UNIT-1 TARIFF STRUCTURE

Content
1.1 Tariff Card
1.2 Basis of Charging Rooms
1.3 Factors Affecting Room Tariff
1.4 Basis of Pricing a Room
1.5 Different types of Room rate/ Tariff
1.1 TARIFF CARD

Room rates of hotels are technically known as tariff. The combination of all the rates
offered at a hotel is called “Rate Structure”. It is statutory on the part of the hotel to
display its tariff to the guests.
There are 2 ways to display a tariff structure:
 Through Tariff Board
A tariff board on the other hand is used in small sized hotels. The board is placed
behind the Reception Counter where it will be visible all the guests.
 Through Tariff Card
A tariff card is used in large and medium sized hotels. These are available at the
reception desk and also in each and every guest room.

Following information can be obtained through a Tariff Card:

 Room Rates against each plan (Rack rate)
 Government Taxes as applicable, e.g. CGST & SGST
 Other charges levied by the management of the hotel, e.g. Service Charge.
 Basis of charging Room Rates.
 Brief description of the facilities available in the hotel.

FORMAT OF
A TARIFF
CARD

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1.2 BASIS OF CHARGING ROOMS

− ‘Fixed check out time’ basis

In this system a particular time of the day is fixed as check in/out time. It may be either
10.00 hrs or 12 noon. Mostly the commercial/ business hotels follow 1200 hours check
in/out time. It is the most commonly followed basis of charging as it gives them a
control of their check-in and check-out time and thereby enabling them to accept
advance bookings for their rooms. It creates an advantage to our hotels as it earns
more revenue for the hotel & the same room may be sold twice a day. It has a major
disadvantage of losing its goodwill as the customers are not satisfied with the billing.

For example; if a guest checks in at 09.00 hrs of 17th November and checks out at
1700 hrs of 18th November and the check-out time is 12 Noon, then he will be charged
for 3 days.

− ‘24 Hours’ Basis

In this system the guest is charged according to the time of arrival that means that one
day is calculated from the time he arrives in hotel till the same time next day. As per
this system, the guest is entitled to keep his room for a period of 24 hours from the
point of the guest’s check-in, for a day’s charge. This is advantageous to the guest but
earns less revenue to the hotel. In twenty four hours basis hotels find it difficult to take
advance bookings as they don’t know what time of the day their rooms will be available
for the next guest. Ws used by resorts in the past, but hotels do not use this basis now-
a-days.

For example; let us consider same example as given above through this system he will
be charged only for 2 days.

− ‘Night spent’ basis/ ‘Per night’ basis/ ‘Night’ basis

In this system guest is charged according to the number of nights he spent in the hotel
irrespective of the time of arrival and departure. In order to calculate night basis
charges the guest should have stayed for a minimum period of nights. This system is
now outdated and not very popular.  Some motels do use this basis.

For example; suppose a guest checks in 10.00 hrs on 17th November and checks out at
14.00 hrs on 25th Nov. then he will be charged for 8 nights.

− ‘Day’ Basis/ ‘Day use’ basis

It is another form evolved from night basis and room rent in charged for maximum 6
hours including in the stay which is never overnight. The hotels may offer max 50 %
discount on the rack rate. Mostly adopted by commercial/ transit hotels.

For example; suppose a guest checks in 11.00 hrs on 17th April and checks out at
17.00 hrs on the same day. then he will be charged for a “Day Rate”.

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1.3 FACTORS AFFECTING ROOM TARIFF

1. Meal plans: The room rate depends on the kind of meal plans which is included
with it.

2. Competition: The room rates must be competitive (at the same time it should be
able to produce adequate revenue to meet fixed obligation) with other hotels of
the same standard and providing almost similar services and facilities and
situated in the same vicinity of the city.

3. Customer’s profile: The room rate depends on the category of customers

coming to the hotel. Also, very important categories like, their social status and
financial status & paying capacity, should be kept in mind.

4. Standards of services: Standards of services provided by the hotel are also

important while fixing room tariff. The USP of the hotel should be kept in mind
while deciding the room tariff. When the hotel offers more the amenities, the
standard of the room will be higher, and so will be the room rate.

