HOTEL MANAGEMENT Room Rate Structure

Contents Rate Structure Room Rate Designations

Cost Rate Formula There are many ways to set the required rates in a hotel, there is no perfect way to do it. One unique method is called the cost rate formula and is based on the construction cost of the hotel The average room rate should equal $1.00 per $1,000 of total construction cost If a 175-room hotel cost $10 million to build, the average rate would be $57.14 ($10 million divided by 175 divided by $1,000)

Market Tolerance One of the more time-consuming methods in establishing a hotel’s average daily rate is called the market tolerance method Before a hotel is constructed an, owner may simply call around to hotels of similar product type, location type and size Called the competitive set, these hotels would serve as direct competitors to the newly built hotel An ongoing record of what rates are offered on any given night would give the hotel an idea of what the market tolerance is in the area

Room Rate Designations The individual room rates within the rate structure are allocated a value based on certain characteristics The room rate designation is the term used to specify the rate threshold within the overall structure, and therefore defines what position a specific rate will take within the overall rate hierarchy The room rate designation does not specify an actual dollar value, it simply “ranks” all the rates within the rate structure

Rack Rate and Corporate Rate Rack rate – the rack rate is the highest published rate a hotel can charge for a specific room. Rack rates can differ between room type, configuration, and designation. Corporate rate – this designation is designed to promote the corporate market segment. Typically the corporate rate reflects a 10 to 20% discount off the rack rate. The corporate rate is widely accepted as the transient target rate for most hotels. The target rate is simply an average rate goal a hotel sets to achieve for a certain day or market segment

Volume Account Rates Volume Account rates – Also called preferred rates, the volume account rate trades a further discount of the corporate rate in exchange for a guaranteed number of room nights within a specific time period. The level of this discount is contingent upon the volume. These volume accounts are usually assigned a grade based on production and hotels with predetermine the number of room nights required to achieve each grade, and assign a rate accordingly

Volume Account Rates (Cont…) For example: “A” Accounts are entitled to a 20% discount off corporate rate “B” Accounts are entitled to a 15% discount off corporate rate “C” Accounts are entitled to a 10% discount off corporate rate

Government Rate Government rate – Within most major cities, government agencies set predetermined rates that they will reimburse travelling employees for. This reimbursement rate is called a per diem, and for government employees, usually covers hotel, meals and other expenses. These per diems are set a year in advance and published so that all interested hotels can offer it.

Seasonal Rates Seasonal rates – Resorts and other location types that see a fluctuation in demand due to the weather or the operation of a nearby attraction will vary their rates accordingly. Offering a different rate for in-season and out-season (off season) allows the hotel to alter their rate structure to compensate for this cyclical demand. A seasonal rate designation can apply to other rates as well.

Weekday/Weekend Rates Weekday/Weekend rates – hotels of all location types will see fluctuating demand during certain days of the week. Traditionally, hotel location types see their weekday and weekend demand levels as illustrated in Figure 7-4

Weekday/Weekend Demand Figure 7-4

Membership Rates Membership rates – Some organisations (such as Automobile Clubs) have a large number of members who enjoy travel and often develop travel guidebooks to assist their members in choosing a hotel. Hotels must offer a special rate and have a certain level of quality, service and cleanliness in order for the organisation to recommend them. These membership rates are usually 50% off the rack rate

Industry and Walk-in Rates Industry rate - Those who work in the travel industry such as travel agents, employees from other hotels, meeting planers etc. are often extended the courtesy of discounted rates. Industry rates can vary from 30 to 50% off the rack rate, depending on the location and seasonality factors. Walk-in rate – This may vary from night to night. A walk-in is a guest who arrives without a reservation. With few remaining rooms, the walk-in rate may be set fairly high, and an empty hotel may reduce the rate significantly.

Premium and Advance Purchase Rates Premium Rates – Room configurations have standard, those with views or other amenities, can command a room rate premium. Premium rates are offered to any room that offers something “extra”. Advance Purchase Rates- An advanced purchase rate offers a greater discount based on the number of days in advance it is booked. A 7, 10 or 21 day advance purchase rate will have a corresponding lower rate.

Half-day Rates Half-day rates – Some hotels offer certain guests as an alternative meeting room, and these rooms are often used for just a few hours so a half-day room rate may be assigned based on half the value of the rack rate. Half-day rates are also commonly offered at airports.

Package Rates Meal Packages – These include meals in the rate. They may include only one meal per day (usually breakfast) or all meals and beverages included Vacation Packages – These include room rates and one or more of the following: airline tickets, transportation, tickets to local attractions or shows etc Meeting Packages – This rate usually includes coffee breaks, meals, audiovisual equipment and the cost of the meeting room all together

Group Rates Group rates – It is difficult to catergorise these rates as a specific designation because they can differ greatly. A group rate is determined by many factors, but are typically lower than transient rates because they are booked in advance and contractually obligated.