The “Tumbleweed Factor”

Covid-19 cancellations are driving prices in the hotel industry

As events come back, we will see unprecedented demand across limited supply. This is going to have a significant impact on your budget! This is due to what I’m calling the “Tumbleweed Factor.”

If you’ve ever driven across the plains in the summer, you probably have seen piles of tumbleweeds against the fences alongside the road.  If you think of the tumbleweeds as the events that were cancelled or postponed in 2020, and the fence as the supply of hotel rooms and meeting space, you’ll have a good picture of what’s to come toward the end of 2021 and the start of 2022.

Given what’s coming, it will be important to educate Procurement and Finance on how hotels set their prices. Because rates and occupancy were at all-time lows during the height of the crisis, they may still believe that it’s a buyer’s market and hotels will be hungry for business after sitting empty for so long. 

They may also expect to negotiate lower prices based on prior spend volume, which is a tried-and-true Procurement practice. Typically, the more a company spends with a supplier, the lower the price they will receive through volume discounts. Leverage works well when materials are being purchased and even some services. In these cases, supply isn’t fixed.

Leveraging spend can work with hotels too, but only to a certain extent. This is counter-intuitive to Procurement and Finance managers who aren’t familiar with the industry.

It’s important to remember that hotel supply is relatively fixed. Each property has a finite amount of meeting space and guest rooms available per night. The only way to increase supply is through a construction project.

It is also important to remember that hotel inventory is perishable. Each room can be sold only once per night. If a room sits empty, that revenue is gone forever. Needless to say, hotels lost a lot of revenue over the past 18 months, which they now need to try to recover.

Because of these and other factors, hotel managers use multi-tier pricing to maximize the revenue for their property. Discounts are offered for regular customers with a lot of volume (i.e. business travelers). Lower rates are also available for groups who book well in advance. For both situations, the number of rooms offered at a discount will be limited.

As time passes, demand will influence price. If a hotel has low occupancy, they may release rooms at a deep discount through online booking tools like Expedia or Travelocity. These are ‘moment in time’ rates and shouldn’t be used as a pricing benchmark. Conversely, the closer a hotel comes to selling out over a night, the more expensive the last rooms available will be.

This means a company (or group of companies) booking a high volume of hotel rooms in a particular market can push supply to scarcity (known as compression), which drives rates up. This is happening now. I spoke with several hoteliers and destination representatives at MPI’s World Education Congress earlier this month, and nearly all of them have compression for the rest of 2021 and into 2022.

What does this mean for you? First, you’ll want to start sourcing your events as soon as possible!

Then you’ll want to talk to Procurement and Finance now to set reasonable expectations for cost for your upcoming events. You can show them this article to help get the conversation going.

Do you need a strategy for managing your “tumbleweeds?” A Strategic Meetings Management Program can help you maximize your leverage, even during compression. If you’ve been thinking about putting one in place, and aren’t sure where or how to start, I can help! I created Microsoft’s Strategic Meetings Management Program and yielded a 900% ROI. I offer a proven project framework that will guide you through the process and help you choose the right solution. I’ve even written the RFP you’ll need to go to market!

Let me help you build a strategy that will let you work in your Zone of Genius, which is delivering amazing events!

Schedule a complimentary, no pressure 30-minute discovery call to see how I can help. Book Now.