Increasingly loyalty programs are shifting from a fixed-price redemption for their loyal members to dynamically priced awards. This can mean cheaper prices for shorter distance flights where airlines need to fill seats and costs are low, but it can also mean astronomical rates when prices are high. But what about when the math doesn’t work?
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What Is Dynamic Award Pricing?
Loyalty programs have traditionally used fixed-price buckets for flight and room awards. Category 7 hotels with Hyatt run 30,000 points/night, if the hotel has an award room available the amount of points required are always the same regardless of how much the room may cost per night for a cash purchase.
Dynamic pricing adjusts the cost per night in relation to the cash price of the room night (it works in the sake way for flights). If a category 7 night is available for $200 or $1,000 in fixed-price award systems, the amount of points paid for the night will remain 30,000 no matter what. With dynamic pricing, the $200 night hotel room might cost 10,000 points while the $1,000 night might cost 50,000.
Dynamic award pricing is a double-edged for consumers and businesses. For carriers who may have been able to get a full standard award price (25,000 points for a domestic flight for example) from a person who was going to book the ticket regardless, they have cost themselves an opportunity to lower their liability. However, for those times where prices should be higher but seats are still available and the airline still desires to fill them, they can glean a little more for a particular award than a standard price.
For consumers, dynamic awards allow for a more exact relationship to points and cash. Dynamic awards will allow consumers to use points before getting to standard thresholds (better for casual travelers) but also makes more expensive flights unattainable, where fixed-price awards often offered outsized value. The worst part of dynamic awards for casual travelers is that the pricing of an award is fluid – casual travelers can’t save up for a dream ticket because they never know how much it will cost.
Standard Awards Still Deliver Value
Hilton uses a unique combination of fixed-price awards and dynamic pricing. Where a standard room is available Hilton will charge a standard price for a given hotel room regardless of the cash price. As you can see below, the standard room at the Conrad Cartagena, Colombia is clearly 50,000 points, a terrific value when the cash rate is $429/night.
The hotel falls into whatever category used to have 50,000 points as standard pricing (they already used a variable range so this could be anywhere from category 6 to 9). I value Hilton Honors points at about $.005/point (half a cent) so this standard award presents true value to me. Instead of the normal rate of $250 for my 50,000 points the program is delivering almost twice that amount ($.00858/point) – this makes me a happy guest.
Dynamic Award Pricing Has Advantages
A couple of months ago Brian Cohen from the Gate featured a post about a flash sale (or error sale, who knows anymore) showing flights to Aruba for dirt cheap from Pittsburgh. I have a friend with a bunch of Delta miles that loves a spontaneous trip with outsized value, he jumped at the chance to go to Aruba for 5,000 miles each way. We ultimately switched to the Bahamas for just 10,000 points each way because hotels were unavailable in Aruba for our desired dates.
At 5,000 points each way or even 10,000 points, Delta found a way to get us to book a trip that we would have not taken. We found value at increments lower than the traditional 25,000 point roundtrip minimum and we loved it. For those with smaller point balances, dynamic pricing allows members to use their points without hitting traditional thresholds.
For carriers and hotel chains, points are a liability on their balance sheet. They are IOUs written to loyal customers so any opportunity to reduce their liability when occupancy on their planes and in their rooms are low makes financial sense for the business.
Many blogs have shown how ludicrous dynamic pricing can be from time to time with no sinner more guilty than Delta. When dynamic award pricing goes wrong, the airline still has seats to fill, and still wants to make them available for award space, but it’s simply ridiculous like this range of 80,000-95,000 for similarly priced itineraries or up to 375,000 as Lucky found.
Here is another Delta example showing dynamic pricing from Pittsburgh to LAX next week. It’s as “dynamic” as it gets. Cash pricing for those flights also fluctuates roughly inline with these variations in award prices.
When The Math Doesn’t Work, Value Erodes
Dynamic award pricing should really help brands to get more for their product when demand is high, and fill seats and beds when demand is low. For consumers, when a price is low but they would still prefer to use points instead of cash, dynamic awards deliver excellent value at lower prices. It really is win-win for low occupancy situations.
But sometimes the math doesn’t work, and that’s where hotels in particular are shooting themselves in the foot. Let’s take this example of a slightly different room at the Conrad Cartagena. Remember the previous example where a rate of 50,000 points/night could be had to replace a $429/night room delivering a value of $.00858/point.
Changing the room or securing an upgrade in advance by booking a better room (rather than relying on the checkin staff and availability when we arrive) we find an absolutely absurd charge.
