Why Hotels Should Never Offer Below Per Diem

First, a little background on how federal per diem rates are derived each year, in simple terms.  Contrary to popular belief, there is no dart board at GSA – there is actually a refined science to the creation of per diem rates each year, and hotels have a lot more control over the rates than they generally believe. 

Smith Travel Research is retained by the General Services Administration to survey average daily rates from March to March each year.  Only business travel days are examined, and only the middle swath of hotel data is used.  The highest and lowest rates, or the ultra luxury and super economy class hotels are excluded, leaving the murky middle.  It’s mid level hotels the government is supposed to be using for travel after all.

The twelve months of data is compiled, seasonality is evaluated, and average rates – usually about 5% below the literal mean, is established as the per diem rate going forward.  This model is a vast improvement over previous models used but a couple of flaws still exist.  For one, though twelve months of data is a fairly substantial sample size, the date range is inherently outdated by the time it’s put to use.  Per diem rates are set for October to the following September.  By September of next year, rates from March of two years prior might be incredibly irrelevant.  The other flaw is related – data from the more recent March should be weighted over the data from twelve months prior.  It’s well known that a lot can change in just one year.  Take the Washington, DC market for example.  The per diem rates were hard enough to find in March of 2010 – but to be setting March of 2011 rates with data affected by March of 2009 is inane.  

But indeed hotels are to be blamed for the huge drops in per diem rates for 2011.   In an effort to stay competitive, hotels in nearly every market were inclined to offer rates below the established per diem in 2010.   In so few cases does a government group make buying decisions on rate alone.  Federal planners are instructed to present the best value for the government.  The lowest bid is not always the best bid.  When rates below (sometimes far below) per diem are in the market, it’s only a matter of mathematics to determine per diem rates will drop for the following year.   Here’s a hint – if the Fairmont in your city offers per diem 7 out of 10 times you ask for it, chances are good the per diem rate will drop in that city the following year. 

Hotels should be encouraged to offer added values instead of below per diem rates.  If the hotel could offer a rate $20 below per diem, perhaps offer internet and parking instead.  Or offer breakfast.  Or best, offer breakfast, breaks and lunch all in the per diem rate.  In that model, the overnight room rates can completely subsidize the cost of the meeting for the group – and that truly saves the government money without cannibalizing the rates for the city.  Lower than per diem rates might help to secure that one group, but in the long run, the strategy is damaging to the city’s rate integrity.  And it takes a lot longer to raise rates than it does to lower them.

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