Racking Down ADR
Higher Rack Rate Could Reduce ADR 

The general practice in the lodging industry these days is “pushing the rates.” That is justifiable when weRack does not increase ADR look at the increasing cost of operations, but the market principles of supply and demand are habitually ignored.  As a result all, revenue indexes of ADR, OCC and RevPAR are dropping in those hotels which follow this practice.  The fallacy of pushing the rates is causing hotels a substantial amount of revenue; increasing rates do not necessarily mean increases in ADR.

The assumption is that increasing rates automatically increases ADR. It does not. One should never “push” the rate; the term refers to increasing the rates above market demand and without analytical justification.  In this sense, pushing the rate is pushing luck and might result in a loss of revenue.

Our products are subject to the most fundamental principles of market economy and are designed primarily to respond to supply and demand. 

The number of guests as well as revenue lost due to increases in rates is measurable.  There is a maximum threshold at which further increases in room rates would result in an unjustifiable loss in occupancy and as a result, lost revenue.   How do we calculate or estimate the maximum and minimum thresholds for each season and segment?  STAR Report, as we have discussed in previous articles, is a good report, but it is incomplete. We need more data.

Let’s say our hotel has 200 rooms. The rate is $100 – rack sale ratio is 50%, and the occupancy rate is 75%. Increasing room rates by $5 increases the room revenue by a maximum of $165.  

Further increases in room rate could change the revenue, shown in the to following chart: Rack ADR Graph

In this arbitrary example, the hotel increases revenue by increasing the rack rate by as much as $15, but revenue drops as soon as the hotel passes that line. Revenue is reduced at $20 and takes significant dive at $30.00.  

The perishable inventory becomes unwanted, remains on the shelves, and becomes available for discounted rates, offers, coupons and opaque rates. You could sell a few rooms for higher rates but end up selling far too many for lower rates; the ADR drops.  

Adding analytical information to the STAR Report, from denial and regret reports to various rate resistance reports and internally produced rate distribution chart provides a more accurate picture of rate productivity.  

Most franchise systems create various versions of rate distribution reports, but some don’t. It is easy to create a rate distribution report, and it is necessary to have one. We cannot make much sense  of other reports without analyzing the correlation of each rate to occupancy rates and various other segments.   

Cross referencing the data in the following reports can help us in our analysis of rate behavior: 

1- Create a Rate Distribution Report even if your franchiser is producing one; pick two or three average weeks with no special events or market jolts. Print an  in-house report that includes room rates and count.
2- Weekly STAR for the same three weeks. The right STAR Report is the one that places the hotel in the middle of the Set. It is relatively useless if it is on the top or at the bottom of the Set most of the year.
3- OTA Reports, preferably Kayak and Room Key.
4- Denial/Regret Report.

 

Rate Distribution

The hotel in Table 1 has sold 3 free rooms, 28 Member Rewards and 11 packages during the period. The rest of the rooms are spread between these two minimum and maximum rates:

a14 table1

1-      Majority of rooms were sold at the rates ranging from $69 to $109.

2-      LNR rates are $59-64.

3-      There is a gap in the $69-79 segment

4-      Sharp drop between $79-89 and $99-109 segments.

5-      No standard rooms are sold above $109.00

6-      Only 34 suites are sold at $139.00

7-      11 packages in a 3-week period is actually a good number to increase ADR.  This can balance the lower rates and provide a more accurate ADR in a STAR Report.

The rack rate at this hotel was set around $109-129 for this period, but the hotel is not selling rooms at those rates.  The STAR Report shows very low OCC and ADR indexes and, consequently, a very low RevPAR Index. 

In addition to the Rate Distribution Report and the STAR Report, a glance on OTA sites also revealed that the hotel rates are far higher than market rates.  It is a good idea to create an OTA Report for hotels.  Kayak is one of the most reliable OTA sites; it gathers the online rates from multiple sources and highlights the lowest rate for each property.  The higher a hotel’s dependence on the transient segment, the more important this report is.

A frequently asked question is how many hotel reservations originate from OTAs? The answer is “only a few for most of the hotels”, but that is not the issue. The most prominent role of OTAs is their billboard effect.  Only a small percentage of visitors to franchise sites actually reserve rooms; far less make their reservations on OTAs.  People shop online first before booking rooms, and OTAs give them a reliable source of comparison across various brands. Most site visitors call a hotel directly or use the franchise website afterward. This billboard effect of OTAs literally sets the rate for the transient segment.  Hotels that fail to keep up with online shoppers lose a large percentage of this segment.  