5. Various amenities: The room rate depends on the various amenities provided
by a hotel. For example, various amenities the hotel is going to provide to the
guests such as air conditioning in all the rooms, carpeting, provision of
swimming pool, availability of conference & banquet halls, lawns, parking spaces,
specialty cuisine offered, exquisite cutlery and crockery, modern equipments and
machinery used in the hotel.

6. Locality of the hotel: the locality in which the hotel is situated gains prominence
while fixing room rates. If the hotel is situated in a posh locality where all the
shopping malls and other facilities, approaches to airports are worthy, the room
rate would be comparably higher than those situated in backward and far-off
localities.

7. Room location in the hotel: The location of the room also matters a lot. Front
rooms and rooms opening to better views would cost more than dark rooms,
corner rooms or rooms not having a good view.

8. Publicity & promotion: The amount of publicity done by a hotel and special
budgets prescribed for hotel publicity also matters in deciding the room rates.
This type of expense has to be adjusted somehow as it has no source of return,
but is a must in popularizing the various services of a hotel.

9. Value of real estate: Surroundings need also a deal of consideration because the
hotel proprietor spends lot of money on décor and furnishing and thus needs a
fair return on his investment.

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1.4 BASIS OF PRICING A ROOM

Establishing rack rates for room types and determining discount categories and special
rates are major management decisions. To establish room rates that will ensure the
hotel’s profitability management should carefully consider such factor as operating
costs, inflationary factors, and competition.

Hotel room rate fixation is a difficult task. They are both qualitative and quantitative.
The quantitative aspect is that they can be measured and structured to meet certain
criteria. The qualitative aspect is that large amount of discretion are allowed in which
rates are implemented.

Room rates often serve as a market positioning statement since they directly reflect
service expectations to the hotel’s target market. Room rate positioning can be critical
to a hotel’s success. For example, a property offering economy facility and limited guest
services will most likely not be successful if its rates are positioned in the mid-price or
upscale levels.

A hotel fixes the room tariff on the following two bases:

I. MARKET BASED:
Market based pricing is setting a price based on the value of the product in the
perception of the customer. The hotel management looks at comparable hotels the
geographical market and sees what they are charging for a similar product. The
thought behind this approach is that hotels can charge only what the market will
accept.

Some common methods of market based pricing are:

 As per Competition: in this approach market looks at comparable hotels in the
geographical market and sees what they are charging for the same product.
 Market tolerance: checking competing hotels’ best available rates for a room, by
calling up the competitive hotel. These hotels must never share who they are
when they make the call.
 Rate cutting: lowering of rates to increase occupancy levels, especially during off
season.
 Inclusive and non-inclusive rate: charging rates on the basis of meals provided.
 Guest requirement: varying room tariff as per guest requirement.
 Prestige pricing: product and prices are fixed much higher than other hotels, it
works on the mentality that if it is expensive it must be good.

II. COST BASED:

Cost based pricing is a room rent determination technique that covers the basic cost of
operations at a given level of service, plus the pre- determined % of return on
investment.

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a) Rule of thumb approach:
This is also known as cost rate formula or 1:1000 ratios. This is the oldest method of
determining the room rent of any hotel. According to this approach, the room rent
should be fixed at the rate of $ 1 for each $ 1000 spent on the construction and
furnishing of the room (cost per room or room cost), assuming that the average
occupancy is 70% for the year.
For example, assume that the average construction cost of a hotel room is $80, 000.
Using the above approach will result in an average selling price of $80 per room.
Singles, doubles, suites, and other room types would be priced differently, but the
minimum average room rate would be $80.

Demerits:
The emphasis placed on the hotel’s construction cost fails to consider the effects of
inflation.
For example, a well-maintained hotel worth $100,000 per room today may have been
constructed at $20,000 per room 40 years ago. The $1 per $1,000 approach would
suggest an average selling price of $20 per room; however, much higher rate would
appear to be appropriate. The suggested rate of $20 per room does not take into
account inflation and increased costs of labor, furnishings, and supplies.

b) The Hubbart formula :

The Hubbart formula offered a standardized approach that structures the decision
making involved in assigning the room rate. The Hubbart formula proceeds from the
needs of the enterprise and not from the needs of the guest. According to the formula,
the room rate should pay all the expenses and leave something for the investors. It
was developed in the mid-1950 by the national hotel accounting firms of Horwath &
Horwath and Harris, Kerr, Forster & Company.

