Following the lead of airlines irrationally pricing airline seats, hotels embraced variable pricing and its promise of liberal price increases during high demand periods. Hotel revenue management became a high stakes game to optimize revenues.
Encountering wild price fluctuations, consumers began playing their own games to save money booking hotels. The ability to find discounts from rates offered by hotel websites alters consumer buying behavior – just ask the online travel agency community.
So what happens as a result of this gamification of the hotel booking process? Much more is involved than simply pitting two sides against each other in a tug-o-war over the contents of a hotel guest’s wallet.
Hoteliers learned that variable pricing was a double-edged sword – similar tactics could be used by competitors to undercut pricing and steal market share. The game became more complex than originally imagined.
Similarly, consumers faced with a daunting assortment of distribution channels, business models and promotional pitches had difficulty finding a reliable method to score big hotel discounts. The complexity of their game increased as well.
How to Save Money Booking Hotels
The approach detailed below has been used successfully for several years. Simply put, it involves bidding using Priceline‘s “Name Your Own Price” service while using Expedia sister brands Hotels.com to calculate an inital bid and Hotwire.com to set the maximum bid.
It is a relatively easy game for travelers to play, with only basic arithmetic skills and a bit of organization required. The hotel savings don’t require booking months in advance, waiting until the day of arrival, or involve buying flash sale coupons and hoping for open availability when travel needs arise.
Tragically for the hoteliers, there is no accretive demand generation, just a potential share shift between candidate properties. These savings do not inspire discretionary trips or stay extensions to take advantage of a great hotel deal. Rooms are booked into targeted destination neighborhoods only when a trip is required.
Plus, this game is not just for the leisure traveler – it also works well for the unmanaged business traveler. Worse yet for the hotelier, even formerly brand loyal guests will be tempted to become brand agnostic when consistently rewarded with discounts ranging from 33% to 67%.
I live a conflicted existence. My hotelier persona laments the slow hotel industry recovery following the 2008 global financial crisis and promotes the need for hotels to build differentiated brands and execute disciplined pricing strategies. However, I must sadly confess to my hotel industry friends that my personal consumer behavior is guilty of waging a deliberate assault on their average daily rates.
The rationalization for such treasonous behavior toward my hotel brethren is simple. I am playing a consumer game with a clear objective – pay the lowest possible amount for a good hotel in a good location. Publicly available tools are used in a manner that is consistent with their design and full endorsement of the intermediary website. The hoteliers deliberately make these rates available for sale, so they should have no gripe with me – The process does not violate any channel, access or opacity constraints.
Why Hotels Offer Irrationally Low Rates
Renting a hotel room is a perishable service whose value drops to zero once a particular night passes. Hotel cost structures tend toward fixed costs. Direct expenses related to renting an incremental hotel room are relatively low. Typical hotel variable costs, excluding overheads, range from $20.00 to $40.00 per hotel room night.
Ridiculously low hotel rates normally occur when:
- Senior management or ownership issue directives to price distressed inventory at arbitrary levels
- Revenue Managers fail to analyze competitive pricing initiatives through merchant, retail and opaque channels
- Profit projections only evaluate marginal costs and do not consider contribution to fixed overheads
- Hotels desperate to put heads in beds neglect the impact of guests that may negatively impact core market segments
- Assumptions that ancillary revenue capture will be comparable to other market segments
- The assumption guests staying at deeply discounted rates may be easily converted to regular customers at normal rate levels
As a result, there is a temptation to open distressed inventory distribution channels under the assumption one incremental dollar is better than nothing. Unfortunately, this behavior can cause substantial collateral damage – and not just to that hotel’s bottom line.
Lowering prices to attract customers from the competition may also attract guests from lower tier hotels that are not members of the hotel’s traditional competitive set. Impacted competitors may react and potentially start a race to the bottom to shift share. Price differentials get compressed between 4-star and 2-star hotels.