Online shopping is about the rate within comparing brands; guest comments and rating play very little role, if any on guest choice. How often you get a reservation originated from TripAdvisor? How often from Expeida or Hotels.com?  Room rates on the OTA are the primary factor if not the only one.

a14 table2

Denial / Regret Report

Denial, Regret and Demand Query Reports are some of the most common reports produced by franchise systems. It is important to know what type of data is used and how these reports are constructed before analyzing them. Some include online visits to a hotel’s web site, while others don’t. Each PMS system tracks activities differently.

As an example, the rate resistance will be much higher if the report includes visits to a hotel’s web site. That is another form of testimony regarding the importance of online rates. A hotel would need to reevaluate its online rate strategy if it experiences much higher online resistance compared to other properties within the same brand and market.

In our example, the hotel has booked less than 35% of calls, including online visits to the hotel’s web site.

The Argument

Hotels can easily over price or under price themselves if these data elements are not used correctly.

Rule one; when the product price is raised above a certain level, it does not increase revenue. Rather simply blocks customers from choosing the product.  In the hotel industry, this results in the sale of products for $0.00

Overpricing rooms results in selling fewer of them. As a result, they remain vacant and are then sold for less or often remain unsold for the day. Consequently, the average rate for the day drops even though the room rate has increased.    

The hotel in Table 1 has sold 129 rooms for $89, but only 79 rooms for $99.  By increasing the rate, this property has made an additional $790, but has lost approximately 50 rooms at $89 for a total of $4,400 with a net loss of $3,500.

Not all of those 50 rooms would be sold at the lower rate, but most of them would, depending upon other factors.    

With 15% of the room inventory is priced at $109, this has created only 5% of the revenue. 

The blue rate distribution curve in Table 1 reveals that more than a fair share of the inventory is sold for the rate of $59. That is to be expected, because rooms were sitting on the shelves and the hotel opted to sell them at extremely discounted rates on LNRs and OTAs.

In this example, if hotel rates were not pushed to $99, they would have sold more rooms at the $89 level, and there would be no need to sell so many of them for $59.  The hotel didn’t make $10 extra on rooms; rather, it lost $30 on distressed rooms in addition to the loss of occupancy.


The fair share of $59 was around 100, but 183 rooms were sold at this price. The 83 extra rooms could have been sold for $89, or $30 more, if they hadn’t been listed for $99.00 

In this instance, the hotel lost another $2400, dropping ADR and consequently RevPAR the Indexes.

We have racked down the ADR by increasing rate!   The accurate tactic for this hotel would be a rack rate of $89.00 for most common rooms, and $5, $10 and possibly $15 higher for the next three next premiums rooms. This would book approximately 40 to 60 rooms at next three rate levels. 

Table 2 also shows that hotel rates are higher at My Hotel than other hotels in the area and/or COMP.

Brand recognition, loyalty programs and added values play a major role here, but only after the rates within same class. Loyalty programs defiantly come after that.  Loyalty programs matter only after guests have chosen their preferred room rates. They leave the OTA site, visit the brand site, and if the price is same or less, they use their rewards membership to get extra goodies! In another words, modern guests are smart. They check the rates on OTAs, find the rate they want, say $109, and then use the brand site and their loyalty program points to get further discounts via points.

The euphoria of being accepted in RFPs often is followed by the disappointment of getting no business because the other hotels – which were also accepted – offered lower rates

In order to manage rates and inventory, in addition to the STAR Report, we must check the OTA rates, and the split personality of the STAR Report and the Rate Distribution Chart. We can increase our RevPAR index by correctly analyzing these data and balancing our rates in accord with market demand. As in this case, we had to reduce rates in order to increase revenue. And it works.  

Supply and demand in addition to  market action and reaction are more than basic mathematics; each hotel behaves differently and reacts differently. Market behavior and demand can also be influenced. However the basic concepts and analytics are constant. 

Influencing market demand and tilting it to our advantage is a major part of our business. It is an exciting and pragmatic concept but comes only after gaining a full understating of the points discussed in this article.

Pushing rates is pushing luck. It is akin to shooting in the dark to see if we might hit something. It occasionally does work, but a sound business should not be based on luck.  Rate management is not guesswork; it is the result of intelligent analysis of numbers and market behavior on daily basis. It is following the market and ultimately leading the market. The purpose of each hotel is increasing RevPAR not rack rate; rack rate has nothing to do with RevPAR and for that matter, as we saw in this article, may negative effect it.  A glance in the daily Star Graph shows that RevPAR line is closely tied to the occupancy line for most of hotels.  The most important task of the rates is to increase occupancy, not RevPAR. Occupancy in turn, will increase RevPAR.

Nicholas Vasseghy
Nicholas@ManagersForum.org

© Copyright Hotel Managers Forum

Nicholas Vasseghy
Nicholas Vasseghy
Forum Contributor
nicholas@daryon.com
 



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