To contract or not to contract - that is the question

28 April 2022
Hotels sign agreements for future room nights at a negotiated rate or discount from BAR with anyone who wants a closer relationship with the hotel. Hotels exist to serve customers and guests, so an agreement is an excellent start to a long-term relationship.
There are many different types of agreements, and there are considerations hotels have to make to maximize the positive impact of a contract. Here are some aspects to consider.

Who owns the customer?

All hotels dream of owning the customer instead of depending on third-party intermediaries. Contracting could be a way of ensuring a direct relationship with the customer and increasing the total revenue from each contracted customer. In addition, long-term relationships tend to give a hotel a solid base of room nights and enable the hotel to optimize the remaining inventory.

Negotiate based on stay patterns

The outstanding contracted customer buys room nights on low and medium demanded days - only a tiny share of room nights on high demand days. By analyzing stay patterns, the hotel can find the contracts with the highest value and offer a very competitive rate to attract the business.
 
For customers only using high-demand days, the rate must be in line with the market rate. Otherwise, the hotel will lose too much money, and the RGI will drop significantly.

Flat rate or a discount on BAR?

Many customers prefer a flat rate because it is easier to budget and gives the customer a feeling of being in control. Hotels prefer a pricing model where the agreed rate is calculated as a discount on BAR since this pricing model provides the hotel with more flexibility. Today, most agreements for future room nights have a discount on BAR.
 
It is, however, not that easy. Hotels sign the agreement and are happy since they can adjust the rate depending on demand. Most hotels forget everything about the booking window and therefore do not understand how they should optimize revenue. Corporate customers tend to book late, and even if the demand and BAR are high, the corporate customer will get a discount. The hotel makes a forecast of 100 % occupancy, so the revenue manager increases BAR. The rate is too high and will not attract many more bookings now, but the revenue manager knows that the bookings will come in late. Three days before arrival, the hotel still has available rooms. Here is the problem. Many of those rooms will be booked by corporate customers with discounted rates since this segment tend to book late. It would have been better to sell more rooms at a lower BAR and wait longer to increase BAR to sell fewer discounted rooms.
 
Hotels rarely practice this since it does not sound logical that a lower rate will generate more revenue when the hotel expects 100 % occupancy. The problem is that many hotels can't quickly analyze booking windows by segment and many other variables.

Communicate BAR levels to contracted customers

Hotels are happy to sign discounted rate contracts because they want to keep their flexibility to adjust rates depending on demand. They would like corporate customers to buy rooms when the demand is low or medium and not on days when demand is high since the hotel can sell rooms at a higher rate. Hotels, however, tend to forget to communicate to the customers when the rates are low. Hotels can display the rates in calendars on their website, or they could let their customers know far in advance when rates are low. The cost-minded company will find dates with low rates for their next conference instead of having to pay a premium even if the hotel has discounted the rate according to the contract.

Recommendations

If the hotel has a sales team and revenue management knowledge, sign as many agreements as possible with customers to own the customer. Understand stay patterns and booking behavior for each customer to negotiate the best deal for both the customer and the hotel. Finally, do not forget to keep nurturing the customer so that you will maximize the value of the agreement.