What is hotel rate management?
Hotel rate management is the process of strategically pricing rooms to attract guests while also maximising revenue. This process requires continuous analysis of market trends, booking patterns, and competitor strategies. It’s not just about setting the right price, but also about adjusting it in response to market changes.
This strategy is crucial for enhancing both occupancy rates and the average daily rate (ADR), directly influencing the hotel’s financial performance. Table of contents
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Why does hotel rate management matter?
Mastering the art of rate management is crucial for thriving (not just surviving) in an ever-competitive hotel landscape. But why does it matter so much? Here’s what hotels who keep a tight rein on their rate management can expect:
- Maximised revenue: The most direct impact of effective rate management is on your bottom line. By dynamically adjusting room prices based on demand, seasonality, and market trends, you ensure you’re not leaving money on the table during peak times, and equally, not pricing yourself out of the market when demand wanes.
- Higher occupancy rates: Pricing rooms correctly plays a pivotal role in driving occupancy. Overpriced rooms deter potential guests, while underpricing leads to revenue loss. Finding that pricing sweet spot is key to keeping rooms filled throughout the year.
- Adaptability to market conditions: The hospitality market is fluid, influenced by various external factors like local events, economic shifts, and even weather patterns. Effective rate management means being agile – quickly adjusting prices in response to these changing conditions.
- Guest perception and value: The price of a hotel room isn’t just dollar signs. It’s a signal of value to guests. Smart rate management helps in positioning your hotel appropriately in the market, ensuring guests feel they’re getting the right value for their money.
- Better data for strategic decisions: With advancements in hotel management software, rate management is no longer a guessing game. Utilising data analytics, you can make informed decisions that align with your hotel’s strategic goals.
- Staying ahead of the competition: In a market where guests have countless options at their fingertips, staying competitive is key. Effective rate management ensures your pricing is always aligned with or ahead of your competitors, helping you stand out in a crowded market.
Basically, hotel rate management is about understanding the market, knowing your guests, and using this knowledge to drive profitability while maintaining guest satisfaction.
Hotel rate management strategy
As we’ve seen so far, there are countless factors that will influence and help you determine your rates.
- Internal factors such as expenses like taxes, wages, supplies, cleaning, and refurbishment mean there’ll be a minimum rate you have to set to break even on your business each month, quarter, or year.
- External factors such as the season, competitors, and events mean you’ll have constant work to do adjusting your rates.
However, even larger industry trends may supersede any of these factors. Google produces 500 million results when asked ‘Is travel getting more expensive?’
Unsurprisingly, the first 10 results are solely dedicated to the price of flights. Panicked headlines from global news organisations warn travellers about the rising costs associated with travelling by plane, thanks to increased fuel costs and the subsequent pressure on airline profits.
One of the difficulties for airlines is knowing how to factor in the increasing fuel costs. Passing the increases onto travellers by raising ticket prices is one of the few options available to them.
What causes hotel rates to fluctuate?
Although hotel rate management has less to do with barrels of crude oil, airline prices could still impact supply and demand for hotels, the most common reasons for the fluctuation of hotel rates.
As we all know, supply is how much of a service the market provides and demand is how much of the market wants to pay for it.
While it would be too simplistic to say fluctuations in hotel room rates can be solely down to this theory, it’s a great place for hoteliers to start because economists have long believed the best way to allocate resources – in this case hotel room rates – is to let supply and demand decide.
Beyond your location and online reputation, your hotel rates will mostly be affected by these 3 factors:
1. The time of year
Is it peak or off-peak season? If it’s a quiet time you can lower your rates to coax more guests in. If it’s the height of your busy season and hotels locally are becoming booked up, you can afford to charge your guests more. It pays to obsess over long-range weather forecasts too.
2. Your types of available rooms
Different rooms will require different rates and this is where you can get creative with your packages and offers.
A good channel manager will allow you to sell the same room in different ways across all your connected online channels – for example, a ‘deluxe suite including breakfast & local walking tour’ vs. ‘deluxe suite room only’. The possibilities are endless – almost.
3. Any major events in the local vicinity
Knowing what’s happening in and around your hotel is crucial to setting room rates accurately. If you’re a hotel in Melbourne and you know the Australian Open tennis tournament comes to town every January, start looking at your competitors’ rates early.
Track the hotel rate management trends and be strategic – you could be winning the business of the world’s biggest sports fans or leaving valuable revenue on the table.
Hotel rate management best practices
Every hotel is unique, with unique selling points and a unique audience. The perfect rate management strategy for one hotel won’t necessarily be the right fit for yours. That said, there are some best practices that can help you along your own unique rate management journey.
What is the hotel industry standard for measuring the effective management of room rates?
