The Art of Negotiating Contract Rates

Contracted rates have always played an important role in a hotel’s bottom line, and how those rates are established has evolved over time. Similar to many other aspects of our ever-evolving industry, calculating contracted rates has dramatically changed as a result of dynamic transient pricing.

In fact, in the not-so-distant past, contracted rates were generally negotiated with minor considerations for seasons or days of the week. As hotels adopted dynamic pricing, many of these contracted rates were converted to discounts taken off published transient rates. In many hotels, there is still resistance to move all contracts to dynamic pricing. Now more than ever, an advanced revenue management system (RMS) is essential for determining the best solution for managing these negotiated high volume contracts whether they are dynamic or fixed.

Hotels always need to ensure corporate accounts do not have unlimited availability of inventory once a contract is in place. A hotel can still manage these contracts through inventory controls on busy days. If the contract does not stipulate Last Room Availability (LRA), then the business can be fenced just like any of the hotel’s transient discounts. Yieldable contracted business allows you to turn away one night discounted reservations on peak nights and leave availability for multi-night retail business.

Hotels also negotiate inventory controls up front during the contracting phase. These are called close-out or blackout dates and are negotiated into the contract to provide the hotel with the ability to close the rate on peak days and pursue higher generating revenue via other types of bookings. This is beneficial in protecting your most critical dates that may be driven by convention business, sporting events, high seasons, etc.

Hotels that negotiate a discount off BAR are also able to dynamically change pricing when it does not conflict with the needs of their clients. On the other hand, if the contracted client requires consistent pricing, then inventory controls are necessary to maximize revenue. Ideally, a hotel would be able to manage contracted rates through a combination of both but only a sophisticated RMS provides the flexibility to meet both client and hotel business needs.

Tempted to go with a pricing-only approach? Before you renegotiate, look at the big picture of its impacts.

Pricing-only means allowing various and often inconsistent discounts, and not maximizing your guest’s length of stay. But not all client accounts will accept a dynamic discount taken off a rate. The client may view this as receiving little assurance of any rate consistency, which is the main reason organizations seek to contract rates in the first place. Many organizations have to budget travel expenses and not having a sense of what they will pay for hotel rooms may be enough to make them take their business to one of your competitors.

When an account is negotiating, they want to get the best price in terms of discount. An RMS is an invaluable tool for helping hash out the details of rate discounts so hotels can maximize revenue from contract business while still offering an attractive rate that ensures repeat volume business year after year.

What’s more, the contract details determined by the RMS go beyond discounts and pricing. There are links between daily pricing and contract segments that have distinct demand patterns and sensitivities. A top-tier RMS will recognize that demand can also be controlled by availability as well as price. Additionally, some of that demand cannot be managed via availability controls due to LRA clauses. Again, the system’s advanced analytics help by providing invaluable guidance that looks at every scenario.

If your RMS isn’t analyzing these varied and important considerations, you might be missing out on revenue — or worse, losing important contracts to your competition.

Related Resources

Hungry for more?

At IDeaS, we’ve always got an ear to the ground and our fingers on the keyboard, ever-ready to share our latest learnings, data, trends, and happenings with you, dear reader.

See all blogs