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Avoiding Attrition Penalties

by Michael Hough
Author of The Profitable Trade Show
www.profitabletradeshow.com

In the past few years many shows and other events have been forced to pay huge attrition penalties -- through no fault of their own. Here is the typical scenerio:

• To get a room block, organizers have been forced to guarantee performance by signing attrition clauses. An attrition clause requires the organizer to pay the hotel a penalty if the room block is not picked up. In other words, attrition clauses assure that hotels will realize their profit, even if rooms sit empty.

• The assumption has been that when the event arrives, transient rates will be above the negotiated rates and attendees will book within the block. In fact, the opposite is now true due to the reduced level of business travel and the resulting low demand for hotel rooms.

• The show's attendees are being lured to online suppliers (such as hotels.com) which have bargain rates, many times at the very hotels and exact dates that are in the block. This process is called "booking around the block."

• As a result, the organizer does not meet its performance guarantee and the hotel enforces the attrition penalty.

But beyond the financial penalty, the organizer suffers under this scenerio because the event's history reported to the IACVB is inaccurate, which adversely affects its negotiations with other cities for future events. Another problem is that this requirement to guarantee performance has raised the cost of entry very high; who can afford to budget for a $100,000 attrition penalty should the launch underperform?

Though recent economic conditions have lessened the pressure to sign attrition clauses, the mindset is still there in the hotel community and will return in earnest once the economy improves.

The purpose of this paper is to help event organizers avoid penalties for nonperformance. In the author's opinion, organizers should not have to hold hotels risk- free by guaranteeing the actions of their attendees. Here is the rationale:

• attendees are acting in their own best interest by going online

• hotels are acting in their own best interest by dumping deeply discounted inventory to online booking engines

• thus, organizers must act in their own best interest by taking the appropriate steps to protect themselves

What follows are those steps they should take.

Avoid the Problem

The best approach is never sign an attrition clause. However, you must implement this as a strategic and not a tactical decision. In other words, use this strategy at the very beginning of the process, before you select the city and hotel block for your next event. If necessary, search out cities and hotel properties that really want and will value your business.

This may mean you will not be able to be in Las Vegas or other popular destinations in peak season. But you have to judge whether not being in these locales will hurt your bottomline more than the risk of being exposed to attrition penalities.

Another approach is to not take a room block at all. This gets you out of the housing business and puts your attendees on their own which may not be all that bad -- should you even be in the housing business? Granted this may result in your not being accepted by Moscone but again, measure this against the exposure to attrition penalities. Likewise, you have to recognize the downside of losing the revenue from room commissions, forgoing some comp rooms and/or having to pay meeting room rental.

Sidebar: One organizer says, "We don't handle airline reservations for our attendees -- why should we book hotel rooms? So we only take a block for staff, speakers, VIPs and exhibitors who opt in." But another says, "I take a full block because I want to control where my attendees stay. We carefully apportion exhibitors/attendees to each hotel in a 55/45 ratio. This enhances the after hours networking which the exhibitors really like. Also, I want total control over each hotel's meeting space -- to ensure there are no functions that conflict with show hours."

An alternate is to book large, guaranteed blocks at only one or two headquarters hotels nearest the convention center. Then take agressive steps to sell out these contracted blocks (see next section). To fill the rest of the block, agree with a group of "overflow" hotels to use your "best efforts" to promote their properties. The hotels do not hold rooms off the market and you provide no guarantee. Be sure your agreement states that you are not liable if the room block at these overflow hotels does not pick up. But if you do pick up, be sure you receive the comp rooms, free meeting space, etc.

Minimize the Problem

In some cases circumstances will force you to agree to performance guarantees. For example, the CVB requires 5000 peak night rooms in order to book the convention center and the hotels won't budge from requiring attrition clauses. Or your medical conference needs a huge amount of meeting space that requires large room blocks which in turn requires attrition clauses.

When you absolutely must agree to an attrition clause, take steps to avoid paying a penalty. Here are some strategies on dealing with the hotel:

• Have accurate historical data along with a "pace" report for your event. A pace report shows how reservations come in on a weekly basis.
  
• Way under forecast the block at each property; you can always go back for more rooms. In our experience taking additional rooms is always preferable to shedding them.
  
• The attrition clause should allow for frequent (downward) adjustments of the room block. And try to define slippage at the lowest percent possible (start at 60%).
  
• Require that the hotel have an affirmative duty to re sell your rooms before they sell rooms outside the block.
  
• Be sure that penalties are based on lost profit and not lost revenues. Note that profit equals 70-80% for guest rooms, 30-35% for catered food and 75-80% for alcohol beverage functions. And start at a net revenue figure which excludes any commissions or rebates.
  
• Get credit for all revenue received by the hotel, such as cancellation/no show penalties and early departure fees.
  
• Broadly and clearly define an attendee as anyone at the hotel because of attending, exhibiting and/or working at your show (for example, include staff for EACs and other suppliers).
  
