Note: Hotel inventory is perishable, meaning the rate is set ‘per night’, a room that was left unsold yesterday cannot be sold again. The hotel lost the opportunity to convert that room night.

They set multiple room rates for the same room as said-above to sell on different market segments such as transient, group, corporate, etc. And of course, the room rates can go up or down based on demand, like in any business, when the demand increases, the room rates go high, and when the demand decreases the rates get lower.

How do hotels calculate a room rate? 

A hotel’s room rate is determined by operating costs, investments involved, annual target revenue, customer segment, and supply and demand. The hotel should attract and increase bookings without affecting room sales.

Calculating room rates in hotel

To make things look easy, a new hotel uses one of the below methods to calculate its room charges:

Market-based pricing

A Market-based pricing approach is focused on consumers, so market segmentation becomes crucial as we discussed below. Here, hotels determine what the end customer is willing to pay for a room type and work backward on that price to achieve a reasonable but profitable return by cutting costs.

Research on competitor pricing becomes a major part of it. For instance, check on competitors from the same location on what their rates are during peak and off-peak seasons.

Cost-based pricing

In this approach, hotels decide on the room rates based on the construction and running costs involved and then add the profit margins to meet the desired return on investment.

For instance, Selling Price = Total cost (construction & running costs) + Fixed profit percentage expected at the end of the year.

There are two formula-based calculations for this: 

Rack rate in hotel

Every room type has its default rate, which is the Rack rate or standard rate. The rack rates are the highest room charge for any room type a hotel charges. This is also called the published rate and in certain jurisdictions, the hotel has to submit rack rates of each room type to get a hotel operation license from tourism or relevant authority.

It is also important to note that rack rates are not discounted and can be with or without the breakfast included. These rates are primarily targeted for walk-in guests and transient (individual travelers with short notice). And, hotels price other rates based on this rate as the ceiling.

Room rates example

The pricing of rooms is one of the major factors in hotel revenue management, so the room rates often change mainly due to the supply-demand factors, just like your air ticket. 

Hotels, before starting their operations, set a crucial rate by calculating the standard room rate (rack rate) for each room type (see section, “How do hotels calculate a room rate?”).

Hotels have the standard room rates set, while the front office/reservations agent will try their best to sell rack rates for any walk-in guest, hotels do offer discounts on rack rates depending on demand — These rates are called BAR or Best Available Rates, for instance, BAR1–10% discount on days when the occupancy is less than 70%. BAR2–15% discount on days when occupancy is less than 65%, and so on. 

1. Rack rate

The hotels’ standard rate for each room type is discussed above in detail.

2. BAR — Best available rates

This is the best rate for transient/individual guests who don’t qualify for discounted or corporate rates. BAR rates fluctuate from Rack rate based on demand. For instance, a hotel can sell a room for a 10% discount on occupancy between 70% and 80%, and so on. The next day, this rate can be higher by 5% when the occupancy reaches 90% plus. The rate amounts and discount percentages are completely up to the hotel’s rate strategy.

3. Negotiated rates

The term, Negotiated Rate is generic. It basically means that there is a negotiated agreement between the sources and the hotel. Sources can be companies, travel agents when sending large groups, government, and sometimes even individual regular guests. So a corporate rate also comes under a negotiated rate in that sense.

4. Member rates

These are discounted rates with sometimes other facilities such as WiFi for members, who have signed up for the hotel’s or the chain’s loyalty program.

5. Group rates

These are often negotiated, discounted rates but for groups, allotments, etc., based on the number of rooms the booker requests. This rate can be further broken down into wholesalers such as tour operators, corporate groups, offline travel agents, or transient groups.

6. Complimentary rate

When a room is not charged, hotels use this rate rather than putting a 100% discount on other rates for statistics and accuracy on room revenue calculations without affecting segment-based tracking (ADR, RevPar calculations). Usually, hotels offer complimentary rates for suppliers who work on short-term hotel projects, tour group leaders, travel agents, or for marketing purposes.

7. House rate

Similar to Complimentary rooms, but for hotel employees, chain staff such as trainers and pre-opening staff, etc. ADR and RevPAR are also not calculated.

8. Day-use rates

Special rates when the guest’s check-in and check-out dates are the same — same-day checkouts.

9. Package rates

These are not separate rates though they can be. Normally, it can be any rate that has packages inclusive such as breakfast (Bed & Breakfast), half-board, full-board, golf course, and spa treatment included. These other products are charged at a single discounted rate which would otherwise be more expensive to buy them separately. However, internal departmental revenue tracking happens without guests noticing.

10. Promotional rates

These rates discounted or come with additional products included, are often non-cancelable, meaning hotels can nearly guarantee occupancy. Then it helps hotels increase revenue during peak or off-peak seasons.

What are the market segments in hotel industry?

Because a market segment is a major factor affecting room rates, we want to give you a brief idea.

In any business, you want to understand what type of customers bring you business and line up your sales and marketing efforts. 

In hotels, they classify guests into market segments where each group of guests has its own behavioral patterns. This segmentation helps hotels offer guests products and services that match their profile, preference, and financial ability to satisfy guests and maximize the hotels’ profitability.

For instance, Transient (individual traveler) segmentation can bring in more room rates compared to Group segmentation, but it can be less profitable to hotels considering distribution costs such as travel agent commissions, credit card commissions, marketing, etc. This helps hotels with their rate strategies.

There are no set rules, predefined metrics, or limitations on what market segments a hotel can have since every hotel has its own business strategy. However, below are a few popular segmentations:

Hotel market segmentation example

Nowadays, hotel rates are often linked to market segmentation, meaning hotels plan their room rates based on guest types which helps hotels increase their revenue while providing the best product and the rate for the right guests.

5 Core market segmentations

Below are a few of the common market segments. However, a hotel can have fewer or more depending on their requirements. Again, each of these main market segmentation can subdivided into several other market segments depending on the need.

Relationship between room rates and market segments example

Customer-focused rate structure is a modern and widely used approach that allows hotels to consider customers’ ability and willingness to pay for their booking. This helps hoteliers to be on par with the competition.

So, the rates are designed and created for segments that directly target customers. And, this helps hotels to track and compare their revenue by segments to fine-tune and improve potential areas accordingly to impact overall revenue.

The post Room Rates in Hotel: 10 Seed Rate Types first appeared on e360 hospitality.