BASIS OF CHARGING AND ROOM RATE FIXATION

Hotels have to decide the rack rate of different category of rooms and have to strategically
allot discount to be offered during different category of seasons and clients (travel agents,
corporate, etc). Hotels have different category of rooms and each type of room have
different tariff depending upon the size of the room, its location, view from room, etc and
accordingly the individual category of room is assigned a standard rack rate. The rack rate is
fixed and tariff card is printed and is approved from Department of Tourism. The tariff fixed
is further shared with all sources of reservation and uploaded on the hotel website. Resort
hotels may print an additional tariff card for off seasons. Front office is expected to sell
rooms at the rack rate and any guest who is provided discount depends on sales strategies
adopted like company volume, frequency of visits, etc. These special rates/ discounted rates
are offered to clients such as groups coming through travel agents, corporates, crew or even
direct. Moreover to promote business promotional rates are offered to group leaders, travel
agents, crew, embassies, etc. Incentives are even offered to guests depending upon
potential referral business they generate for hotels. The special rates are authorized by
higher management depending on the policy and strategies adopted from time to time.

1. TARIFF/ROOM RATE

Tariff or Room rate is the price that is charged by hotel from the guest for providing
overnight stay and the services rendered thereof. As most of the hotels have more than one
category of rooms and so are different room rates. Room rates depends on the type of
rooms like deluxe, standard, single, double, suite, lanai, pent house, etc and further
corresponds to location, view from room, size of room, amenities in room/bathroom, plan,
etc. There are two most prevailing methods of fixing the room tariff:

o Cost-Based Pricing: As the name denotes, this pricing focuses on both fixed and
operational cost is kept in mind along with the required rate of return while fixing
the tariff of rooms.
o Market Based Pricing: In this competitive age, both the competitive hotels tariff and
the paying capacity of guests is to be kept in mind. Moreover in the view of same,
the total cost and operational cost of the hotel project is to be maintained. If the
market is very competitive, then the time for return on investment may be
prolonged.
2. TYPES OF ROOM RATES

a) Rack Rate: Rack rate is the published rate of a hotel and is considered to the maximum
possible room rate which is charged form the guest by the hotel for overnight
accommodation. The rates published on tariff card is rack rate.

b) Discount Rate: As the name suggests, are rates charged from guests being less than rack
rate. This happens when the hotel provides discounts or concessions to different category of
guests such as corporate, travel agents, crew, regular, etc.

Types of Discounted Rates:

1. Corporate Rate: These rates are offered to frequent guests belonging to companies
providing volume business to hotel or its chain properties. This is even termed as
company volume guaranteed rate.
2. Seasonal Rate: These are the rates generally charged by resort properties having
extreme climatic conditions from the guests visiting such peak or lean seasons.
Examples of such destinations are Leh, Udaipur, etc.
3. Group Rate: People visiting hotels for meetings, conferences, conventions as groups
are charged such rates because of the volume of business provided in one go.
4. Family Rate: These rates are offered to families travelling with children to attract
them as the rates are lower than the rack rate. Moreover the rates may be offered
as a package with sightseeing, entertainment, games, tracking, pick up and drop
depending on the family requirement. Depending on the size of family travelling,
rooms like suit, quad, triple, interconnected, etc. may be offered.
5. Package Plan: Package rates are offered in both seasons peak as well as in off
seasons. In off season, a hotel offers packages to attract guests with less rates and
may include various other services. In peak season the rates may be kept high
inclusive of services which generally are not opted by guests.
6. Government Rate: These rates are charged by government hotels, guests’ houses,
circuit houses from guests who generally have to be government servants. Some
private hotels even offer discounted rates to government officials.
7. Crew Rate: These are special rates fixed for airline crew members who stay in the
hotel for short durations. These hotels are either known as airport hotels or even
transit hotels.
8. Crib Rate: It is the rate applicable to the children below 12 years of age. An extra bed
is generally given to the children and a crib bed or COT may be given to children
below age of 5 years.
9. Week End and Week Day Rates: This tariff is popular nowadays at most of the
destinations and in different category of hotels. The rates on weekends is kept high
and the rate is lowered on week days depending on the volume of guests visiting
hotels accordingly.
 10. Incentive Rate: The rates offered to guests in affiliated organisations such as tour
operators, airlines, and corporate due to potential business. This rate is even offered
to group leaders, MICE operators and other people or agencies to promote future
business.
11. Company Volume Guaranteed Rate (CVGR): Hotel may offer a special rate to attract
high volume of business from special market segment. It is given when a guaranteed
number of room nights within a specific time frame are assured by the company and
the same is maintained. Any fluctuations in the volume of business can bring change
in prevailing rate decided.
12. Airline Crew Rate: It is special discounted rate for the crew of airline that offer a
certain volume of business throughout the year on a consistent and continuous
basis.
13. Educational Rate: Educational rates are special rates provided by hotels to students
and educationists who have a limited travel budget. Students are significant sources
of business because of their large number and frequency of visits.

