How do hotels calculate their prices?

Written by Paul Jun 25 2014

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Ever wondered how hotels work out their prices? Why no two websites seem to display the same prices, for the same room, in the same hotel? Well so do many of our customers. About 25% of the enquiries we receive require some form of accommodation, ranging from 3 bedrooms for a small meeting to 300+ for large conferences. This often requires hotels to involve their revenue managers, the people in charge of calculating how much each room should be charged at to achieve their revenue targets.

What we must consider when assessing hotels prices is that their business is transient and therefore last night rooms cannot be sold tonight! Also unlike in manufacturing or retail hotels cannot simply create more stock to meet demand in the short term.

Here are the main calculations revenue managers focus on, for our example we will look at a hotel with 500 rooms over a 1-day period

Occupancy: Calculates the percentage of rooms used, if our hotel had 450 in use the occupancy level would be: 450/500*100 = 90%

ADR (Average Daily Rate): Shows the average revenue received per occupied room in a given period. So if our hotel made £112,500 in the day discussed then we would calculate: 112,500/450 = £250

RevPAR (Revenue Per Available Room): The most crucial of all as unlike ADR this looks at all rooms rather than just those occupied. Calculation is ADR/total number of rooms: 112,500/500 = £225

The RevPAR a hotel or chain achieves is rarely a secret, all will report them in quarterly and yearly financial results and they are easily available through major chain websites as they are used to attract investors and franchisees.

The key metrics for a hotel to figure out prices are last years figures and the RevPAR of local hotels. Revenue managers will compare like for like periods to determine the various rates offered on each night for each different room standard. Their job causes them to walk a fine line between filling room and achieving the best rates. For instance a revenue manager would rather fill 300 rooms at £200 a night than fill 400 rooms at £140 a night.

To add to the complications managers must also price for a variety of ‘special rates’ including loyalty card holders, government rates, associations, military, corporate rates, rates of OTA’s (Expedia et al), walk-in rates etc and then there are those with free cancellation or with breakfast included.

Written by Paul Moynihan, Director of wefindvenues.com. If you require a venue anywhere in the UK for an event then submit a free enquiry to venues in that area saving yourself time and money.