A Proactive Approach to Negotiated Rates during tough times

Are we on the brink of the demise of the Hotel RFP, if only for the nonce? The market will bear only what it can bear and no one knows what occupancies and ADRs will look like. For sure, market rates will be lower than corporate rates in the foreseeable future.

The Global Business Travel Association recently endorsed a postponement of the 2020 hotel request-for-proposals process until 2021 because of the coronavirus pandemic and in the process encouraged hotels to roll all 2020 rates for 2021. While this announcement is probably premature, given that the typical RFP season doesn’t get going until post August when the hotel landscape might look different, Business Travel News reported that it also ignited a controversy among procurement experts who see rolling hotel rates over possibly eroding the value of the corporate travel program.

Buyers need to be given a choice. Isn’t that what a free economy is all about?

Static negotiated rates will very likely be higher than spot rates in the market going into 2021, thereby putting the program manager and the travel management company in an awkward situation. When corporate travellers see lower rates on the online booking tool, they will begin to distrust the TMC and the RFP program. RFP contracted productivity in Indian city hotels ranges from 08-20% of bookings and if you roll over RFP rates, given the post-pandemic bleak business forecast, there is a very good chance these contracted rates will look high a lot of the time.

In a static RFP rollover there would be a concern about eroding the value of the corporate travel manager who is supposed to be aligned with their duty to their own companies as they get paid to get the best value for their company. If they just let things ride and not get significant discounts, their bosses would ask them to justify their salaries & existence.

What may happen is that those RFP programs which remain static would be switched to use dynamic rates i.e. LAR (Least Available Rate) on GDS.

In a post pandemic scenario, the Market will necessarily be in the Buyer’s favour for quite a while. Nobody wants to hurt the hotel industry while it is down, but business is business. When was the last time a hotel went to a struggling business and offered more sops and discounts on their negotiated rates until their business bounced back?

Hotels would like to sustain their pre-Covid ADR (average daily rate) for as long as possible, because that was the rate point created at the end of a long growth cycle; but a majority of their clients would see an opportunity to negotiate for lower rates and better terms and conditions.

Many companies are already on a hunt with scythes to lower vendor costs realising they see an opportunity, and are being asked internally by not only their Chief Procurement Officers but also their Chief Financial Officers to make use of the market situation for their benefit. They view this as an opportunity to do the right thing for their company and to obtain better terms and conditions based on the current market.

Static rates will be non-competitive, and hotels may see some clients go off-cycle, reduce the size of their hotel programs, and diversify the program by adding more dynamic rates, thereby quitting sourcing rates everywhere and using rate targets.

With over six months remaining of this year, it is within the realms of reality that Companies may call for lower rates on their RFP program for the remainder of the year. Though this is a time consuming process for the procurement division, the value of savings for the company may be significant enough for it to reach out to all its partner hotels asking for these lowered rates.

While it is still the hotel’s prerogative as to whether they would like to offer discounted rates or not; those that do – could get volume and market share in return.

Today’s Proactive Hotel Manager will have to absorb this reality and strategically see their way through turbulent times ahead.

So, should Hotel companies reach out to their Client Companies before these companies get around to calling the hotel for re-negotiation?

With RFP accounts, experts I have spoken to, advise Hotels against doing so. One has to be careful of setting benchmarks when dropping rates, for this can have a rollover effect and take you years to regain ground thereafter. Hence with RFP accounts, it is better to load lower rates as per the forthcoming business troughs as a Least Available Rate (LAR) on GDS which will achieve the purpose anyways, but with the control on pricing and period within your hands.

In the case of companies with a Locally Negotiated Rate (LNR) however, it is possible that once you have realistically seen the near future and realised that RevPAR is going to drop drastically, you approach these companies giving preference to them on the basis of the Pareto principle.

The advantages of reaching out to their procurement heads to possibly offer special post-pandemic rates are numerous.

  • You make their job of approaching you otherwise, easier.
  • You are showing empathy for their situation even though your industry in all probability is worse hit than theirs.
  • Your approach is proactive and hence open – rather than reactive and hence defensive.
  • The expected business from the corporate will anyways plunge due to the market situation but as a first mover you could vie for additional business normally given by the corporate to your competition, hence filling the forecasted contraction.

Festinger’s cognitive dissonance theory (1957) suggests that we have an inner drive to hold all our attitudes and behaviour in harmony and avoid disharmony (or dissonance). When there is an inconsistency between attitudes or behaviours (dissonance), something must change to eliminate the dissonance… A number of hoteliers I have spoken to are apprehensive of reaching out in advance and offering new rates to LNR companies, yet they want their business to return. While I understand their concerns, we must also realise these are unprecedented times and we have no frame to fit to compare these times to; hence we would need to keep re-inventing the wheel and act decisively to resonate our thoughts with our actions.

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