Establishing Room Rates
• Any serious exploration of hotel room rates and their management must include basic information about room rate economics. Room rate economics recognizes that, when the supply of hotel rooms is held constant, an increase in demand for those rooms will result in an increase in their selling price. Conversely, when supply is heldconstant, a decrease in demand leads to a decreased selling price.
• Understanding the law of demand is critical because, unlike managers in other industries, hoteliers cannot increase their inventory levels of rooms (supply) in response to increases in demand.
• Hotel managers must also understand that their own inventory of rooms is highly perishable. If a hotel does not sell room 101 on Mondaynight, it will never again be able to sell that room on that night, and the potential revenue that would be generated from the sale is lost forever.
• Since information about supply is readily known, and since forecast data helps to estimate demand, you can learn to accurately gauge the relationship between guestroom supply and demand. Using this information, you can determine the best rates to beassigned to each of your rooms.
• A rack rate is the price at which a hotel sells its rooms when no discounts of any kind are offered to the guests. Rack rates, however, will vary based upon the type of room sold. Figure 8.1 lists the rack rates that are associated with Paige Vincent’s Blue Lagoon Water Park Resort based on her room mix (the variety of room types) in her hotel.
• In Figure 8.1,rack rates vary by bed type, by amenities, by location and by size.
• Some hotels have very strong seasonal demand. These hotels will have a seasonal rate that is higher or lower than the standard rack rate and that is offered during that hotel’s highest volume season.
• In some cases, it makes sense for hoteliers to create special event rates. Sometimes referred to as “super” or “premium”rack, these rates are used when a hotel is assured of very high demand levels (e.g., Mardi Gras in New Orleans and New Year’s Eve in New York City).
• Hotels often negotiate special rates for selected guests. In most cases, these negotiated rates will vary by room type. In addition to rack and negotiated rates, hotels typically offer corporate rates, government rates, and group rates.
• Some hotelshave great success “packaging” the guest rooms they sell with other hotel services or local area attractions. When a hotel creates a package, the package rate charged must be sufficient to ensure that all costs associated with the package have been considered.
• A hotel’s revenue managers can also create discounts at various percentage or dollar levels for each rate type we have examined. Theresult is that a hotel, with multiple room types and multiple rate plans, may have literally hundreds of rates types programmed into its property management system.
• A property management system (PMS) is a computer system used to manage guest bookings, online reservations, check-in/check-out, and guest purchases of amenities offered by the hotel.
• In addition, the use of one or moreauthorized fade rates, a reduced rate authorized for use when a guest seeking a reservation is hesitant to make the reservation because the price is perceived as too high, can result in even more room rates to be managed.
The Hubbart Room Rate Formula
• Hoteliers want to maximize their profits and thus collect the highest rate possible for their rooms. However, the rate cannot be so high that itdiscourages guests from staying at the hotel, nor can it be so low that it prevents the hotel from making a profit.
• The room rate charged should not result from a mere “guess” about its appropriateness but, ideally, should evolve from a rational examination of guest demand (because it is the most significant factor impacting room rates) and a hotel’s costs of operation with specific and accurate...