It’s that time of year where my tour operator clients are finishing off their 2020 pricing (and in some cases 2021 pricing) and reaching out to hotels and accommodation providers for their net rates. This used to be such a simple process, with hoteliers setting rack rates and then a discounted FIT rate and it hardly got more complex than low or high season and weekday and weekend rates. The burst of sales machines that are the online booking engines has changed all that and a significant number of providers are now offering dynamic pricing and only dynamic pricing, with perhaps a small, tour operator discount of say 10% off the price of the day, but often not.
Fine, if the maths suggests this is the right approach then run with it, but I believe this carte-blanche approach of treating B2B clients i.e. tour operators, in the same way as B2C clients i.e. direct guests, is actually supressing your revenues far more than it needs.
To me, the maths is simple. Dynamic pricing works on the basis of instantaneous bookings and flexes the rate in direct correlation with date demand. This makes perfect sense when you are competing against local providers for often one-time guest bookings, and also helps to take into account fluctuations in local demand. It does not however work in the slightest for the B2B tour operator or support your relationship with this potentially lucrative income provider.
Tour operators set about creating holiday programmes which have an annual price or a high and low season price which they publish in brochures and on websites across the world. This simply doesn’t fit with dynamic pricing and there is no way to account for these fluctuations. This means the tour operator has two choices; they price for the worst case scenario i.e. the peak price or they price against the average and see their margins squeezed for clients that book at just the wrong time.
The former often makes their prices non-competitive or non-desirable to their target traveller and the latter makes it hard for them to control margins. Yet most hoteliers seemingly refuse to set a fair and balanced FIT rate.
I have spent much of the last two weeks supporting one particular client with their pricing and working a PR exercise to first compare and contrast the dynamic versus fixed rate pricing and second to encourage hotels to take a chance on a semi-fixed rate for our client. The maths is clear but even with a robust financial argument the hotels are still reluctant and I simply cannot fathom why.
Bear in mind, we have done hundreds of calculations based on actual bookings made during 2019 with and without dynamic pricing. The result was the same every time – providing fixed FIT rates would have made the hotel more money, without squeezing the tour operator’s margin.
First, we started with the bookings themselves and mapped them against both the FIT rate and the dynamic rate for each date. Selecting specifically one location in Cornwall for example (which I hasten to add is representative of the norm and not a crazy data outlier) and the ‘FIT’ price provided for the year was a 10% discount on the published rack rate. Flattened across the year for the purpose of package prices, this meant my client ‘should’ pay £125 per night per room for two people sharing a double or twin.
They placed 178 room nights during the 2019 season to date which should have equated to c. £22,250 for the year not including on-site spend in the bar or restaurant. The hotel was adamant this was the ‘best’ rate for the room and that it wasn’t worth them standardising across the year. Enter dynamic pricing – which definitely works for the consumer market – and my client’s administrators got in the habit of checking all of the online booking portals for the price before making a booking.
Over the course of the 2019 season, on average 4 in every 5 bookings made during the season could be purchased cheaper via dynamic pricing and the average rate paid for the room booked online was £91, making the total seasonal revenue £17,422. That’s a direct loss of £4,828 simply because the original rate wasn’t good enough to keep the tour operator on board.
At this point, many hotels argue that the tour operator bookings weren’t guaranteed and that on a number of the nights they secured the £125 ‘rack rate’, but the bit that this argument completely and utterly misses is the direct savings in OTA commissions as well as the indirect savings through reduced marketing overhead and higher conversion rate. Get a tour operator on side and they will pretty much guarantee you regular business throughout the year, including your shoulder seasons, apart from when you don’t have any availability at all.
Back to the maths: assuming that the booking from the tour operator is made through one of the major booking engines like booking.com instead of direct to you. Booking.com for example publish a global average commission rate of 15% which is likely to be the best case scenario given that they vary their commission by location popularity, but we’ll assume 15% for now. 15% commission on 142 nights at an average £91 is £1,938 down the drain for no reason other than reluctance to flat fee.
So I put it to you again – what would you rather? 178 bookings made direct and commission free at say £95 totalling £16,910 where you sometimes sell below your dynamic pricing but rarely, or 36 bookings at £125 and 142 bookings at £77.35 (after commission) totalling £15,438.70. It seems like a no brainer to me!