It was named in the honor of Mr. Roy Hubbart, who was a Chicago hotelier who
chaired a committee in the American Hotel & Motel Association. He was a major
advocate of using this formula to calculate room pricing. The Hubbart formula
resolved all the problems associated with the rule of thumb approach. The Hubbart
formula is also known as the “Bottoms-Up approach”.

To determine the average selling price per room, the approach considers operating
cost, desired profit and expected number of the rooms sold.

The Hubbart Formula is used to determine what a hotel’s Average Daily Rate (A.D.R)/
Average Room Rate (A.R.R) should be to reach the hotel owner’s financial goals.

A.D.R/ A.R.R = Estimated rooms department revenue

Estimated number of rooms to be sold

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1.5 DIFFERENT TYPES OF ROOM RATES/ TARIFF

A hotel generally designates a standard rate for each category of rooms offered to the
guests. Room rate categories generally correspond to the different types of rooms.
Differences in the room rates are based on criteria such as room size, location, view,
furnishings, and amenities. Each room rate category is assigned a rack rate based on
the number of persons occupying the room. Apart from standard rates, hotels also offer
discounted rates to attract additional business from multiple market segments. Special
rates are often quoted to groups and certain guests for promotional purposes during
low occupancy period.

1. Rack Rate
This is the room rate which is published on the room tariff card or its brochures for a
particular room category or type. It is the standard rate of a particular room before any
discount. This term is used in the Hotel industry to describe the highest price that a
guest would have to pay at a hotel if he or she deals directly with the hotel when
booking a room, instead of booking a room with a travel agent or any online travel
agencies. Front office employees are expected to sell rooms at the rack rate unless a
guest qualifies for an alternate room rate.

2. Corporate Rate
This is designed to promote the corporate market segment. Typically, the discounts are
ad-hock. The corporate rate is widely accepted as the transient target rate for most
hotels. These rates are offered to existing business guests and frequent guests.

3. Corporate Volume Guaranteed Rate / Volume Account Rates

Also called preferred rates, the CVGR/VAR trades a further discount off of the
corporate rate in exchange for a guaranteed number of room nights within a specific
time frame. Organizations who know that they have a certain level of transient volume
that they can bring to a certain hotel can negotiate for this volume discount. The level
of this discount is contingent upon the volume. A record of the Room Night
Contribution (R.N.C.) of individual companies is maintained to ensure that the R.N.C.
levels are maintained. Whatever criteria are used, these volume accounts are usually
assigned a grade based on contribution. For example:
— “A” Accounts are entitled to a 20 percent discount off corporate rate.
— “B” Accounts are entitled to a 15 percent discount off corporate rate.
— “C” Accounts are entitled to a 10 percent discount off corporate rate.

4. Season rate
Resorts and other location types that see a fluctuation (high, low & shoulder season) in
demand due to weather or the operation of a nearby attraction will vary their rates
accordingly. Offering a different rate for in season and out-of-season (also called off-
season) allows the hotel to alter their rate structure to compensate for this cyclical
demand.

5. Government Rate
When government officials travel for official work, they are given a travel allowance by
the government. This reimbursable rate is called a per diem. A per diem for
governmental employees usually covers hotel, meals, and other out-of-pocket

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expenses. These per diems are set a year in advance and published so that all
interested hotels can offer it. A hotel interested in catering to this segment may quote
room rates that match their per diems. Those traveling on government business are
usually asked for identification upon check-in before being granted the government
rate.

6. Advance Purchase rate

A relatively new trend in hotel rate structures, an advance purchase rate offers a
greater discount based on the number of days in advance it is booked. The individual
booking cycle is the time between when an individual reservation is made and when
that reservation is due to arrive. How far in advance a hotel sets its advance purchase
rates depends largely on its booking cycle. The booking cycle can be anywhere from a
few days to a few months. A 7, 10, or 21-day advance purchase rate will have a
corresponding lower price. i.e., a hotel may offer more discount for a room that is
booked two months in advance as compared to a room that is booked that is booked
fifteen days in advance. The advance purchase rate concept was borrowed from the
airline industry. Similarly, they are often nonrefundable and can carry a penalty for any
change.

