Monday, May 22, 2017

What is and why do hotels have a rack rate?

Sometimes, with all these 'entitlement' discounts, I wonder myself . . .

First of all, rack rate is not - at least not in the US - set by law. If some hotel clerk told you that, he or she either didn't like you, or just didn't want to give you any kind of discount. Every hotel sets its own rates - and its own exceptions to and discounts from those rates.

(Some localities require the hotel to post their rates, like on the inside of the door to your room, usually a scheme to thwart price gouging, or fraud by clerks. Where there is such a requirement, you'll see an astronomically high rate posted, in anticipation of the expected rate for the most high-demand special event in the area . . .)

Rack rate is the asking price for a room, the set price from which nearly all discounts are calculated.

How much? Well, certainly I want to cover my costs, make a profit, etc. - but it is strictly market driven. (Consider Hampton Inns, or Courtyard by Marriott. A room at a Hampton Inn, or a Courtyard, is going to come pretty much one way. But a king room at a Hampton Inn in one city can be priced very differently from a similar king room at a Hampton Inn in another, depending upon the local market. The same goes for Courtyard, and any chain that emphasizes product consistency and uniformity.) I'm going to set it at an amount comparable hotels are asking for comparable rooms. Set it lower, and I'm charging less than the guest might be willing to pay; set it higher, and unless my property has amenities and features for which the guest considers worth paying a little more, I'm going to lose business to the competing hotels.

And now, the discounts . . . You can pretty much figure that everyone who walks in the door has some rationale why he or she should receive a 10% discount from the rack rate.
  • A core part of the very reason AAA and AARP exist is to leverage discounts from hotels, so AAA and AARP members get a 10% discount. If you didn't get 10% for AAA, Honda Motor Club would do for emergency roadside assistance, and AAA wouldn't be able to sell memberships.
  • There's even a 'senior citizens' rate of 10%, for old folks who are too cheap to sign up for AARP and pay the $12-16 per year dues.
  • In many places, there's a 'corporate' rate of 10% to be had for the asking if you qualify. If you have a job, you qualify.
  • In many places, there's a 'government' rate of 10% to be had for the asking if you qualify. If you work for federal, state and local government - or if you have no job and get a Social Security or welfare check from the government - you qualify.
  • As you can guess, I lack enthusiasm for entitlement rates. If you give the discount for AAA and AARP, for example, you get no added loyalty from AAA or AARP members, and you get no extra business: they just take it as their due, it gets the hotel nothing in return that it wouldn't have had anyway. So, unless I have a franchise organization requirement that says otherwise (Best Western and Choice Hotels require a 10% discount for AAA and AARP from what they call their 'Best Available Rate'), that discount is not going to be 10%: I'll try to get away with 6-7%, only enough to keep the customer from storming away in a huff and and driving on to another hotel. (Most of the time, nobody does the math - and I want to keep it that way, which is why my $100 per night rooms are never priced at exactly $100.00. As to why the extra 3-4% means so much to me, we'll get to that.) The same goes for senior citizen, corporate, and government rates.
So, as to entitlement discounts . . . did I miss anyone? Okay, everybody gets their ten percent discount (more or less). Moving right along . . .

Rack rate, as you can also guess, is a rate for customers that I'm not willing to give up too much, or go too far out of my way, to gain or to keep. In most hotels, it's a sucker rate: someone paid rack because they didn't know to ask for some kind of discount. If I'm setting the rates, for example, 'guests without baggage', local people - people from the area who just want a room for an hour or two to consummate a hot date - pay rack. (I don't ask questions about what they want to do in there, but if their drivers' license address shows that they live in the same town as my hotel, I won't even give them AAA . . . As long as I'm pretty sure they'll do their thing quietly, not trash the room, not do anything destructive or illegal, not invite a bunch of people over and throw a party, pay the bill and leave quietly; I won't turn them away, but I'm not running a no-tell motel or a sex farm, and I don't go out of my way to encourage that particular use of what I do have to offer.)