Comparing quality grade/price/review score differentials for New York City – Times Square hotels on Hotwire, one sees relatively normal splits six weeks before arrival:
- Stars – Rate/Review % Favorable
- 2-star – $159/80%
- 3-star – $223/65% (+$64)
- 4-star – $308/90% (+$85)
- 4.5-star – $359/95% (+$51)
However, this all changes with intense pricing compression one week prior to arrival during a high demand period:
- 2-star – $248/35%
- 3-star – $228/85% (-$20)
- 3.5-star – $236/65% (+$8)
- 4-star – $380/90% (+$144)
- 4.5-star – $282/95% (-$98)
One would expect the first set of rates to align well with guest budget and quality preference tiers – producing a logical shopping and purchase process (with perhaps some hesitation to book the 3-star property given its low 65% approval score.)
In the second example, the 2-star (apparently a low quality property) and 4-star hotel are clearly maximizing revenues during a high demand period and not focused on driving business from the opaque channel. The 3.5-star hotel appears to be drastically discounting, perhaps to counteract relatively low ratings. Based on this spread, it would be anticipated that the 3-star, and especially the 4.5-star hotel would capture the vast majority of bookings due to their steep discounting.
While radically low pricing signals profitability issues a hotel, they also represent buying opportunities for consumers.
How Priceline works – The Rules
Priceline patented its “reverse auction” model, so it is unique within the travel industry. “Name Your Own Price” hotel bookings require guests to blindly bid for a hotel by defining the dates of the stay, a desired neighborhood and quality (star) rating. Users must submit full credit card details before being able to bid. The name of the hotel is not revealed until after a bid is accepted.
Accepted bids are pre-paid, non-cancellable and non-refundable. Arrival and departure dates can not be changed.
If a bid is not accepted, one must wait 24 hours to rebid unless the travel dates, city, neighborhood, or hotel quality rating is changed.
After 24 hours have passed, the re-bid can duplicate a previously declined bid.
The downside of using Priceline is if bids are too low, they are a waste of time. If they are too high, they are a waste of money. The secret to avoiding the Priceline lose/lose scenario is to figure out how to make the lowest acceptable bid.
How Priceline Gets Worked – The Loophole
Since its inception in 1997, Priceline has had a loophole that can easily be exploited to avoid the 24-hour waiting period for rebidding.
The key is to enable rebids by adding additional neighborhoods to the search. The secret is that Priceline will allow users to add neighborhoods that do not have hotels with the desired quality level. If a shopper adds a neighborhood that only offer hotels with lower quality grades than the quality tier used in the bid, the rebid is enabled, but the universe of hotel candidates remains unchanged.
As if this basic loophole wasn’t enough, Priceline doesn’t simply flag previous zone searches, but allows users to get even more rebids by only tracking specific zone combinations.
Here is an example –
For clarity, let’s say New York City has only three zones:
Zone 1 – Times Square (has 5-star hotels participating)
Zone 2 – Upper East Side (no 5-star hotels participating)
Zone 3 – Upper West Side (no 5-star hotels participating)
Common sense would lead most to assume that if one wanted a 5-star hotel in Times Square, they would only make one bid, but using the rebid loophole, they get two “free” rebids – one extra for Zone 2 & Zone 3 respectively. Like this:
Bid 1 – Zone 1
Bid 2 – Zone 1 + Zone 2
Bid 3 – Zone 1 + Zone 2 + Zone 3
However, Priceline only considers exact zone combination matches when identifying duplicate bids. As a result Priceline provides an extra “bonus” rebid, allowing this series of bids:
Bid 1 – Zone 1
Bid 2 – Zone 1 + Zone 2
Bid 3 – Zone 1 + Zone 3
Bid 4 – Zone 1 + Zone 2 + Zone 3
With some cities offering up to 20 additional zones lacking 4-star hotels, the permutations and combinations enable a huge number of instant rebids.
The coding logic for Priceline to close these loopholes is easily implemented, but negatively impacts Priceline’s conversion rate – something consumers and Priceline shareholders do not want. Again, Priceline has been aware of this issue for 15 years, but hoteliers have reportedly not been outspoken in calling for its closure. The belief is that only a small minority of Priceline customers are aware of this capability, so exploitation of the loophole is limited.
While this is a multi-step process, the four steps are logical and not very complicated. The detailed steps are provided below, with a real-life example provided later.
Step 1: Find your bid floor and ceiling
- Search Hotwire.com for the desired city, arrival/departure dates and party size. Check the ” Compare with Hotels.com” box before submitting the search – those results will be used in the bid floor calculation later.
