How can you determine the ideal discount rate for a hotel room?

Discounting is a common strategy for hoteliers to boost occupancy and revenue, especially during low-demand periods. However, finding the optimal discount rate for a hotel room is not a simple task. It requires balancing the trade-off between attracting more guests and maintaining profitability. In this article, you will learn how to determine the ideal discount rate for a hotel room using some basic concepts and tools.

Key takeaways from this article

Understand market demand:

Analyzing historical data and using industry benchmarks can help gauge your market's demand and price sensitivity. This insight allows you to set discount rates that attract more guests without sacrificing profitability.### *Evaluate break-even point:Calculate the break-even point by dividing total fixed costs by the number of available rooms, then add variable costs per room. This ensures you never set a discount rate below what’s needed to cover your expenses.

This summary is powered by AI and these experts

1 Demand and elasticity

The first step to determine the ideal discount rate for a hotel room is to understand the demand and elasticity of your market. Demand refers to the number of potential guests who are willing and able to book a room at a given price. Elasticity measures how sensitive the demand is to changes in price. A high elasticity means that a small change in price will have a large impact on demand, and vice versa. You can estimate the demand and elasticity of your market by analyzing historical data, conducting surveys, or using industry benchmarks.

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Manuel Costa Oliveira

MO Consulting
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Depends on the context, would say we should take into consideration the max aproches, mix them and extract juice. On normal conditions we should focus on demand.

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Manuel Costa Oliveira

MO Consulting
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Depends on the context, would say we should take into consideration the max aproches, mix them and extract juice. On normal conditions we should focus on demand.

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2 Break-even point

The second step to determine the ideal discount rate for a hotel room is to calculate the break-even point. The break-even point is the price at which the revenue from selling a room equals the cost of providing it. It is also the minimum price that you need to charge to avoid losing money. You can calculate the break-even point by dividing the total fixed costs (such as rent, utilities, and salaries) by the number of rooms available, and then adding the variable costs (such as cleaning, laundry, and amenities) per room.

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Tim Anderson

VP Hotels, HOTEL/MOTEL Specialist and Hotel Co-Owner
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There’s another consideration. Sometimes just covering the variable cost, even though it doesn’t cover the total cost will still help offset the overall cost for the hotel. While it may help for that cost offset, it may also help service to guests and, quite frankly, help maintain employee loyalty by keeping them busy on your payroll.

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3 Margin and contribution

The third step to determine the ideal discount rate for a hotel room is to evaluate the margin and contribution of each room. The margin is the difference between the price and the cost of a room, expressed as a percentage of the price. The contribution is the amount of revenue that a room generates after deducting the variable costs, expressed as a dollar amount. The margin and contribution indicate how profitable each room is, and how much it contributes to covering the fixed costs. You can calculate the margin and contribution by subtracting the cost from the price, and then dividing by the price or multiplying by 100.

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Manuel Costa Oliveira

MO Consulting
(edited)
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Hard to determine on a daily basis, but should be on top of mind when driving the revenue, should be the limit to sell at the bottom line, will grown up as rate increases.

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4 Optimization model

The fourth step to determine the ideal discount rate for a hotel room is to use an optimization model. An optimization model is a mathematical tool that helps you find the best solution to a problem by maximizing or minimizing an objective function, subject to some constraints. In this case, the objective function is the total revenue from selling all the rooms, and the constraints are the demand and elasticity of the market, the break-even point, and the margin and contribution of each room. You can use an optimization model to find the optimal discount rate that maximizes the total revenue, while satisfying the constraints.

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5 Sensitivity analysis

The fifth step to determine the ideal discount rate for a hotel room is to perform a sensitivity analysis. A sensitivity analysis is a technique that helps you assess how different factors affect the outcome of a decision. In this case, the factors are the variables that influence the demand and elasticity of the market, such as seasonality, competition, events, and customer preferences. You can use a sensitivity analysis to test how different scenarios affect the optimal discount rate, and how robust your solution is to changes in the market conditions.

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6 Implementation and evaluation

The sixth step to determine the ideal discount rate for a hotel room is to implement and evaluate your strategy. Implementation involves setting the discount rate for each room category, segment, and channel, and communicating it to your target customers. Evaluation involves monitoring the performance of your strategy, such as the occupancy, revenue, and customer satisfaction. You can use key performance indicators (KPIs) and feedback tools to measure the results of your strategy, and make adjustments as needed.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you determine the ideal discount rate for a hotel room?

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1 Demand and elasticity

2 Break-even point

3 Margin and contribution

4 Optimization model

5 Sensitivity analysis

6 Implementation and evaluation

7 Here’s what else to consider

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