7. Weekend and Weekday Rates

Hotels of all location types see fluctuation in
demand during certain days of the week. The
hotel industry looks at the days of the week
slightly differently than the public might. The
determination of what days is considered
weekday and which are considered weekend
is based on the next morning of occupancy.
Guests who stay at a hotel on a Friday or
Saturday night are staying on a weekend night
because the next morning is a non workday.
Those staying Sunday through Thursday are
considered weekday occupants because the
next morning is a traditional workday.
Traditionally, hotel location types see their weekday and weekend demand levels as
illustrated in the Figure. These figures will vary based on market factors, but
traditionally the hotel location types will see their demand fluctuate with the days of
the week. Resort hotels (in season) will see demand grow on weekends and drop
during the week. Airport hotels traditionally have higher demand when business travel
increases during midweek, and lower on weekends when most travelers are home.
Downtown hotels have a strong weekday demand cycle that corresponds to meetings
and conventions. Suburban hotels will see steady mid-week demand and a drop off on
weekends. A spike can occur on Saturdays if suburban hotels have strong demand from
the social market.

8. Day/ Half Day rate

Some hotels offer certain guest rooms as an alternative meeting room. These rooms are
often utilized for just a few hours (maximum 6 hours) to conduct interviews and small
conferences. Because the room is not used for the entire night, a half-day rate may be
assigned based on half the value of the rack rate. Half-day rates are also commonly

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offered at airport hotels in major gateway cities. Travelers arriving in from a long flight
may come at all hours of the day. They may require a room for a few hours’ sleep and a
quick shower to freshen up. A half-day rate may be imposed in these cases as well.

9. Group rate
Group rates are typically lower than transient rates because they are booked in
advance and are contractually obligated. The group rate depends upon the number of
rooms taken by them and the frequency of their visits. A group under standard
stipulation comprises of 15 guests or more. Based on the discretion of the
Management, the group leader may be given a complimentary room for a minimum of
15 paying customers.

10.Tour operator rate

These are heavily discounted rates that are given to wholesalers who operate series of
tours for groups arriving and departing together. The tour operator guarantees the
hotel that it would provide a particular series of business every month for a period of
one year. In return, the hotel offers a heavy discount to the operator and allocates or
‘blocks’ rooms for the series for the entire year.

11.Travel agent rate

Travel agents sell travel products like hotel rooms, airline bookings, etc. on a
commission basis to the end users (guests). Travel agents provide substantial volume
of business to hotels; hence hotels offer them special discounts and commissions.

12.Airline crew rate

Airlines offer certain volume of business throughout the year on a consistent basis.
Such airlines enter into a contract with hotels in different cities where its flights
commute, wherein staffs of the airline (crew) are given a very special rate for a fixed
period.

13.Educational rate
These are the special rates offered by hotels to students and educationists who have a
limited travel budget. They are a significant source of business because of their large
numbers and frequency of visits. They provide a large chunk of repeat business to
hotels.

14.Walk in rate
This type of rate designation may vary from night to night. It is set each night by the
front office or room’s manager based on the remaining unoccupied rooms in the hotel.
A walk-in is a hotel guest who arrives without a reservation. These guests can help fill
any remaining hotel rooms. With few remaining rooms, the walk-in rate may be set
fairly high to maximize room revenue. An empty hotel may reduce the walk-in rate
significantly.

15.Industry rate
Those who work in the travel industry (travel agents, employees from other hotels,
meeting planners, etc.) are often extended the professional courtesy of discounted
rates. Industry rates can vary from 30 to 50 percent off rack rate, depending on the

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location and seasonality factors. The one restriction most hotels impose is a valid form
of industry identification. The International Association of Travel Agents (IATA) is a
recognized industry group that issues a number for all legitimate travel agencies and
their employees. A business card or paycheck stub may suffice as well. This industry
rate should not be confused with what is referred to as an ‘employee rate.’

16.Employee rate
Many chains offer their employees a discounted rate at affiliated hotels when they
travel. They see this as an effective way to promote awareness of sister hotels and to
instill a form of loyalty on the employee. These rates vary greatly, but can be as much
as 75 percent off rack rate.

