caps present the maximum rate travelers can book, and most travelers book as close to that as possible. However, with rate targets set at a competitive market rate, travelers book much lower rates when they are encouraged to book at or below that rate. In following the rules, they end up saving money for the company.
This three-step approach of reduce, diversify, and implement rate targets is a great starting point to taking back control of your hotel program. By taking this approach last year, one of our clients reduced their program size by 64% and realized $388K in savings by shifting 43% of the program to dynamic discounts instead of static rates. Following these steps in your 2022 hotel RFP will not only drive cost savings but will also save the time and resources you typically spend on a full-blown sourcing event