The Role of the Room Rate
Chapter 9
THE ROOM RATE’S IMPACT ON
GUEST DEMAND
Room rates communicate a great deal about
a hotel. Higher than average rates indicate a
well-run property.
The rate of growth in room prices has held
roughly steady at 5.8% per year for more
than 30 years.
Hotel Room Demand
Today, there are more hotel rooms available
in the U.S. than ever before, but room
demand is higher than ever before too.
Unique, because no matter what direction
the nation’s economy, room rates continue
to rise.
Competition
Differences in both the physical facilities
and the range of services offered justify
higher rates than the competition.
The condition of the facilities can offset
their competitive advantage. “Clean and
neat” sends an important subliminal
message. Differences in service are more
difficult to discern, but they add to the room
rate as substantially as other components.
Room rate elasticity
Elasticity is defined as the change in
demand (rooms sold) resulting from a
change in price (room rates).
Elasticity of demand for hotel rooms is
complex. Hotels experience different
degrees of elasticity throughout the year.
Elasticity of lodging taxes
One rate component over which hotel
managers have little or no control is local
lodging taxes.
Antagonists of the hotel tax believe it is
wrong to charge out-of-town visitors for
city services that are not tourism related.
Studies have demonstrated that an increased
lodging tax may actually hurt the local
economy.
Dynamic pricing in negotiated
corporate rates
Corporate travel managers often negotiate
favorable rates for their corporate travelers.
Some of the questions corporate travel managers
are asking about dynamic pricing include:
– Will the dynamic pricing discount include all rooms
types in the hotel?
– Will the discount apply across all expenses for the trip,
including breakfast, internet access…?
– Will the rate fluctuate by night for a multi-night stay?
– Will there be a floor or ceiling limiting how low or high
the rate can fluctuate?
Discounts off Rack Rate
All hotels have a rack rate against which
other pricing structures are designed.
A hotel’s rack rate is the quoted, published
rate that is theoretically charged to full
paying customers. The rack rate is the full
retail rate.
Proof of discounting is most evident in the
average daily rate computation.
The discounting dilemma
In markets where discounting is rampant, the only sure
winner is the customer who buys a quality product for a
fraction of the price.
After becoming accustomed to discounted rates, customers
perceive full rates as very poor value.
Discounting profitability: both parties are happy—the
guest pays less for the room and the hotel makes a higher
profit from having created more room demand.
However, rate discounting has a negative side as well, a
10% rate discount requires occupancy to rise to 66.67% in
order to gross the same revenues as previously earned.
Rate cutting: Rate cutting functions in an
inelastic market. Rate cutting aims at the
guest already staying in a competitor’s
hotel across the street.
Competitors, who lose business, counter
with rate cuts, and the price war is on.
For once sold at a lower rate, it is almost
impossible to get the buyer to pay the
original price.
Examples of discounted rates
Discounted or special rates come in a variety of
shapes and sizes.
Seasonal rates: Season and off-season rates are
quoted by most resort hotels, with incremental
increases and decreases coming as the season
approaches and wanes.
Weather-related discount: Credits or discounts
against the rate are offered guests for each day it
rains or stays unseasonably cool.
Weekly rates: which are less than seven
times the daily rate.
Corporate rates: by guaranteeing a
number of room-nights per year, the
corporation negotiates a better rate, a
corporate rate, from the hotel chain.
Commercial rates: are the small hotel’s
answer to corporate rates, smaller hotels
make arrangements with small
commercial clients.
Government per-diems: Federal, state, and
local governments reimburse traveling
employees up to a fixed dollar amount.
Difficulties may arise when the per-diem
guest encounters the desk. Some chains
accept the government rates, but individual
properties may not.
Employee courtesy rates: most hotel
chains extend special rates to their
employees when they travel within the
chain.
It pays to pay rack rate: although not really a
discount, some upscale chains are experimenting
with added perks for guest who actually pay full
rack rate.
Senior citizen rate: people over the age of 50 are
the best money savers. They love to travel, and
they’re careful with money.
Infinite other discounts: there are an unlimited
number of additional rate discounting
possibilities. For instance: by providing
members with deep discounts for traveling
during off-peak periods, such clubs provide a
win-win-win product.
Auction travel sites: auctioning is a form
of discounting that has gained popularity
with the individual traveler.
To qualify for deep discounts, travel
auction companies often require a degree
of flexibility on the part of the customer
(non-prime-time flight schedules and less
popular travel dates are the norm).
Complimentary rooms
Hotel managers should be as reluctant to give
away complimentary (comp) rooms as
automobile sales managers are to give away
free cars. Comp are used for business
promotion, as charitable giveaways, and as
perks.
Posting the comp: some casino hotels have the
comp paid by a paper transfer to another
department. The department manager has
accountability, and the amount of comps
appear on that departmental budget.
Additional Rate Factors
Energy, Resort Fees and Other Non-room
Surcharges: swimming pool towels, inroom coffee, fax machine usage,
administrative fee, etc.
Double Occupancy: double occupancy
refers to the use of the room by a second
guest. Traditional rules increased the
single-occupancy rate by a factor
whenever the room was double-occupied.
Time is Money
While the actual date of arrival and departure is
the primary consideration for establishing the
guest charge, the number of hours of occupancy
may someday play more of a role in rate
determination than it does today.
Day Rate Rooms: special rates exist for stays of
less than overnight. These are called part-day
rates, day rates, or sometimes use rates. Day rate
guests arrive and depart on the same day.
DETERMINING THE PROPER
ROOM RATE
Traditional Rate Calculations:
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The Hubbart Room Rate Formula
The Building Cost Room Rate Formula
The Ideal Average Room Rate
Upselling Premium Accommodations