- Look at the Hotwire search results for the neighborhood(s) and quality rating (star-tier) you desire. The hotel rate will be used as your bid ceiling.
- Now check the Hotels.com results. Filter the results by neighborhood and quality rating to identify the best available rate for a comparable hotel matching the desired neighborhood, hotel quality and stay dates. Multiply that rate by 30% (to reflect a 70% discount.) The result will be used as the bid floor. If the rate appears unreasonably low, try the calculation using 50%. Note that if your first bid is accepted, your floor may have been too high.
Step 2: Find the number of free re-bids.
NOTE: In the interest of simplicity, the method used to calculate rebids uses the first example used in the loophole explanation above. Any anal-retentive cheapskates (used here as a term of endearment) that feel true rebid process optimization should involve stair-stepping in one dollar increments, please feel free to knock yourself out and use the second method. Also, if you want to involve a spouse or partner with a separate email address and credit card number, you can go even further by doubling the number of bids. (In my opinion, this is unnecessary overkill.)
- Search on Priceline.com’s Name Your Own Price Hotel product using the same city, dates and party size.
- Look at the Priceline search results for the list of neighborhoods. This list will be used to determine the number of available rebids.
- Check the first of the neighborhood selection boxes and note the neighborhood name if it only offers hotels in LOWER quality categories than the one desired.
- Repeat this for each of the neighborhoods.
- When finished with the list, count the number of neighborhoods that only offer lower quality hotels. This total, plus any number of target neighborhoods that include hotels of the quality desired, will be your total number of available bids. Don’t worry if you do not want to stay in some of these other zones. Since they do not have hotel inventory in the requested quality category, structurally, no hotel can be selected from that neighborhood.
Step 3: Calculate price increase to use after receiving failed bids.
- Carefully prioritize a list of your target neighborhood(s), followed by the other zones with lower rated hotels. This will be the bid sequence that will be followed.
- If you have more than one acceptable target neighborhood, check to see which are priced lower in Hotwire and sort them into ascending order.
- Put the bid floor amount next to the first target neighborhood.
- Add Hotwire at the end of the list and enter the bid ceiling amount next to it.
- Subtract the bid floor amount from the bid ceiling amount.
- Divide that result by the total number of entries in the neighborhood bid sequence.
- The resulting figure will be the amount to be added to the price following every failed bid.
- On the bid sequence list, fill in the amounts to be used for each individual bid.
Step 4: Start bidding.
- For the first hotel on the list (your primary target) enter the bid floor as the Priceline bid, enter your initials & credit card security code when prompted and submit the bid.
- If Priceline responds to a bid by stating there is a limited chance of success or proposing a higher bid, ignore it. Stick to your process.
- If the bid is rejected, move to the second neighborhood on the list, check the corresponding neighborhood box in Priceline and change the bid to the rate associated with that neighborhood on your list.
- Keep repeating steps 1-3 with the next neighborhood on the bid sequence list until a bid is accepted.
- If no Priceline bid is accepted, book on Hotwire using the ceiling bid amount.
The number of deals found using this method are impressive. Over the last six months, here are some examples of the savings achieved:
- 67% off a 4-star hotel at Dallas – DFW Airport at $55 per night (Friday)
- 57% off a 3.5-star hotel in Downtown Denver – Downtown at $67 per night (Thursday)
- 48% off a 4-star hotel in New York – Times Square at $111 per night (Monday)
- 44% off a 4-star hotel in Minneapolis – Downtown at $49 per night (Friday)
- 42% off a 4-star hotel in Minneapolis – University at $94 per night (Saturday)
- 38% of a 4-star hotel in Los Angeles – LAX at $63 per night (Saturday)
Better yet, these bookings all reflected considerable savings over Hotwire, tallying 25%, 19%, 16%, 11% & 18% discounts respectively.
In deference to the dignity of the hotel groups involved, I have withheld the names of the specific properties associated with each deal listed above. Over the past 18 months, I have booked properties through Priceline affiliated with all major hotel groups including Hilton, Hyatt, InterContinental, Marriott, Radisson, Starwood and Wyndham, plus independent properties with similar results using this process.