Apparently, I'm not the only one who feels that way about entitlement discounts: other 'industry professionals' who are not uncomfortable with more sleazy marketing gimmicks than I use or encourage my people to use, have had it with them, too: they just don't want to antagonize the American Automobile Association or the American Association of Retired Persons by just coming out and saying so directly and honestly.

So, the term 'rack rate' is falling into disuse and disappearing.

Most chain hotels in the U.S. are using a new term for it, 'Best Available Rate'. The idea in devising the new buzzword for what has always been known as 'rack rate' was to discourage people demanding entitlement rates, to either convince or con people who want to engage the desk clerk in a haggle over their rate every time they check in ('Do you give AAA?' 'Do you do government rates?' 'Do you have a truckers rate?' Or, asked if they intend to pay cash or use a credit card, 'Which is cheaper?') that they are getting the best rate available to them.

Frequently, they aren't. Holiday Inn and other InterContinental brands use the term 'Best Flexible Rate'. Marriott uses the term 'Regular Rate'. These expressions, however, defeat the purpose of the switch: each implies that a lower rate can be had. For some years now, Choice Hotels has used the term 'Best Available Rate': now, they seem to be transitioning to the term 'Everyday Rate'. And even Best Western, which still uses the term 'Best Available Rate', still require their member hotels/franchisees to offer a 10% discount to AAA and AARP. 

So, quite often, 'Best Available Rate' isn't the best available rate after all: the term is a misnomer bordering on misrepresentation. Think of the 'Best Available Rate' as the 'Best Rate You're Going To Get Out Of Me Unless I Can Think Of A Really Good Reason To Give You A Better One' rate. My personal feeling is, if you want to get away from entitlement discounts, do it already and be upfront and candid about what you are doing. But any large hotel company who does that can count on losing the business of AAA and AARP loyalists, who insist on demanding those rates, to competing hotels - which in turn may just decide to hang on to the entitlement rates and keep the AAA and AARP loyalists, a significant travel market segment. Hyatt tried it for awhile about ten years ago, then backed off. So, the smaller hotel companies feel like they have to go along in order to compete with the larger ones.

