It is all about knowing your product, your opponent, and the terrain.
Improving revenue by using the method ‘rate fence’ is popular. It is used to yield in rate and build the base business over it, that is yielding quickly. It can generate stunning results; however, a slight miscalculation can lead to a business volume drop.
Rate fence is a technique used to charge different prices to different customers. It is determined on various factors such as better view, amenities, room type, and also availability for the next couple of months with a discounted rate. It influences certain categories of customers for booking guest rooms.
The rate fence can be ‘direct or ‘indirect’ and built on what they offer and to whom they offer it? The booking pattern suggests that the direct rate fence can effectively yield in rate whereas the indirect rate fence prices is centered on the base occupancy. To get best results both are to be used simultaneously.
The direct rate fence improves the average rate, which transforms into generating higher margins and better flow-through. It is based on the
Room type (a deluxe, superior, or pool villa, there can be multiple options)
View from room (Garden face, sea face, and east face/west face for the product such as water villas in the Maldives)
Space (another constraint that may generate a higher rate for bigger balcony space, or bigger size rooms, and suites)
Benefits (giving access to the executive lounge or clubhouse is the best way. Others can be value add-on in the room rate where the COS is low and for customers, it is a higher value benefit, example is spa treatment having low COS)
The customers take the benefit in ‘sale value’ whereas, for the hotel, it is centered on the minimal COS. It is based on the preference and choices of the customers. Clear communication in explaining the benefits to the customer's assists in this process and thereby the business unit benefits at a higher rate and mostly for a longer stretch.
Another option is the Indirect rate fence, which is to provide a finer rate based on certain criteria. It is a strategy to secure business to attain a base occupancy. The popular indirect rate fence is,
Rewards programs (in alliance with airlines or other businesses)
Student rates
Senior Citizen rate
Loyalty (the members get additional benefits each stay)
A business model can use direct or indirect rate fence structure to either give a push to the occupancy level or price of the room, once carefully implemented.
The primary task of the hotel manager will be - how to create the most profitable package to attract maximum customers.
Multiple ways of ‘rate fence’ apply. However, the ‘purpose’ is to be agreed upon first, as it affects the business model. Rate-fence is used to successfully target the most sought over business. It also ‘avoids’ certain categories of business that are needed if the yielding rate is a necessity. taking an example of the rates offered by hotels during the festive season. The condition or inclusions attached to packages with the intention to take out a ‘certain category’ or let’s say, the conditions/inclusions will make it difficult for the certain category to book the room. It will instead prompt another category of customers to book it.
It is a smart technique to go for what we need at a certain point in time. My favorite package is implementing ‘length of stay period’ which not only pushes the volume but at the same time reduces the variable cost impact. The issue with a shorter span of stay time is that the guest room supplies need frequent replacement. Also, with different check-in and check-out timing guest, compels the hotel manager uses more room inventory than the occupancy level. This situation worsens if the hotel operates in multiple room categories.
Summarising common issue in a few lines.
Let’s take an example of a hotel with 100 rooms. The hotel has four different categories. The ‘entry-level’ rooms are only 40 which means many times the hotel will have an issue providing same room category if the check-out and check-in time of the guest does not match. This is a regular feature. The Hotel manager ends up upgrading the guest because staff limitation is one factor for such delays. There are multidimensional issues to be sorted out. This time, the rate-fancing helps to clear many operational issues along with uplift in the revenue.
The ‘rate fencing’ offers as an example ‘extra bed free‘ that will influence family business. Whereas a half day rate for the hotels close to railway station or airport influence business travelers. It can be a layover business from airlines. In such circumstances, a room can be sold twice with slightly over variable cost. All these improves overall margins.
Another way is the ‘early booking deal’, which is slightly cheaper but gives a base occupancy for a ‘targeted period’, and then once they achieve base occupancy, the revenue manager yields, generating high margins.
It’s managing the room inventory and yielding the best rate.
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