The Strategic Approach To Rate Setting

Description

Free e-journal

The Strategic Approach To Rate Setting

As customers become more sophisticated in manipulating the current pricing system, hotels will eventually be forced to modify their pricing structure. Rather than allow that modification to be made at random, we have been testing a strategic approach to room rate structures.

A Single Rate

The first approach is to offer a single rate for all transient inventory ( nongrou, noncontract ).

That rate can change according to season, or day of the week. Such an approach is easy to administer and easy to explain to customers.

Sophisticated yield management would not be necessary. The one-price strategy, however fails to respond to peaks and valleys of demand and does not respond  to customers’ ability or willingness to pay. Some guests will be paying less than they are willing to pay, while others will find the rate too high and go else-where, possibly leaving the hotel with rooms it could have filled by using another strategy.

Rates By Room Type

A second approach is to set rates according to different room characteristics, like; view, size, floor level etc. This approach is mainly used by most hotels. It too, is easy to explain to customers, because there may be a perceptible difference in the rooms offered at different rates.

It approves on the one-rate approach by allowing the hotel to offer different rates on the same day, thereby realizing more revenue. But setting rates by room type also has several disadvantages. It certainly wouldn’t work for a hotel that comprises just one type of  room. Even if it had different kind of rooms, a hotel would be limited by its actual physical inventory

In the number of high-priced rooms it could sell, so potential revenue is limited by product levels and not demand levels

This approach to segmentation won’t work in markets where customers are unwilling to pay for upgraded rooms , and it is operationally difficult for the front desk clerks and reservations sales agents to manage.

Good Fences Make Good Profits

The third is to erect “fences” – logical rational rules or restrictions that are designed to allow customers to segment themselves rate categories based on their needs, behaviour or willingness to pay. Such fences include

Such fences include advance reservations and non-refundable advance purchases. Those policies allow, for instance, price-sensitive customers to gain a lower rate in exchange for reduced flexibility. On the other hand, traditional full-rate customers can have a room whenever they please.

The important aspect of fences is that they allow a hotel to sell discount rooms to one segment of customers without allowing higher rate customers to trade down.

Rates with fences are easy to explain to customers and every rate has a rationale. Using a rate-fence system, hotels can yield management for 100 percent of their inventory, opening up discounts when demand is weak and closing off discounts during strong demand periods.

The downside of rate fences is that they are more difficult to manage than other approaches.

Rate fences require sophisticated  reservation and yield management system. Moreover a hotel must have regular rates that are correctly positioned for the market place.

By introducing fences and other rate restrictions, a hotel can penetrate its intended markets as deeply as possible without allowing higher-paying market segments to trade down. The airlines

“Saturday –Stay” requirement is an excellent example that separates leisure travellers ( who generally don’t want to linger once their business is conducted ).

Fences must be combined with inventory-controlled procedures to maximise revenues. That requirement goes beyond the yield management currently practised by many hotels. While yield management is effective in selling high-rate rooms during periods of strong demand , it has limited effectiveness in preventing a  guest who normally pays rack rate from trading down

During times of weaker demand, when discount rates are open. Therefore the inventory control of yield management needs to be combined with the segmentation control of “fences” to maximise revenues.