3. ROOM PLANS
Plans in front office operations mean meal plans, as these plans allow the guest to select
one such plan which is a combination of room rent and meals as per the requirement of the
guest. These plans make it easier for the hotels to charge from the guest on the basis of
package stay and is cost effective for guest as the meals included in plans tend to be
cheaper than ‘a la carte’ menu. Most of the hotels offer various types of plans. European
plan or the Continental plan is generally offered to business guest in city hotels and rest
plans such as American plan, etc may be offered to guests staying for enjoying holidays.
Resort hotels may offer American/Modified American plan to most of the clients. Hence the
selecting of plan depends on the type of client and usually the stay length of the guest.

Following plans are offered to guests in hotels:

• European Plan (E.P.): Most of the hotels offer this plan to free individual travelers
(FIT). This plan is mostly adopted by downtown or city hotels. This plan is cheapest
as it includes room charges and early morning tea only. The guest is required to
order and pay separately for meals. This plan caters to the needs of guests visiting
the city for business purposes.
• Continental Plan (C.P.): This plan is even termed as bed and breakfast plan. The tariff
is inclusive of room rent early morning tea and continental breakfast. This plan
caters to tourists, conference attendees and transit guests who may stay in the hotel
for day. The other meals are ordered and paid extra. Continental plan is even
suitable for groups/corporate guests. Continental breakfast includes canned juices,
toast, rolls, butter, jam, tea or coffee.
 • Bermuda Plan: This plan offers same as in case of Continental plan, but the only
difference is that – American or English breakfast is offered rather than Continental.
• American Plan (A.P.): This plan is also called an En Pension or Full plan. The tariff is
inclusive of room rate and all meals of the day. Guest may order some extra snacks
or deinks, which may be paid individually. The resort or sub urban properties offer
this plan and the guest also finds this meal cheap on such location. This plan tends to
be costly and all three meals may not suit to all guests, hence has not got good
response.
• Modified American Breakfast (M.A.P): This plan is one of the most suitable plans on
resorts, residential hotels, motels and sub urban locations from most of the guests.
This plan is also known as demi pension or half pension. The tariff in this plan
includes room rent and any two major meals (Breakfast/Lunch/Dinner). The guests
have to inform about the meal selection at the time of arrival for on time service.
Front office prepares the meal coupons and issues to the guest, determining the
venue of the food service.
• Inclusive Plan (I.P.): This is a special plan offered to guests who wish to add other
requirements in single price. This is even called as inclusive plan that means a certain
hotel services are covered in a single price. Charges of board rooms, conference
halls, bed tea, breakfast, lunch, dinner may be inclusive in the tariff. The other
services such as laundry, alcoholic drinks, etc. may be charged separately.

4. ESTABLISHING ROOM RATES

There are many ways of pricing rooms/fixing room tariff, some common are:

• The Rule of Thumb: The rule of thumb approach sets the room rent fixed at the rate
of Rs 1 for each Rs 1000 spent on construction and furnishing of the room. The rule
of thumb is also called as ‘cost rate formula.’ For example: Suppose the average
construction cost of a hotel room is Rs. 200000. Using the Rs 1 per Rs. 1000
approach results in an average selling price of Rs. 200 per room. To find the current
rate in case the hotel was build years ago, either the present value is evaluated or
the net present value of money invested is calculated keeping in view the inflation.
The rule of thumb approach fails to price room rent considering the other factors of
services and facilities provided by the hotel.
• Hubbart Formula: It is considered a bottom-up approach for pricing rooms. It is
called so as the first item i.e., net income is at the bottom of the income statement,
tax, fixed cost and so on. And to determine the average price per room, this formula
considers desired profits, income taxes, fixed cost, management fee, variable cost,
etc and divided by the expected room nights.

