Christy Richards is a rare breed in the meeting planning business. She doesn't “do”. Never has, and she hopes, never will. The meeting planner for the Chicago-based National Association of Realtors avoids the “A” word by employing a room-pricing formula and rate protection clauses that result in significant room discounts for NAR attendees.
“The rate drives the people to your group block,” she explains. “Very few people want to book on the Internet just for the pleasure of booking on the Internet. They book on the Internet because the rates are cheaper.” Richards says her strategy saves the National Association of Realtors about $500,000 per year in attrition costs, and meeting attendees about $1.6 million per year in lower room rates.
“The National Association of Realtors is one of the best negotiating associations that we know of,” says Bill Martin, vice president of sales at I.T.S., a registration company that has been serving associations for decades. “Some may say they're too tough, but they just know their business and they've done their homework. I think other associations would benefit by following some of these procedures.”
Cheaper by the Dozen
Richards, who has worked for NAR for 12 years, is managing director, department of planning and development. Her approach to rate management is predicated on the (not uncontroversial) view that meeting attendees should get a better room rate than individual travelers staying at a property.
“The law of economics would dictate that as volume rises, price declines,” she says. So in theory, a group buying 500 rooms should get a better rate than an individual buying one. But the drop in travel demand in the past several years has pushed hotels to sell more of their inventory to Internet discounters like Orbitz and Expedia, which can often sell attendees a cheaper rate at a hotel than the contracted group rate.
This “inverted” pricing structure used by hotels in recent years has caused clients “massive attrition bills,” Richard says. To protect against attrition damages like these, Richards employs a three-step process: 1) determine the “market value” of the hotel room during her meeting dates, 2) negotiate a group discount off that rate, and 3) include flexible rate-protection clauses in the.
For meetings more than a year out, she determines the market value of the hotel room both at the time the meeting is contracted and at rate confirmation (which is 12 to 14 months out from the meeting dates). She comes up with the market value by surveying published rates for the property during the month that her meeting is to be held. For example, if she were contracting in 2004 for a meeting in November 2008, she would analyze rates posted for that property in November 2004. She collects rates published by third-party reservation companies and the hotel's own Web site.
Using a spreadsheet showing a month's worth of rates at the hotel, she calculates a weighted average rate. Rates for each night of the month can be weighted equally, or if there is an appreciable difference between say, weekends and weeknight rates, she comes up with a weighted average that reflects the bell curve of the block. (See sidebar, page 30, for details on weighted averages.)
This process of arriving at a weighted average room rate is repeated at the time of rate confirmation. Both calculations are needed in the NAR contract.
Flexible Rate Clauses
The NAR contract includes several possible rate confirmation clauses, and NAR reserves the right to invoke whichever clause yields the best group rate at the time of rate confirmation. For example, there is a “bottom-up” rate clause and a “top-down” rate clause.
The “top-down” clause takes the weighted average room rate, based on data from the year prior to the meeting, and discounts it the negotiated percentage. So for a meeting in November 2006, the rate would be the weighted average from November 2005 minus the group discount that Richards negotiates with the hotel.
The “bottom-up” clause specifies how much a base rate can increase due to inflation. Example: If the contract was signed in April 2004 for a meeting in August 2008, the rates would be set by multiplying the base rate (the weighted average for August 2004 less the group discount) by the predetermined inflation multiplier.
A third rate-clause option is added when there is a “large discrepancy between the meeting hotel and its competitive set,” Richards says. This clause stipulates that the negotiated group discount will be taken off a weighted average rate that factors in rates at specified competitive hotels. (See sidebar on page 32 for a legal perspective on this clause.)
To insure against hotel transient rates that slide after rate confirmation, there is an additional clause that says that no lower rates shall be offered to other groups or to individuals, whether directly or through any third party, for any days of the NAR event, unless made applicable to all NAR attendees. So if the published rate during the meeting dates dips below NAR's rate, NAR's rate decreases to that same published rate. In some cases, the clause goes further to state that the negotiated discount will remain intact. So if the published rate drops 10 percent, NAR's rate will decrease 10 percent below the new published rate.
Leverage Is Relative
Richards says she uses these contract options for all the meetings she manages. (She plans four main meetings each year: two meetings of 750 to 1,000 people each; one with about 7,000 attendees using about 10 hotels; and one with about 24,000 attendees using approximately 30 hotels.) Meeting space used at individual hotels is generally given as part of the overall negotiated package, she says, except for small meetings with little or no guest rooms and food and beverage.
The fact that NAR is a large organization doesn't give her additional leverage in imposing these stipulations, she claims. “The most powerful leverage comes from having options, and the larger the business, the fewer the options,” she explains.” A smaller group may not have the same sway at a larger hotel where it is filling up half the rooms, but it will at a smaller hotel. “Our pickup is exceptional, and the reason it is exceptional is tied to our rate clauses,” she says. “We have protection when times are good times and protection when times are bad.”
