The following Management guidelines & Fencing Issues and have been proven to be quite useful over time for hoteliers.

Ethics

One might ask, is ethical and fair to charge different guests different rates based on their booking characteristics or willingness to pay?

Many hoteliers are uncomfortable with the thought of charging different guests different prices based on those factors. The issue hinges on setting expectations and educating customers. In segmenting the market, the hotels create different products with different prices.

Even if the physical attributes are the same, the last room in the house sold the night of arrival is not the same product as a room booked into a half-full house 30 days before arrival.

Through market segmentation, the hotel is able to satisfy at least two diverse groups. For the leisure guest, deeply discounted rooms are available on demand at a higher price.

Hoteliers seem to be at ease in charging different rates based on an individual’s status,

Such as diverse organizations as AARP, government employees and travel agents. The different rates generally have nothing to do with the quality of the accommodations or the cost of services rendered. They are based solely on expectations of customers’ price

Elasticities

Most guests however, have little control over their status, when they make a hotel reservation.

We think it is more equitable to have a rate structure based on factors that the guest can control, for example arrival & departure patterns

Finally, such restrictions as non-refundable rates clearly represent a shifting of risk ( that is for no-shows), for which the hotel is willing to compensate the guest through a discount.

Hotels face a substantial opportunity cost, for rooms that remain unsold or are cancelled. If the guest is willing to assume the risk of an empty room by purchasing a non-refundable stay, the product is different from a room that can be cancelled.

The hotel rewards this behavior with a reduced rate.

Business Versus Leisure

Some hoteliers might observe that business travelers are tired of “subsidizing” leisure travelers. That perception stems from the observation that business rates are generally higher than leisure rates.

Any room rate that exceeds the low variable cost of occupying a room, contributes toward covering fixed costs, additional room-nights of any kind ( at almost any rate ), generally help increase profitability,

Therefore additional revenue generated from discounted leisure travel helps limit room-rate increases.

Inn reality

Leisure and business guests “cross-subsidize” each other.

Administration

One might think that advance-purchase rates are too difficult to administer. There’ s no question that allocating inventory and remembering what can or cannot be sold at a particularly rate is a complex challenge. Advance-purchase rates may also require additional staff to process and keep track of deposits.

While it is true that fenced rates may require additional resources, that cost is quickly out weighed by additional revenue that can be gained from targeted discount offers and preventing trade-down.

Customer Complaints

Customer service is clearly an issue with fenced rates, especially when customers cannot meet restrictions or change their plans after purchasing a room. We believe that customer service issues are actually less troublesome with fenced rates than those encountered with the unstructured system common today.

While fenced rates are not easy to manage, they certainly can be explained to the customer by reservation sales agents.

Unlike the negotiation system, the hotel loses nothing by explaining the rules to prospective guests. The choice is always up to the customers, depending on whether they can live with the restrictions. Simply having a rational rate structure diffuses many of the customer issues hotels face today.

Conclusion

In conclusion, the economics of supply and demand require that hotels use segmented prices to maximize revenue and attempt to cover the property’ large fixed investment. Most hotels now use what can best be described as a “haggling” approach to attempt to segment customers. That confuses and alienates guests who don’t understand the system. Customers who have learned to “work the system”\add to the problems.

A rational way to segment prices is to use “fences” or logical rules and restrictions that segment customers on their needs, behavior and willingness to pay.

Several tests of non-refundable, advance-purchase rates have proven successful for Marriott. Tests of other rule-based discounts may also prove effective. By using these techniques, Marriott has been able to increase revenues while improving pricing integrity and boosting confidence.