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How Do Hotels Determine Room Rates?

Guest Author

By: Friedhelm Tringas, Sales Account Manager

Do you find room rates a daunting topic? It most definitely is for a lot of hotel operators! Especially those who are not able to invest in specialist Revenue Managers and are bombarded with varying opinions from numerous sources. Yet, like everything in life, room rates can be made to look more difficult than they need to be.

There is lots of information available to those responsible for setting room rates – yet limited guidance for one of the most important business decision facing them.

Airlines are a classic example for their approach to setting rates; to maximize revenue they set rates according to demand at a certain time. If there is limited interest several weeks out from a flight, the fares are dropped to encourage bookings. As the time of take off approaches, customers become more focused on getting a seat and less concerned about the price. Options become limited, and airline fares increase quickly. If customers book the day before, they usually pay the highest rate for a ticket. There is no incentive for the airlines to cut rates at this stage, as they have worked out that the income from this late period is best kept high, otherwise people will always book at the last minute.

This principle also works for hotels. As occupancy/demand increases and supply (room availability) decreases, lower rates are closed and only higher rates are available. Hotels today need a base of business in order to cover operational expenses (e.g. Airline crews are often used for this). Selling all rooms at the same rate rarely produces good occupancy or a good average rate.

What are the key rate determinants?

  • Location
  • Hotel rating/standard
  • Competition
  • Demand

These determinants guide the rate scales and set the basis for setting up revenue management parameters. In its simplest form, rates might look like this:

  • Rack Rate
  • Discount 1 (walk-in Corporate)
  • Discount 2 (Government)
  • Deep Discount 3 (Segment Discounts)
  • Deep Discount 4 (Promotional rate)

Once rates are set for each segment of business, the next step is to set desired occupancy levels needed to close each discount level (what is needed to establish a base of business?). This example is for a 100 room property:

  • 0 to 50 rooms sold…all rates are available
  • 51 to 70 rooms sold…close Deep Discount rates
  • 71 to 85 rooms sold…close all rates except Walk-in Corporate and Rack Rates

Note that rates are not actually increased. As the number of occupied rooms increase, lower rate categories are closed for sale; in effect, increasing revenue yield. The scales above are very simple of course.

Adding Restrictions

For high demand periods, many hotels add restrictions to increase revenue yield. Some common restrictions, such as “minimum stays” and “closed to arrival” are excellent tools for experienced yield managers. Restrictions should be applied with some caution because they do limit demand.

Constant Reviews

It is vital that these rates and bookings are reviewed constantly. The mission should not simply be to get 100% occupancy; it should be to get the highest occupancy & average rate. That is, for a 100 room Hotel, occupancy of 85% with an average rate of $140 is more profitable than 100% occupancy at $110. Although both scenarios produce roughly the same revenue, what does it cost you to clean an additional 15 rooms?

This is of course a simplified format for those hotels which are currently “simply selling rooms” at the present time. The purpose of revenue management is to help hotels to “shape” their business. Obviously, there can be much more detail and intricate techniques involved in revenue management; but solid progress comes best from smaller steps in the beginning.

As stated at the outset of this article, it is true that many larger hotels have full-time Revenue Managers utilizing revenue management software to develop rate strategies. However, most independent and smaller hotels are not using any form of revenue management in their operations. Revenue management, even in its simplest form, can benefit most hotels no matter how large or small, and software to assist with this management, has very high returns on investment. Revenue management software enables concrete historical figures to be used to recommend future rates at different times of the year – a powerful tool far superior to trial and error.

Find out more about what Oracle Hospitality can do for you, your Revenue Management, and your Property Management System at oracle.com/hospitality! For more information contact us at oraclehosp_ww@oracle.com. 

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