The Role of Rate Fences in Hotel Revenue Management

As we’ve explained in previous articles, customer segmentation and the implementation of targeted price strategies for each segment are cornerstones of a good revenue management strategy. In this article, we will focus on how price differentiation can be successfully implemented using rate fences.

To successfully differentiate pricing by customer segment, each price difference must be explainable and justifiable. Potential guests need to feel that they are buying different products when they pay different prices. Rate feces in hotel revenue management are the elements that create this product differentiation. Rate fences are characteristics, conditions or rules that apply to a rate. They are generally used to prevent customers who are willing to pay a higher amount, to have access to a discount.

The secret is to design and offer products that combine the hotel room with fences. These products must meet the needs of each segment and must be priced appropriately. For example, if business travelers are not so sensitive to price, value flexibility of cancellation and like to have breakfast included in the price, a hotel could offer a free-cancelation breakfast included plan to attract them. For a holiday segment that is very price sensitive, the hotel may offer a non-refundable no-meals included plan at a lower rate. These are two products targeting different segments where the price difference is defendable and justifiable.

The most common types of fences are the following:

  1. Physical fences: Physical fences are features such as the location of the room, the view, furniture, amenities, size, etc. For example, a resort hotel can offer an ocean view room priced higer than a garden view room. The ocean view is without a doubt a physical fence. Some segments will be willing and able to pay more for such rooms, while other segments will prefer to forgo that view in return for a lower price.
  2. Fences related to the characteristics of the transaction: These fences involve time, place, quantity of purchase and flexibility of use. An example of the application can be non-refundable rates. It is very likely that non-refundable rates will not be attractive to a business customer. On the contrary, a more price-sensitive holiday traveler might prefer a non-refundable product over a refundable higher priced option.
  3. Fences related to the characteristics of the buyer: These fences are related to attributes such as age, affiliation to an institution or group and frequency or volume of consumption. An example of these “fences” would be the specific products for a membership a frequent flyer program.
  4. Controlled availability fences: In this case, availability and price points are assigned based on geographical criteria or distribution channels. For example, charging different prices according to the customer´s residence. In some beach destinations, the Canadian market price is lower than the US market price. These fences are less effective because today it is very easy to find what other customers are paying. It´s not easily justifiable and hard to accept for customers that they must pay more because they live in a different country.

Applying fences on the right way can make your business more successful and give you a competitive edge.

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