The 5 types of rates you need to know in order to do revenue management in your hotel or lodging establishment
Not sure what types of rates you need to adopt to do revenue management properly? In this article, we introduce you to the 5 most important ones.
If you work with dynamic rates to set room rates, you already know that there are several types.
In revenue management for hotels and accommodations, each rate serves a specific purpose and combined these rates help maximize revenue from the sale of your rooms or ancillary services. You can learn more about these dynamics in our quick guide to revenue management.
The main types of rates you can charge in an accommodation facility are:
- the bottom rate
- the starting rate
- the bar rate
- the rack rate
- the last minute rate
Let's look at them in detail one by one.
Bottom rate: the minimum rate at the base of your revenue management strategy
This is the minimum rate below which selling is no longer viable.
When devising a pricing strategy, it is essential to start by calculating the bottom rate: on the one hand it prevents the risk of selling services below cost, and on the other it provides an important benchmark for improving margins through increased occupancy.
In fact, once you have set your bottom rate limit, you can set a price higher by even a few euros, knowing that you are not selling at a loss. In this way, you could sell at a more competitive price than others by increasing occupancy and consequently marginality.
The bottom rate is obtained by starting with the calculation of the average marginal cost per room to which you add the profit margin that you consider to be the minimum necessary.
Bottom rate example
If the average marginal cost for an occupied room in your facility amounts to about €30 per night and you are disposed to make a minimum margin of €20 per night, your bottom rate will be €50.
Starting rate for dynamic pricing
The starting rate is a close relative of the bottom rate in that it represents the lowest rate from which (in theory) your dynamic rate will begin to increase.
In other words, the starting rate is the rate you charge when your facility is empty and which you abandon at some point depending on demand trends.
If demand rises, the price of the rate goes up.
If, on the other hand, demand goes down, the price follows it by going below the starting rate (but never below the bottom rate as we have seen).
Defining the starting rate is significantly more complex than the bottom rate.
First of all, while the bottom rate is theoretically the same for all days of the year, the starting rate is calculated pointwise for each of them.
One simple way to calculate the bottom rate may be to relate the average sales price (ADR) and the occupancy rate.
Starting rate example
If you have achieved an average of 50 percent occupancy on a given date over the past few years with a rate of €100, you may choose a starting rate close to the product of the two factors (€100*50% = €50), or rather somewhere in between on a case by case basis.
Bar rate (Best Available Rate): how you position yourself against competitors
The BAR (Best Available Rate) is the lowest available rate with no restrictions or special conditions.
More precisely, it is the rate with the lowest price among the many available (available to anyone, not negotiated) and with a flexible cancellation policy (a non-refundable rate cannot be a bar).
Let us explain.
An accommodation usually has more than one room type (double, triple, suite), more than one service (with breakfast, without, with dinner), and more than one active rate plan (flexible, nonrefundable, promotional). This variety serves to meet the different needs of customers.
This means that a facility offers not one, but several prices on the market.
The bar rate is used to understand, through a single indicator, how the facility is positioned in terms of pricing compared to its competitors.
Put even more simply, the bar rate helps you understand whether your facility is worth more or less than others in terms of price.
It also represents the benchmark rate from which all others are defined. Unlike bottom and starting rates, which remain fixed once established, the bar rate can change several times.
Bar rate example
Imagine running a B&B with breakfast only and with standard and premium rooms, sold with a flexible or nonrefundable rate. In this case, the bar rate is equivalent to the sale of the standard room with flexible rate.
From that you will set the price of the standard non-refundable room at 10% less, the flexible premium room at 20% more, and so on.
If you set a bottom rate of €50 and a starting rate of €75, these remain fixed. When at a specific time of the year you choose to raise the price by €20 over the starting rate, your bar rate becomes €95 from which all other rates will be derived (+€10, - 10%, etc.).
Rack rate: the maximum to aim for in your revenue management strategy
If the absolute minimum rate is the bottom rate, the maximum is the rack rate. The rack rate is the highest of all.
But why put a brake on growth? Why put a limit on the fee?
There can be many reasons, but mostly the purpose is to avoid encroaching on markets whose expectations are higher than the quality of service you can provide and which you therefore risk disappointing.
Last minute pricing: reduce unsold rooms
Long gone are the years when the last minute rate was more of a vacation style than a price, yet this rate still exerts a certain appeal and has its own devoted audience.
The last minute rate, when properly used, is a "reaction" rate and is whipped out when needed to reduce any unsold rooms due to an incorrect forecast.
Unfavorable weather, unexpected strike or cancelled event? Here's where the tariff that until a few days ago acted as a filter for substantial demand now becomes an obstacle for a demand greatly weakened by an unpredictable event.
The last minute tariff aims to reduce the damage in an emergency by stimulating that part of the demand that until recently we had deliberately kept out the door.
There is no fixed criterion for calculating the last minute rate, except the usual one: never go below the bottom rate.
All types of rates we have seen can be applied across the board within different market segments (leisure, business, MICE, individuals, groups...) or booking channels (direct or intermediated).
In this way we could have, for example, a bar rate dedicated to direct individual leisure and one to intermediate business, as well as a starting rate for MICE groups that might differ from that for leisure groups.
Does applying these rates as part of a revenue management strategy seem complex to you?
If you want to make it simple and profitable to manage the rates in your lodging facility, let Smartpricing do it for you!