Switching to a pool view for an extra $10/night will run you 80,000 additional points per night! The value for this room is terribly poor but compared with the standard room it’s downright deplorable. It drops the rate per point to just $.00337, nearly a third of the standard room value. But what’s more important to me is that for the unknowing traveler, they are charging an unconscionable 80,000 points for $10 in cost or a value of $.000125/point a drop in value from the standard room of 68% for spending more money with the brand.
In reality, it’s not that Hilton wants 80,000 points for $10 – it’s that the room went outside of the standard award and prices now on a dollar per point ratio with dynamic award pricing. That’s why the second example of absurdity is less absurd with only a 5,000 point surcharge to replace another $20 in value (where $10 cost 80,000 in the first example when it jumped from standard to dynamic pricing).
Once I have seen this pricing, there is no way I will pay anything more than 50,000 points/night. In reality I would have paid more for a better room, but now any time I see crazy high costs like this one it feels less like I am getting a deal at 50,000 points and more like the brand is looking for an opportunity to take advantage of me or unsuspecting loyalists.
It’s not just hotels or crazy Delta, check out Jet Blue. Taxes are excluded from point redemptions so we need to remove them the calculation of the total cash fare paid to determine a per point value. In this instance 11,000 points and $87 the 11,000 points replaces $200 in value as the cash price is $287 or $.0181/point.
When looking at alternative options Cartagena to NYC is dynamically priced at either $876 in cash (base fare of $789 or 68,000 points or $.011/point. That doesn’t make sense. For spending four times more on the fare I get less than half the same value? In essence I spend almost 7x the price for less than 4x the price difference in cash? What’s the incentive for anybody there?
In this instance, when the pricing is as crazy as this is, it does more harm than good for all involved. I immediately started looking around at other brands (Avianca and IHG) and found a decent rate for the better located (though not as nice) Intercontinental Cartagena. What’s more, the price per night is better ($327 in cash), better value per point (35,000 points/night) $.00934/point though IHG doesn’t treat their elites very well. After our last trip to Cartagena we really wanted to stay in the Sofitel but it is sold out for our dates. Lucky wrote a great review of that property. I’m still searching for good flight options though this is what happens when you play vacation roulette.
In the end we snagged a few nights speculatively at the 50,000 point redemption rate before they disappear, but overall, when the math is this bad, it’s hard to imagine the hotel fills any rooms at those rates.
Have you seen examples of where dynamic award pricing went terribly wrong? What are your horror stories?
I don’t think the Delta example is dynamic pricing (if it was, then it would probably be around $50 revenue ticket). It’s just a promotion, like the current 98k business ‘sale’.
Lack – I’ve updated with another Delta example that may further illuminate the dynamism.
This is and has been standard practice at Hilton for years now even prior to their devaluation. Standard rooms are reasonable but anything above that they just want an insane amount of points. It costs them too because very often your status means you gut a free upgrade to that better room that at booming time you would have paid for.
Where it gets really insulting now is with Hilton’s points and cash option. On upgraded rooms their outrageous point totals become the basis for the points and cash calculation. So if the standard room was 50k points at a rate of $430 night and the upgraded room $450 a night you can’t just pay 50k points and $20.
Hilton has. Another issue as well related I think to their dynamic pricing. Very often when pricing multi night stays where there is a rate change during the stay it ends up being more expensive in points to book the multi night stay as opposed to booking multiple one night stays over the same dates. It’s not always true but it does happen regularly and Hilton sadly seems uninterested in doing anything about it.
Intersting regarding the points and cash differential. I like the concept and if priced correctly, it should land more revenue for the property. In the end, as you said, they will probably upgrade you anyway for free, at least if those upgrades were reasonable they could get some cash for it.
Sorry. I really need to proofread my posts especially before the first cup of coffee in the morning.
I see two other problems with dynamic award pricing. One, when “the price is the price”, there is no accountability for pricing errors in the airline’s favor. I recall DL had a problem (and still might) of “additive pricing”, where the website would try to charge you for two awards for routings with a connection. I.e. SFO-LAX-DFW should be the same price as SFO-DFW, but the search engine would add on extra mileage. But try to call Delta and explain it to an agent, it’s like talking to a brick wall because “the price is the price”. I suppose consumers could theoretically benefit if the pricing error is in their favor, though.
Second, no award chart means the airline or hotel chain can introduce stealth devaluations with no notice, and nobody would be the wiser unless you’re like you and me and pay attention to these things. DL has, of course, done this over and over with SkyPesos. I fear Hilton will do the same thing soon enough.
Hilton may do the same thing but I think, for some reason, that they have less of the arrogance that Delta does. Delta flat out made a punitive relationship with their best customers and they still continue to succeed despite their efforts. Who knows?