How are hotel rates determined
 

Hi,

I've recently been negotiating rates with hotels in my area and have a quick question.

How are hotel rates determined?

Simple logic would assume that as long as the room is sold for more than the cost of upkeep of the room, then why not sell the room.

Recently, the hotel manager said that although revenue is something they're measured against, something else they're measured against is occupied rate per night.

So I asked, if there are three rooms in a hotel. Isn't it always better for the rates to be: 100, 100, 40 than 100, 100, 0 - given that the 40 exceeds the cost of the upkeep of the room.

Hotel manager replies "no." Because, 100, 100, 40 means that the average occupied rate is 80 as opposed to 100, 100, 0 would suggest average occupied rate is 100.

HE also spoke about displacement, but I'm not sure exactly what he meant.

Can someone shed some light about this?

Thanks

Hotel rates run into the same problem as many other goods. If you consistently have "on sale" rates, everyone starts expecting them, meaning that in 6 months, you might only be able to sell your rooms at 60, 60, 60 rather than 100,100, 40. And 100, 100, 0 produces a better result.

One reason places put rooms on opaque site is to keep pricing power up. I could easily see hotel management being evaluated on both raw revenue and gross margin (revenue per room less direct expenses) as the owners want to capture the high gross margin during peak periods. Also, hotels have significant fixed costs (land, building, interest, property taxes, etc...) so your hotel rates need to be priced to cover these off in the long run. So your long run "break even" rates might be $80, even if $10 will cover off your variable costs (staffing, lights, etc...). If you have high and low seasons, then you might aim for $50/$60 in the low to cover a bit of the fixed costs but then this means that your high season rates will have to be even higher to break even.

I understand a little - but i was wondering if you could elaborate on the long run break even rates.

Let's say that your fixed costs are $500,000 / yr and given that it costs $10 to cover the upkeep on a single night of a room.

In all your power, you're trying to break that 500k mark.

I absolutely understand the expectations of pricing. That's clear. But, an empty room isn't contributing to that 500k a year? Rather, it would seemingly appear that a $40 room rate would be better than an empty room netting 0 as opposed to the $40 room that nets $30.

I'm sure most hotels have their large name companies that can give them the higher margin of $150 / night - but only during high seasons or particular nights could the hotel be sold out - so it would still be more advantageous to have a room that provides some income towards that 500k mark than a net of zero.

Are you negotiating for absolute same day last minute rates? Seems that is the only certain way that the hotel would know the room is going to go empty - as another poster replied that is what many properties use opaque sites for - to dump unsold last minute inventory without conflict to their higher rated business.

I will try and make this as concise as I can;

The hotel in which I currently work does not look at pricing/rate structures from a break-even point of view. We rely on historical data to track demand periods and use discounts off our rack rate to encourage demand when necessary (also known as BAR - Best Available Rate). This is all apart from contracted wholesale or corporate rates that we must accept regardless of occupancy levels.

We also prefer to let a room go empty than sell it a discounted rate that is below our set minimums as this can negatively affect our efforts to raise rates when needed (similar to how some airlines will not upgrade someone from Y to J becuase a seat is empty a la SQ, CX). Competitor rates are also monitored, particularly during high demand periods.

We are measured by total revenue, occupancy and REVPAR, with total revenue our main focus, within the standards set by the brand.

Displacement refers mostly to groups - for example I will calculate the revenue a lower-rated group will displace against the possibility that the hotel will fill these rooms with higher-rated FIT guests closer to the arrival date. Potential F&B revenue is also considered.

This is just scraping the tip of the iceberg - it is a very detailed and complicated process that manages to confuse most guests when I have discussed the subject with them. Happy to discuss further if anyone has questions although my experience is mostly in Asia/Pacific resorts and may not be relevant to current practices in the US.

This reminds me of Front Office Operations class.. :P Especially with the words total rev., occupancy, and REVPAR :) I believe Revenue Management is one of the best sectors to get into in the hospitality industry specifically in the hotel side. I recall my professor saying that and he was the most recent CFO of Starwood North America.

understanding that you were giving us the 40,000 foot version, thank you

my 40,000 foot question based on the above is

total revenue, each room having some sort of occupancy no matter the rate would increase total revenue, would it not?

occupancy, again, each room would increase occupancy correct?

each room bringing in additional revenue would increase revpar right?

for example, if you had 100 rooms and each were at your rack at 100 dollars then you would max out at a revenue of 10000 dollars, with a 100% occ rate and a revpar of 100

if you had 60 rooms at 100 dollars and thats it then the rev would be 6000 dollars 60% OR and a revpar of 60 per room? is this correct

so why not have 60 at 100; 20 at 75 and 20 at 50?

this would make it revenue of 8500, OR at 100% and a revpar of 85 or am i way out of whack here?

I think the key takeaway from nzed's extremely well written and informative post as it relates to your situation is that hotels will not openly advertise/provide a pricing position that dilutes the value of their brand regardless of occupancy rates (hence the use of opaque channels to fill last minute availability). Consumer expectations shift over time and if people become accustomed to Marriott service at Fairfield rates the ability of Marriott to command a premium for their top-tier brand diminishes.

Are you negotiating a national contract rate with the hotel chain's sales group or are you negotiating a local rate with an individual operator? What is your account's expected volume? Those and other factors will affect the considerations the hotel is willing to provide within their overall pricing strategy.

From the perspective of having spent 30 years selecting and contracting with hotels for state, regional and national associations, nzed's given you more than most need to know in a concise package.

He did leave out the part where a few key staffers go up on the roof, sacrifice a live chicken, marking their foreheads with the blood, and taking auguries from its still quivering entrails to determine the rate to be offered to the current group RFP on the sales desk.

In theory, you are correct. In practice it is more complicated. The challenge facing any Revenue Manager is to obtain the highest possible yield whilst meeting occupancy targets and the brand expectations. In effect, we are trying to sell the right rate to the right person at the right time.

Also, the hotel will already have quite a large percentage of rooms reserved well in advance by segments like wholesalers/groups, conferences, etc. Tracking future demand and forecasting what I will have "on books" will result in rates moving up or down depending on seasonality, competitor positioning and several other factors.

For example, as occupancy increases and if demand is forecasted to be strong, the rate will move up as room categories are sold out. During weaker demand periods the decision may be taken to oversell lower room categories and upgrade/upsell upon arrival.

In short, the process is hard to explain in a few sentences, however striking a good balance between maximizing the rate and increasing occupancy levels is essential to a successful hotel operation.