On the Other Hand…
Hospitality marketing consultant David M. Brudney, ISHC, founder of David Brudney & Associates, Carlsbad, Calif., reviews hotelfor a living and hasn't come across one quite like Richards'. He thinks it would be difficult for the average association planner to benchmark market rates in any particular market four or five years out and to reach a consensus of any kind.
“How would the planner convince the hotel in question on what are market rates?” Brudney asks. He thinks that benchmarking or quantifying would have to be done by an independent consultant for the system to work.
Larry Luteran, vice president of group sales and industry relations at Hilton Hotels, also has concerns. His major issue with Richards' formula is the condition that allows the association to review the package one year out and change the pricing formula that has already been agreed to at the time of booking. He claims this type of pricing adjustment on definite business is potentially devastating to hotels because the value of future group bookings to the hotel community would be virtually impossible to quantify.
He also doesn't agree with the notion that groups should always demand the lowest rate at the hotel. “There are a lot of things that go with the group meetings rate and that make a particular hotel the right selection for a meeting,” says Luteran, including date security, business centers, meeting space, convention service personnel, and all of the other custom items a meeting customer might need to make a meeting successful at a particular venue. While groups typically generate ancillary revenues for the property, there are also expenses that may not be incurred with other clientele, he says.
Luteran says he understands the challenges that planners face in fighting attrition, and he thinks packaging might be a solution that works for both sides. “We already typically package the meals and other meeting services into registration fees, so it just makes good sense to package the guest room into the registration fee as well,” he says.
“Once the deal is done and the price and terms have been established, we should spend our energy on making sure the event is successful. We have certainly seen cycles over the years where established group pricing is well below market demand at the time of the meeting, and changing group pricing upward without regard to the established contracted deal has not been an option.”
Richards says that her system does allow rates to float upward to a point, citing the inflation multiplier clause. “The formulas don't change at all, just the numbers that go into the formulas,” she says, adding that hotels have to project their revenue based on best estimate of market conditions, just like every other business has to do.
“It's not like we're asking the hotel to hold the rooms and we'll decide later if we want them,” Richards says. “We're signing contracts that obligate us.”
How Weighted Average Works
To determine the “real market value” of a single room for any given set of dates, Richards calculates a “weighted average.” Here's how:
For meetings booked more than one year out, the first step is to check the lowest rates for each night in an entire month, making sure the rate research is done for the same month as the meeting. So, for a meeting contracted in September 2002 for November 2006, for example, Richards would find the lowest published rate for each night (and each room type) in November 2002.
For a deluxe room with a king-sized bed or two double beds, the rates could be all over the lot. Seven nights in the month, the low rate for the room might be $159 per night, while six nights it might be $169 per night. Sixteen nights it could be $269 per night while one night, the low rate might be $439 per night.
Richards multiplies each rate times the number of nights it appears, adds it all up, and divides by the number of days in the month to come up with a weighted average. Using this example, the average price per night is $229. It's to that number that the negotiated group discount is applied. This same rate research is repeated one year prior to the meeting (November 2005), and the outcome determines the rate clause she chooses to employ.
For meetings less than a year away, the research method is the same, but the rate is confirmed based on the results of the research — no clauses are written into the contract. On a very small meeting booked within a 3-month window, research typically is done on just the dates of the meeting. So for a meeting booked in September of 2004 for November 9 to 12, 2004, she would check rates for November 9 to 12, 2004.
Factor In the Competition
John Foster, partner with the Atlanta-based law firm, Foster, Jensen & Gulley, says he uses rate clauses similar to those used by the National Association of Realtors in his clients' meeting contracts. Instead of NAR's three clauses, however, Foster uses five clauses to determine the lowest possible room rates. Like the NAR formula, the rates float.
“The key to NAR's formula is tying it into competitors' rates, this is what many planners aren't doing and I think it's a good idea,” says Foster. Looking at the competitive set gives the planner a broader spectrum to determine market rates, thus deterring attendees from staying at cheaper hotels down the street. “Hotels are trying to shift all the risk of market fluctuations back to their client,” he says, by using association groups as “insurance policies” in effect. “The objection to that is that nobody is giving the association any type of insurance.”
Foster doesn't think attrition-busting techniques clauses such as NAR's will lead to hotels breaking out costs for meeting space and other amenities.
“There's never been a period of time where every hotel in the city is sold out, where the economy is so good that every one is running full 365 days a year, so there are always going to be competitive pressures,” Foster says. If occupancy does get that high, “developers will build more hotels.”
— Dave Kovaleski