Hurdle Rate

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Hurdle Rate: A must in Revenue Management Strategy of a Hotel -

Divya Thakur, Assistant Professor, Banarsidas Chandiwala Institute of Hotel Management

Revenue Management is the process of understanding, anticipating and influencing consumer behavior in order to maximize yield or profits from a fixed and perishable resource. Also called Yield Management, Revenue Management is used by many companies in order to maximize profits by focusing on selling the right product to the right customer for the right price at the right time.

Initiated by the airline industry, the concept of Revenue Management has spread across the entire travel and hospitality industry today. Almost all major hotels, car rental agencies, cruise lines and passenger railroad firms have developed, or are developing, Revenue Management systems. Other industries that appear ripe for the implementation of Revenue Management concepts are golf courses, freight transportation, healthcare, utilities, television broadcast, spa resorts, advertising, telecommunications, ticketing, restaurants and web conferencing.

We know that all airline passengers boarding the same flight pay different fares. Once an aircraft takes off, the unsold seats don?t generate any revenue for the airline, thus, can be said to have perished. Therefore, the airlines industry adopts various strategies to overcome the losses incurred by unsold seats. For example, airlines offer discounts on low-demand flights or create Saturday night packages. Some airlines, on the contrary, sell more expensive seats when there is excess demand.

The primary aim of Revenue Management is selling the right product to the right customer at the right time for the right price.

If we talk about the hotel industry, all hotels have a common problem?they produce a fixed inventory of perishable products that cannot be stored if unsold by a specific time. For example, if a hotel has not sold a particular room, then that room will not generate revenue. Similarly, if a guest books a room in advance but doesn?t turn up to occupy the room, the booked room will not generate revenue. In both the situations the hotel incurs a loss. Therefore, it is important that the management of the hotel adopts various strategies to overcome its loss incurred due to unsold rooms.

To avoid the risk of cancellations and no-shows, overbooking is followed in hotels. Overbooking is a must for any business that accepts reservations. In hotels, the practice of overbooking requires a fine balance between guest service, operational procedure, and revenue optimization. For hotels with multiple room types, the complexity is multiplied. Managers not only need to forecast future events, but also need to consider issues such as the competitive market, previous year's revenue, guaranteed reservation guests, seasonal rates, activities in the city, business guests, long stay guests and more. The goal is to identify the high-yield guests, the one who will pay the most and stay the longest, to achieve the highest possible profit.

The Front Office Manager must determine the rate at which the rooms will be sold on each day. Hotel rooms are sold at varying prices depending on the time of booking. One of the major tactics hotels adopt is to organize a hurdle rate. We all know that rack rate, which changes everyday, is the highest rate paid by a guest for a room. Any room cannot be sold for more than its rack rate. Generally, rack rates are offered to walk-in guests, but the Front Office Manager must also set the lowest rate for a given date based on the demand. This lowest rate is called hurdle rate. Any room can be sold at a price above its hurdle rate. It may vary from day to day depending on the hotel's desired yield and market conditions.

The primary aim of Revenue Management is selling the right product to the right customer at the right time for the right price

Hurdle as the name suggest, is the problem which need to be solved by implementing proper revenue strategies.

The hurdle rate is usually determined by evaluating existing opportunities in operations expansion, rate of returns for investments, and other factors deemed relevant by the management. Hurdle Rate will help in informing that which rooms should be sold to whom, when and at what price to achieve maximum profitability for a hotel.
Implementation of Hurdle Rate has many Benefits:

Increases revenue
Marks a standard
Involves employees: motivates staff

Hurdle rate genuinely increases the revenue as rooms sold at a hurdle rate are better than no sale at all. Also through its implementation, hotels follow a standardised system of not selling a hotel room less than the hurdle rate. Hotels also set incentives to the reservation and front desk agent for selling a room above the hurdle rate. It helps in increasing the involvement of staff in increasing the revenue of the hotel.

As market conditions have changed, there is also a change in the nature of Front Office?s role, from a passive order taker to an active order generator.

Applying tactics is a part and parcel of every business. In the hospitality business, where we treat our guests as God, managers must keep in mind that the ultimate business is to meet the needs of guests. Too much focus on Revenue Management and failure to meet the needs of guests will not only produce undesired effects, but will also lead to loss of guests in future.

Too much focus on revenue management can be just as ineffective as no revenue management at all.

Discovering, developing and nurturing customers, therefore, is critical to the present and future success of most businesses. Identifying key customers is only one step of creating this profitable relationship. To maximize profits, companies must continuously collect ongoing data about these customers or groups.