17.Introductory rate
This is offered by a hotel on the opening of a new property in town. The introductory
rate is generally offered till the hotel is established, or it may be revoked at the wish of
the management.

18.Incentive Rate
The rate offered to guests in affiliated organizations like travel agencies and airlines
because of potential referral business. The rate may also be offered to promote future
business; it is often extended to meeting planners, tour operators, and others capable
of providing hotel with additional room sales.

19.Family Rate
A rate reserved for families with children. Usually these rates include Extra Bed
charges and may also include some free add-on activities for children.

20.Membership rates
Organizations such as the Hotel and Restaurant Approval and Classification Committee
(HRACC) and Federation of Hotel and Restaurant Association of India (FHRAI) have a
large constituency of members who enjoy travel. As a gesture of goodwill for members
of the same fraternity, the association issues membership cards to them which entitle
them to special discounts.
Benefits given to FHRAI members include:
(1) A special discount rate of 30% on accommodation, food & soft beverage, and 15%
on liquor applicable on all modes of payment.
(2) A special discount rate of 50% on accommodation, food & soft beverage, and 15%
on liquor applicable on all modes of payment. (This is offered only to some specific
top level members.)

21.Crib rate
This is a special rate applicable in some hotels for children above five years and below
twelve years of age.

22.Bar rate/ best available rate

These rate codes are the lowest discounted rate available for a day which can be
offered to the guest by the reservation or front desk staff.

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 23.Per person rates
A single occupancy room has only one occupant. A single occupancy rate assumes the
same. Rooms that are occupied by more than one guest are called double occupancy
(two guests), triple occupancy (three guests), and quad occupancy (four guests). It is
rare for a standard room to house more than four people.
Based on the number of people, hotels may charge a preset amount for each additional
occupant. Similar in design to the premium rates, per person rates can be variable or
fixed. Sometimes called the rate spread, the difference between the single and double
occupancy rates can range anywhere from 10 to 25 percent. This additional cost is due
to the fact that hotel rooms suffer a greater “wear and tear” with more occupants. Hotel
rooms that house many people will, over time, require more maintenance and a greater
frequency of renovations. There are a few hotels that do not charge per person rates
because they value the outlet and ancillary revenue that additional occupants will
surely generate.

24.Complimentary rate
When a hotel does not charge the room rent from a guest, it is known as
complimentary rate. Also called comp rate. The hotel may offer comp rooms to tour/
group leader, tour operators, travel agencies, local dignitaries etc.

25.House use rate

A room rate with zero room charge which is used for rooms stays for hotel purpose.
E.g.: manager or duty room, in house general / resident manager room etc.

26.Package rates
A hotel package combines one or more hotel products or services to make the new
entity more attractive. Called bundling, a hotel will package the room (and its rate)
with another service or amenity. Often this entails pricing the package below the cost
of purchasing the items separately. The perceived benefit to the guest can be monetary
savings, convenience, or both. Package rates can incorporate non hotel items as well.
Variations on the hotel package can consist of:
 Meeting Packages
These can be valuable for the busy meeting planner. A Complete Meeting
Package (or CMP) rate typically includes coffee breaks, lunches, dinners, and/or
audiovisual equipment, the cost of the meeting room and a sleeping room all
bundled together.
 Vacation Packages
These bundle room rates and one or more of the following: airline tickets,
transportation, tickets to local attractions or shows, and themed amenities. A
themed amenity could include sunglasses and suntan lotion for a “Fun in the
Sun” package. A “Night on the Town” package might include a limousine ride and
dinner. “Shopping” packages may include discount coupons to local shops and a
foot massage for tired feet. A “concert” package might include a ticket to a show
and the musical artist’s latest compact disk in addition to the room.
 Meal Packages
A meal package is a combination of room rent and meals. For example ; (AI, EP,
B&B, CP, BP, FP, MAP, AP) etc.

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 TAXES ON ROOM STAY

Tax Rate Categories

Hotels and lodges with declared tariff (Rack rate)
Exempt less than Rs. 1,000 per room per day.

Hotels with declared tariff (Rack rate) Rs. 1,000-

12% 7,500 per room per day.

18% Hotels with declared tariff (Rack rate) Rs. 7,500

and above per room per day.

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