What is a rack rate?

The term ‘rack rate’ is common in the hospitality industry and refers to the standard, non-discounted price that a hotel charges for a room - typically the highest rate guests can expect to pay when demand is high, or for a last-minute booking. It's essentially the published rate listed on the hotel's official website, in brochures, and promotional materials.

The term goes back into the mists of time, when hotels and lodging houses often had a metal or wooden rack in the reception area, with cards displayed on the rack showing the maximum price for every type of room. It was simple for staff and guests alike to refer to the rack, and although the practice has long since ceased, the name continues. 

Rack rates are useful to potential guests because they can see at a glance what their worst-case expenditure can be, and can shop around different hotels, based on the rack rates. The difference between - say - luxury and budget hotels can be clearly seen, which means that searching for and booking a hotel is quicker and easier. 

It’s also vital for hoteliers and staff to have clear rack rates for each type of room, at every time of year. That way the hotel is assured of the best return for a given period, but more importantly it provides the benchmarking for discounts and adjusted pricing. Better to have a guest occupying a room at below rack rate, than to have the room stand empty.

Pricing under the rack rate

“I can offer you a discount” are sweet words in any business, but in the hospitality industry they are especially potent. Business travellers expect a discount as a matter of course, and large companies negotiate bookings at well below rack rate for their employees. Private individuals, especially when on vacation, love the offer of a discount from the published rack rate. For many people this can be one of the deciding factors in making a booking - a bargain has been struck with an attractive discount! But why does there even have to be a rack rate - surely we are all experienced enough to know that prices nowadays are rarely truly fixed, especially in the hospitality sector? 

Well, think of all the media that a hotel can be discovered on: From its own website, through Online and high street travel agents, in brochures and magazines, and across a wide array of social media. Every change of season or fluctuation in demand would require re-pricing through every channel - a massively inefficient use of time and energy. Far better to set a maximum price which is shared across all media, which then can be benchmarked and adjusted according to real-world circumstances. In this way the story is essentially the same wherever the guest searches, because the rack rate is consistent.

Automated adjustment of prices

Which brings us to the subject of Dynamic Pricing, where the cost of a room will be altered according to seasonal demand, and other factors. If there’s a big event in town such as the Paris Olympics, then there will be no expectation on anyone’s part that prices will be less than rack rate. On the other hand, low demand will drive prices down. In the past this would be done on an ad hoc basis, with individual managers watching how the local market might be going, with a weekly or monthly review of what competitor hotels were charging, and what capacity they were at. In recent years however the technology has come into being where constant automatic monitoring of the market and prices charged is done dozens of times every day. The Online Travel Agents have become particularly adept at this, and the era of Dynamic Pricing is now with us, where room rates can and do change frequently. This can often be without the overall or detailed knowledge of hotel staff, who are simply free to gain and apply the insights provided by Dynamic Pricing at any particular time. But what provides the ‘North Star’ in this highly-charged and changeable situation? - The rack rate, that’s what.

The importance of the rack rate

Let’s review how a properly defined rack rate produces a number of advantages:

• The published rack rate provides baseline pricing for hotel rooms and services, giving a reference point for both hotel staff and potential guests.
• Having transparency in pricing means that guests can easily compare rates across different hotels and booking platforms, helping them make informed decisions. There’s no longer the need for guests to chop and change between sites, because the rack rate for your hotel is the same everywhere.
• The rack rate can become a starting point for negotiation, especially with corporate clients and group bookings. During low periods the hotel can offer discounts, and private guests are always delighted when prices appear to be reduced.
• Maintaining consistent rates across all distribution channels, or rate parity ensures fairness and consistency for all guests and all partner organisations no matter which channel that rooms are booked through.
• Hoteliers can use rack rates as part of a revenue management strategy where they adjust prices based on demand, seasonality, and other factors. In having a standard rate, they can effectively manage pricing to maximise revenue, and do this within the benchmarked guidelines of the rack rate.

Influences on the rack rate

All of these points can change however because of those ‘other factors’ which can influence the rack rate. These can be both macro and relatively micro effects, from unpredicted events such as the worldwide pandemic and subsequent massive slow-down of bookings, through to more local changes. Perhaps a new player enters the nearby hospitality market, offering ‘taster’ discounts, or special deals. At this point sticking rigidly to your rack rate may not be the best of ideas. So flexibility in setting and adhering to rack rates is advisable, but it’s still important to have them as the ‘line in the sand’ by which guests can assess your charges, and your staff can respond to queries about discounts and special offers. Being aware of movements in the local and wider market gives the hotelier power to set the most effective rack rates.

Strategies for a healthy rack rate

The rack rate is therefore clearly important in creating and maintaining profitability targets, so what strategies can be adopted to ensure a healthy rack rate?

REPUTATION is key to all hospitality businesses and the rack rate should reflect this, and maintain and build on the existing reputation. Obviously a luxury hotel would never have a rack rate that marks it out as a budget option, so the rack rate will always be appropriate to the brand and underscore brand reputation. In this way the hotel type and category is also clearly signalled by the rack rate.

ROOM TYPES are also in part indicated by the rack rate, and hotels offering a variety of types beyond standard singles and twins can indicate their Suites and Presidential selections (and so on) through the rack rate.

LISTING AMENITIES and services is also a strategy which supports the rack rate in that guests can see what they’ll be getting for a set cost. If there are comprehensive facilities, such as a spa, pool, or gym, these can contribute to clear rate differentials, making the rack rate more acceptable and understandable for guests.

LOCATION is frequently paramount in a guest’s choice of hotel, and depending on the target demographic, this will be important to stress in terms of justifying the rack rate. Is the hotel in secluded countryside, adjacent to the airport, or in the lively heart of a tourist city? Knowing why guests come to your particular hotel will help define what the rack rate should be.

SCOPING the competition is a significant part of strategising what the rack rate will be. What are the rates of other similar hotels in direct competition with yours? Monitoring what they say about themselves on their own websites, through the OTAs, and on social media means having a better understanding of what your own hotel’s optimum rack rate should be.

Setting rack rates to maximise profitability

Put together, adopting these strategies will ensure that your room rates remain competitive and an attractor for guests. We’ve come a long way from having room prices displayed on metal or wooden racks, and now the automation which underpins the setting of a rack rate is swift and seamless. The Online Travel Agents have hugely powerful tools to analyse market trends, and apply Dynamic Pricing, however hotels also now have access to similar data-crunching technology. Modern Property Management Systems, such as SabeeApp’s comprehensive PMS, enable hotels to get real-time data and set rack rates that are effective in attracting custom, at maximum profitability. Managers and staff still need to ‘keep an ear to the ground’ for market movements and initiatives by the competition, but the technology now exists to be far more decisive and accurate in setting and maintaining the rack rate. The origins of the rack rate may be charming, but the modern application of it is very good business sense.

At SabeeApp we have over eleven years of in-depth knowledge and experience in supplying our modern cloud-based PMS exclusively to the hospitality industry. We’d like to share that experience and show how we can help your operation, with our PMS and a host of custom-made apps to make modern hotels function efficiently and profitably.
Please do contact us for a free, no-obligation demo.