Following steps are involved:

 o Desired profit is calculated by multiplying the desired rate of return by the capital
investment.
o Desired profit is calculated after deducting the total tax.
o Calculate fixed charges and management fees. Example- property tax, insurance,
mortgage, land, rent, depreciation, etc.
o Calculate operating expenses.
o Example- general expenses, transportation, maintenance, fuel cost, etc.
o Estimate profit from other departments like restaurants, health club, laundry,
etc.
o Calculate the required room’s income. For same add step 1-4, and deduct step 5.
o Determine the room’s revenue. The cost shown in step 6 and to this operational
cost needs to be added.
o Calculate the average room rate by dividing the total calculated in step number 7
by expected room sale.
• Competition: Rate must be competitive as compared with other hotels of the same
standards and providing mostly similar services as provided by other hotels situated
in the same vicinity of the city. The size of the hotel also has to be kept in mind while
comparing as the rates can different depending on the size of hotels.
• Rate Cutting: The tariff of a hotel can be reduced to increase occupancy level,
especially during off season in case of resort properties and also at the time of the
year or day of the week when hotel needs business.
• Customers’ Profile: The social status and the paying capacity of guest should be kept
in mind before establishing room tariff.
• Standard of service: The hotels providing more amenities, having high standard and
so also higher the room rate as compared to the hotels providing minimum services
and amenities.
• Locality/Area: The location of the hotel also places a pivotal role while fixing tariff.
The better the location, greater the room tariff. Hotels situated in posh area,
shopping, airport, etc will have higher room rates than hotels located in suburban,
far off place.
• Room Location: Tariff of rooms at good locations is more than rooms located at
other locations. Rooms located towards scenic beauty, swimming pool, etc will have
more rates than rooms located near lift, corner, etc.
• Publicity: The amount of publicity done by hotel. The type of expense has to be
adjusted somehow as it has no source of return but is a must in popularizing the
various service of a hotel.

BASIS OF CHARGING
Basis of charging means the basis on which the room rate is charged. The same may be
charged on 24 hour basis, weekly basis, half yearly basis, hourly basis, monthly basis,
seasonality basis, etc.

a) Check In and Checkout Basis: It is the most common globally accepted basis of charging
tariff. To fix tariff on this basis is convenient for both guest and the hotel. On this basis the
tariff charged from a guest is from check in time to check out time. The guests are even
allowed to check in after the fixed check in time by the property depending on the location
and if guest wishes to check in before check in time, he/she may be allowed depending on
the availability of rooms and secondly they will be asked to pay for additional day. In same
way, if guest check outs after the dedicated check out time, he/she may be asked to pay
additional tariff. There is no hard and fast rule to fix the tariff at 12 noon and the hotels are
free to fix a different check in and check out time generally depending on the location of the
property and the types of clientele one caters to. Example 12 noon could be kept as check in
while 10 am could be kept as check out. This is done generally to meet operational
obligations or to fetch more profits at busy locations.

b) 24 Hour Basis: Hotels can charge room rent on the basis of 24 hours. The check in time of
the guest automatically becomes the check out time for the guest. The room rent charged
for one single day depends on the stay of guest not exceeding 24 hours or additional day
will be charged completing up to 48 hours from the time of check in. Transient or transit
hotels charge mostly on 24 hours basis because of the nature of business. These hotels
generally are very busy and guests keep on checking in at all most all hours of the day and
night.

c) Number of Night Basis: There are hotels which charge room rent on the basis of nights
spent in the hotel. The number of nights a guest spends in the hotel attract them charge for
such number of nights. The guest spending few hours only in the day even is charged for
one night. This practice of charging for night basis is followed in guest houses/circuit
houses/dak bungalows of government or private companies who mostly cater to their own
employees. The hotels falling into this category usually provide economical accommodation
and do not look for earning profits.

d) Day Basis: Many transit hotels attract business by providing facility of providing
accommodation for day use and charging for the same either for full day or half day. The
guests sometimes want to stay in hotel for few hours or a day only and the hotel charges
room rent irrespective of the check in and check out time. Hence a guest can take
accommodation from the hotel from 10 am to 12 noon or 9 am to 5 pm, etc.