The purpose of a discount is to arrive at a rate that is mutually beneficial to both the hotel and the guest. I'm going to rent as many of my rooms as I can at some price that will cover my costs and give me a profit. The guest wants something that works for her, that she can afford, and she wants some assurance that her presence, and the presence of other guests like her, is special and appreciated. I'm also going to 'shape' my clientele, try for a market position that is compatible with the ambience that I want to generate for my hotel. So, any discounts I offer will reflect this.
  • If you, or your group or organization, is good for a lot of room-nights (whether you're a large group that'll take thirty rooms in one night, or one or two guys who'll be back to each rent a room seven or eight nights out of a month, on a regular basis), I'll offer a discount, often a pretty deep one in return for that much assured business. (As noted, everyone gets ten percent anyway, which is why, if I have entitlement rates, I want to keep the discount at less than 10%. The less the discount to which everyone is entitled, the less I have to discount my contract rates in order to get the business.). This is especially true if we contract the rate and room availability, and I can count on your people to use my hotel regularly if not exclusively. You'll get that discount in the form of a negotiated, contract rate.
  • (We want as many of these as we can get, and still cover our costs, as long as it gets us steady business that we can manage well and guests that we can keep happy. The fewer rooms we have available for transient guests, the higher we can justify tapping up our rack rate - and the higher discounted, entitlement, and contract rates we can ask of future group and corporate customers accordingly. Rack rate is a rising tide that lifts all boats. It also works that way in reverse - an occupancy problem, lots of empty rooms available most any night, will lead us to consider lowering our rack. Once we do that, our corporate customers won't feel we're giving them as much of a discount as we should be, and they'll leverage that: we'll either have to negotiate an even lower contract rate with them at some point, or lose the business to another hotel.)
  • I'm not against entitlement rates, I just feel they should benefit the hotel in some way in return. So, I might offer a rate for firefighters and emergency service workers. None of my competitors do, so guess where any firefighters and EMTs who know of my offer are going to stay? (Of course, if every hotel offered a rate for firefighters and EMT's, such a rate would be worthless to me.They could get it at any hotel, so it wouldn't necessarily benefit me at all. It would be just another entitlement rate.)
  • I've found cross-promotions with non-profit organizations rewarding. If part of your room charge benefits the local Habitat for Humanity, I can usually count on the local Habitat to steer any of their visitors from out of town to my hotel. And of course, we'll be mentioned in their newsletter to all of their supporters.
  • If I have a big meeting or conference space, or ballroom to rent, I'll let that go pretty cheaply if I believe that most of the attendees are going to rent a room. Or, I'll offer a block of rooms pretty cheaply if I'm getting a really good price on the use of the facilities for the event.
  • If having you there benefits the hotel in some way, oh, by golly, we can work out something. As a younger manager, two of my best marketing successes occurred in a hotel where;
  • I rented a block of rooms at a discount to a construction company that included, among its services, snow plowing. During the blizzard of 96, they sent a bunch of guys, with their plow trucks, to rent a bunch of my rooms and wait for the big snow. It turned out the snow was heavier than expected, and the guy we had contracted to plow our parking lot was running behind, it was getting pretty deep and we thought we might be in trouble - but when he finally did arrive, plowing our parking lot was for the most part handled already. Our guests with that construction company had to get their plow trucks out somehow . . . and,
  • I took over as general manager of an economy-tier property that had security problems, mostly a function of the previous management renting rooms to locals cheaply and turning a blind eye to signs of drugs, prostitution, and other behavior that scares off good guests. One of my first new group accounts was the regional police academy, some cadets, mostly instructors. The location was convenient (only a half-mile away), it was a pretty easy account to get, and I didn't have to give them much of a cut rate, once I agreed to their request that we stop renting rooms at short-stay rates in the daytime, something I intended to cut out anyway because it was causing more problems than it was worth. (Here's the big reason why. Besides, it's pretty shameful when your security is so bad the cops are afraid to stay there . . . ) Thereafter, when people showed up, they'd notice a lot of late model, beat up Crown Vics in the parking lot, making the property look very safe . . . like, for some of the people that showed up, a good place to get busted. We actually lost business for a month or two, but no one was complaining but the owners; and after the numbers of incidents and guest complaint numbers stayed down even as business picked back up, even they started warming up to it . . .
  • The US Government has a limit on the amount of money it will reimburse a federal employee traveling on government business. These vary from city to city, and are published annually by the GSA, So, if I want to capture government employee business, I'll cap my rates for government employees traveling on business at the federal per diem rate (this year, $89 per night in most markets, more if the GSA determines that a room in a decent hotel will probably cost more). States and larger cities either follow the federal GSA per-diems, or set up their own, similar scheme.
  • During special events, the law of supply and demand is going to do its power and magic, and the rack rate itself - and any discount linked to it - is going to be higher. If we expect things to be slower during a particular period of time, we'll lower it a bit. (How do hotels change prices as time approaches the booking date? )
  • And then there's the OTA, the online travel agency. Expedia, Travelocity, We have to use them, since they're the first places a lot of people look for a room nowadays, but their fees are high, and they're just as likely to send a guest to your competitor as they are to send it to you (especially if your competition doesn't manage his rates well). Careful planning and rate management on our part (see previous paragraph) should work to keep us from having to dump a bunch of empty rooms on the market at a deep, deep discount and so allow them to make good on their promise to you to sell our $100 per night room for $19.95 . . .
So, you're right, the actual charge is more often than not, less than the rack rate. Indeed, if most of a hotel's room charges on a night audit report every night are either rack, or the recognizable ten-percent-off-rack, figure, then something's wrong with their sales and marketing, For a given type of room, an aggressively marketed hotel will have rates all over the place, depending upon who's occupying it.

Ultimately, the more rooms I rent at rack, the lower my rack rate is going to be.

Originally appeared on Quora

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