• Work in partnership with the hotel such as agreeing to require deposits in order to discourage last minute cancellations.
  
• Negotiate to see if the hotel will extend the cut-off date to say 14 days out. And try to have the group rate honored as long as there are rooms left in your block.
  
• Communicate with the hotel pre event so they know what is happening. Thus, rooms can be released back to the hotel within its transient booking window.
  
• Get credit for all rooms your attendees generate (no matter the source) and always include the right to audit. Agree in advance on how the audit will be done and what exactly constitutes a valid hit. If necessary, agree to sign a confidentiality agreement and to perform the audit at the hotel so the hotel's rooming list does not leave the property.
  
• Any room block should have attrition based on cumulative room nights. For example, if you miss one night but go over the next, you avoid an attrition penalty.

Here are some strategies that deal with your relationship with attendees or exhibitors:

• Really sell the hotels in your promotion material. How many travel pages in a promotion brochure really do this? List all the advantages of staying within the block such as being within walking distance or on the free bus shuttle (no cab fare); at the show's centroid where the VIPs are staying; site of several important evening events; etc.
  
• Offer special benefits for staying within the block, such as restaurant coupons, a free spa visit, airport shuttle pass, etc (all provided by the hotel)
  
• Take steps to restrict shuttle bus access to those within the block. One show issues wrist bands.
  
• Consider innovative offers such as three nights at $149 per night vs. one night at $199. Also, offer early bird room rates, just as you offer early bird registration rates.
  
• Package the hotel room with event registration. For example, the registration fee is normally $400 but those staying in the block pay only $250.
  
• Offer incentives to exhibitors to use hotels within the block, such as giving additional priority points (prefer this positive approach rather than taking away priority points for noncompliance). But one organizer with a hot show (and thus considerable clout) actually forces all exhibitors to book within the block.
  
• Be sure your registration people are talking to your housing people, starting several months out. If reg is tracking normally but housing is not, this is a flag and steps should be taken to correct the imbalance.
  
• Develop your own actual housing list by agressively asking your attendees where they stayed. One show requires this info before handing out the tote bag.

Sidebar: "Forcing" your attendees or members to book within your block is not a good policy, in our opinion. It is better to "motivate" them, such as selling the advantages of being in the block (see above). It is difficult to change self interested behavior - so you should not even try.

What if your event is going down the tubes and you expect to be liable for a large attrition penalty? Here are some thoughts:

• Know this early in the process (as mentioned, have good historical data).
  
• Compare attrition damages to cancellation damages; maybe it is better to cancel the event.
  
• It may be less expensive to buy the rooms to bring you to the minimum, rather than pay the attrition penalty. Do the math.
  
• Reduce the room block as soon as you realize what is happening. This will give the hotel a chance to re sell the rooms.
  
• Offer future business if the hotel will reduce/eliminate the attrition penalty. Here it helps to be dealing with the national office of the hotel chain.

Sidebar: One organizer found that their headquarters property had dumped rooms online at $49 (their group rate was $149). The organizer immediately emailed this message to all pre registrants: "X Hotel has kindly dropped their rate to $49. You should cancel your existing room registration and re book at this new rate." Not nice, but neither was what the hotel did.

Other Thoughts

Consider completely offloading the responsibility for citywide room blocks to another entity who would handle all reservations and receive the commissions. They would be motivated to find all the rooms generated by your event. The quid pro quo is they agree to handle expensive services such as the bus shuttle and also transfer all amenities to you such as free meeting space and comp rooms. Even if you do not take this step, consider outsourcing housing to one of the third party providers. This will save you a lot of headaches.

Here are some other thoughts:

• Invest in consulting a good lawyer who knows this subject. See Resources for a list.
  
• If at the time of the event you find the negotiated room rate is way out of line, talk to the hotel about lowering it to something closer to a market rate.
  
• As mentioned, try to deal with the national offices of the major hotel chains. They are more likely value your business, particularly if your show rotates.
  
• And be sure to use your overall clout if you are a good customer (including that you hold many meetings throughout the year, preferably at the property).

Resources

• Three lawyers who specialize in this topic are John Foster in Atlanta (404 873 5200 john.foster@fjglaw.net); Mark Roysner in California (818 224 8095 roysner@earthlink.net); and Henry Schaffer in Chicago (312 263 3001 hms@howehutton.com).
  
• A good recent article is "Hotel Attrition Clauses Continue to Spark Controversy" in the January, 2003 issue of Trade Show Executive.
  
• Expositions Operating Society (EOS) is sponsoring a one day session on Booking Outside the Block on March 13 in Rosemont, Il. Tapes are available. Contact Steve Schuldenfrei at 877 272 3976 Steve@ExpoOps.com.
  
• An outside provider helps you deal with attendees wanting to book cheap hotel rates on the internet. ResQuest tracks - and gets you credit for - attendees who book outside your room block. For more details contact Mike Foster at 214 571 1328 mfoster@resquest.com.

Copyright 2003, MRH Associates, Inc. All rights reserved.