This approach does not work everywhere – it is predominantly North American focused where hotels are more inclined to offer inventory at opaque pricing tiers for groups like Priceline and Hotwire. It also works better in major markets that have many neighborhoods. As the opaque model continues to grow in popularity throughout the world, more neighborhoods will be added in destinations, introducing the opportunity for the recursive rebidding required for this approach to be successful.
As Priceline only books rooms with a maximum double occupancy using the “Name Your Own Price” option, it is not a good solution for families or friends interested in booking triple or quad occupancy for a single room.
Try to do all your analysis and bidding within an hour. It is highly unlikely that Priceline will add a new hotel in an undesirable “rebid” neighborhood during your bidding session, but that risk increases if you wait until the next day to bid after doing the initial research. Additionally hotel pricing can change considerably over a matter of hours, which can result in bids failing unnecessarily or paying more than required.
Remember not to bid on a neighborhood that has hotels in equal or higher star categories than the one being bid. Depending on the level of the bid, Priceline will occasionally pull a hotel from a higher quality tier. An accepted bid for a nicer than expected hotel in an undesirable location is still a problem.
Since Priceline hotel bookings are non-refundable, non-transferable and non-changeable, carelessness can get expensive. When it comes to Priceline bidding mistakes, the old saying applies – “You made your bed, now lie in it.”
If you need to also rent a car or take a flight, it may be more beneficial to book a package – some airlines and most car rental companies move distressed inventory through the package channel to shield their retail pricing structures behind a package rate that keeps the underlying component prices opaque. Booking the hotel separately from the car rental may prevent access to some deep package discounts.
Car rentals may be booked using Priceline’s Name Your Own Price service, but there are no rebidding loopholes similar to the one for hotels.
A Recent Practical Example
Warning – Hotel Owners already suffering from falling rate induced vertigo, irritable refinancing syndrome, OTA dependency or distribution channel dysfunction should not read any further. You have been warned.
Target Hotel Stay –
Location/Neighborhood: Dallas, Texas – DFW Airport North
Hotel Quality: 4-stars
Arrival: Friday, May 19, 2012
Length of Stay: 1 Night
Bid Ceiling Calculation –
Hotwire Base Rate: $75.00 | $94.16 including taxes & fees for 4-star hotel Dallas – DFW North and Grapevine
Bid Floor Calculation –
Hotels.com Lowest DFW 4-star Best Available Rate: $89.00 (Westin Dallas Fort Worth Airport)
Bid Floor: $45.00 (rounding 50% off Westin best available rate)
NOTE: As the Westin rate was already at least $40 lower than the next closest four-star hotel in the area, it was highly unlikely the hotel would offer a rate 70% off an already discounted price. The floor bid was calculated by taking 50% off the discounted $89.00 rate.
Bid Count / Bid Strategy –
Area | Highest Star Rating
1. DFW Airport North | 4 (Target)
X. Downtown Dallas | 4
X. Frisco – Plano North | 4
X. Galleria – Dallas North | 4
X. Irving – Las Colinas | 4
X. Knox – Northpark | 4
X. Market Center – DAL Love Field | 4
X. Park Central | 4
X. Richardson | 4
2. Arlington – Grand Prairie | 3.5
3. Dallas Northwest | 3.5
4. Allen – McKinney | 3
5. Arlington South | 3
6. DFW Airport South | 3
7. East Dallas – Mesquite | 3
8. Garland North | 3
9. Hurst – Euless – Bedford | 3
10. Lewisville | 3
11. Plano East | 3
12. Plano West | 3
13. Carrollton – Farmers Branch | 2.5
14. Dallas West – Pinnacle Park | 2.5
15. Garland | 2.5
Qualifying Neighborhoods/Bids: 15
Difference Between Bid Ceiling & Bid Floor: $30.00 ($75.00 – $45.00)
Bid Steps: $2.00 ($30.00 / 15 Bids)
Bid Execution –
- $45.00 (DFW Airport North) Unsuccessful
- $47.00 (+ Arlington – Grand Prairie) Unsuccessful
- $49.00 (+ Dallas Northwest) Unsuccessful
- $51.00 (+ Allen – McKinney) Unsuccessful
- $53.00 (+ Arlington South) Unsuccessful
- $55.00 (+ DFW Airport South) Successful
- $57.00 (+ East Dallas – Mesquite)
- $59.00 (+ Garland North)
- $61.00 (+ Hurst – Euless – Bedford)
- $63.00 (+ Lewisville)
- $65.00 (+ Plano East)
- $67.00 (+ Plano West)
- $69.00 (+ Carrollton – Farmers Branch)
- $71.00 (+ Dallas West – Pinnacle Park)
- $73.00 (+ Garland)
- $75.00 Hotwire – Ceiling
Winning Bid: $55.00 ($70.16 including taxes & fees.) 67% off Hotel Brand.com website best available rate of $169.00 ($212.33 inclusive) and 25% below Hotwire 4-star Dallas – DFW North and Grapevine $75.00 rate ($94.16 inclusive.)