There’s no single KPI that perfectly describes how effective your rate management is. Rather, there are a handful of metrics that describe different facets of the success of your strategy:
- Average daily rate (ADR): This metric measures the average rental income per occupied room in a given period. It’s calculated by dividing the total room revenue by the number of rooms sold. ADR is a crucial indicator of how effectively a hotel is pricing its rooms.
- Occupancy rate: This is the percentage of available rooms that are occupied over a specific period. It’s calculated by dividing the number of occupied rooms by the total number of available rooms. While not a direct measure of rate management, occupancy rates can indicate the effectiveness of pricing strategies in attracting guests.
- Revenue per available room (RevPAR): RevPAR combines elements of both occupancy and ADR to provide a comprehensive picture of a hotel’s performance. It’s calculated by multiplying the ADR by the occupancy rate, or dividing total room revenue by the total number of available rooms. RevPAR helps hoteliers understand how well they are filling their rooms and how much they are earning from each room.
- Length of stay (LOS): This metric measures the average number of nights that guests stay at the hotel. A longer LOS can be an indicator of effective rate management strategies, such as offering discounts for extended stays.
- Market penetration index (MPI), average rate index (ARI), and revenue generation index (RGI): These are comparative metrics used to assess a hotel’s performance against its competitive set or the broader market. MPI compares a hotel’s occupancy rate to the market average, ARI compares the ADR, and RGI compares the RevPAR.
- Distribution channel analysis: Understanding which distribution channels (like OTAs, direct bookings, travel agents) are bringing in the most revenue and at what cost is essential for rate management. This analysis helps in optimising channel mix for better profitability.
What are rate fences in the hotel industry?
Fences are rules that apply to room rates. It means that to secure a certain rate the guest will have specific conditions applied to them.
One such example might be a minimum stay length. If the guest wants a discounted rate they might be required to stay at least two nights. By that example, the cheaper rate is ‘fenced’ off from those guests who only want to stay one night.
Potential guests need to feel that they are buying different products when they pay different rates. Rate fences are the elements that can help create this differentiation. Rate fences are commonly used to prevent customers who are willing to pay a higher amount, to have access to a discount.
The most common types of fences include:
- Physical fences – These include features such as the location of the room, the view, furniture, amenities, size, etc. Some segments will be willing and able to pay more for rooms with a great view, while other segments will prefer to forgo that view in return for a lower rate
- Transactional fences – These involve time, place, quantity of purchase and flexibility of use. An example can be non-refundable rates. It’s likely that non-refundable rates will not be attractive to a corporate guest but a more rate-sensitive leisure guest might prefer a non-refundable product if the rate is lower.
- Buyer characteristics – These regard attributes such as age, affiliation to an institution or group and frequency or volume of consumption.
- Controlled availability fences – In this case, availability and rates are assigned based on geographical criteria or distribution channels. For example, charging different rates according to the customer’s place of residence.
Applying fences the right way can make your business more successful and give you a competitive edge.
How software helps improve hotel rate management
Set up base rates
Software assists in setting initial rates based on a comprehensive analysis of factors like historical data, room types, and standard market rates. This foundational pricing provides a consistent benchmark, ensuring that all subsequent dynamic pricing adjustments are rooted in a sound, data-driven starting point. It lays the groundwork for effective rate management, allowing for strategic adjustments while maintaining a level of predictability and stability in pricing.
Create flexible restrictions
Implementing flexible restrictions on bookings, such as minimum stay requirements, advance booking limitations, or closed-to-arrival (CTA) days, is simplified through software. These restrictions help in managing room availability more effectively, especially during peak periods or special events.
For instance, requiring longer stays during high-demand periods ensures maximum revenue generation from each booking, while advance booking limitations can be used to encourage early reservations, aiding in better inventory management.
Use dynamic pricing algorithms
Dynamic pricing algorithms in software automatically adjust room rates in real-time based on market demand, competition, and other external factors. This responsive approach ensures that rates are always optimised for current market conditions, enhancing revenue opportunities during peak demand and maintaining occupancy during slower periods.
Analyse market trends and data
Software tools offer in-depth analysis of market trends, booking patterns, and guest behaviour. This analysis helps in understanding the best times to adjust rates, either upwards or downwards. Using this data-driven insight aids in making informed pricing decisions, aligning rates with market expectations and maximising revenue potential.
Unify distribution channels
Integration with various distribution channels ensures consistent and updated room rates across all platforms. Software automates the distribution of rate changes to OTAs, GDS, and direct booking channels. This consistent rate presence helps in avoiding disparities, ensuring a unified booking experience for guests and reducing the risk of overbookings or rate conflicts.