The Unintentional Gamification of Hotel Booking
Unfortunately, the hoteliers have turned the hotel booking process into a game, so I play that game to the best of my ability. On the rare occasion Priceline does not provide a lower rate, I always have the Hotwire ceiling rate to fall back on and those savings normally run in the 25 to 50% range.
Hotwire, may be a good alternative for those unwilling to do a bit of extra work for a deeper discount, but their reputation has slid somewhat since Hotwire sabotaged their hotel rating scale to bump some half-star properties into higher rating categories.
To sprinkle some additional salt into the wounds of the hoteliers, suffice it to say that in every case, I would have been happy to pay the Hotwire rate. In the Dallas example, I would have been happy paying the $89 at the Westin – that’s a pretty good deal. However, as I am now playing a game, I don’t want to do well, I want to win.
These excessive discounts do little to earn loyalty or provide any motivation to return to the hotel when paying full price – unless perhaps if someone else is paying for the return trip. More than doubling the price for a product substantially changes the value equation – and the full retail value equation suffers irreparable damage when such deep discounts are experienced.
That is not to say that getting these low rates doesn’t inspire loyalty; it’s just that the loyalty is gained by the intermediary, not the hotel providing the accommodation. Priceline’s Name Your Own Price website, not the hotel website, now becomes the starting point when a return trip is planned for that city.
Consistent 33-67% savings provide sufficient incentive to replay the game and bid on a 4-star hotel in the same neighborhood on the next trip. There is always a good chance that one might return to the same hotel.
The reward to the consumer for playing is not just financial. Getting the lowest possible hotel rate also satisfies competitive instincts and provides an intellectual challenge. It’s mano a mano – guest versus the hotel revenue managers in that wallet tug-o-war.
Game playing travelers quickly learn that like a Cheetah, to win, one doesn’t need to run faster than all the antelopes, just the slowest member of the herd…
Is the time spent searching for benchmark rates and calculating bid differentials worth the benefit? That’s exactly the point. In the Dallas example, the savings were $142 (inclusive) when compared to the hotel’s BAR rates, but a better measure is that the winning bid was $24 (inclusive) lower than the Hotwire rate and $32 (inclusive) lower than the Westin rate. For some, that might not be enough to justify the additional effort.
However, for the hotel booking game aficionado, the principal satisfaction is not the financial savings, but playing the game well and besting the opponent. Accomplishing a clearly defined goal and not succumbing to the temptation to compromise by paying more than required may be sufficient reward in itself. It’s not a financial equation, it’s an emotional one.
In summary, promoting “4-star Hotels at 2-star Prices” or “Save up to 60% by naming your own price” are not healthy messages for the hotel industry. A generation of guests, one that has grown up with extensive training in gaming related skills, are learning through positive reinforcement to not trust brand messaging and to relay on various intermediaries to provide deeply discounted, high value offers.
For the hotel industry, this problem is compounded by the oblivious management or lazy revenue managers whose under-performance reinforces that sentiment – They ultimately bear a majority of the blame for doing their hotels and the industry a disservice. That’s the hotelier side of my brain speaking.
Each time I book a laughably low hotel rate, the hotelier in me weeps a little bit. Then I quickly get over it as the consumer side of my brain basks in the glory of another relatively easy victory over the missing links of the hotel and revenue management professions.
I may be conflicted, but I am not stupid enough to pay more than required for a hotel room of the quality I desire in a neighborhood I prefer.
Earlier this year, Priceline killed off their long running ad campaign starring William Shatner.
R.I.P. The Negotiator… The Priceline rebidding loophole sustains your legacy.