Fuhan

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QUARTERLY CLASSIC

HOTEL RATE FENCES

Discounting in the
Hotel Industry
A New Approach
Here’s the case made ten years ago for an approach to discounting that provides a rational method of price segmentation. The hotel industry is just now getting it.
BY

RICHARD D. HANKS, ROBERT G. CROSS, AND R. PAUL NOLAND

T

hree busy executives approach a hotel’s front desk, check in, receive their room keys, and head for the elevator. On the way up to their rooms, the topic of room rates comes up. As it turns out, Roy is paying $20 more than Jeanne, while Jennifer is paying $18 more than Roy. Yet all three are staying in essentially the same type of room.
Those of you familiar with yield management already have figured out that
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While most of those conditions are straightforward, the last characteristic—segmenting customers—is both the most difficult to achieve and the most important. To maximize revenues, most hotels need to separate customers and charge them different rates based on their differing needs
From both the hotel’s and the customer’s and behavior. It is essential both to segment the point of view, we believe that approach is a suboptimal way to arrive at the appropriate rate for 2 For discussions of yield management, see: Walter J. Relihan
III, “The Yield-management Approach to Hotel-room Pricthat customer to pay.
Caller: “I’d like to book a room for next Tuesday.”
Agent: “Our single rate is $189.
Caller: “Do you have anything cheaper?”
Agent: “Our corporate rate is $159.
What company do you work for?”
Caller: “Well, I was hoping for something less.” Agent: “Let me check. Oh, yes, we have our super-special rate of $129.”
Caller: “Do you have anything under
$100?”
Agent: “Well, we do have a few rooms available at our value rate of
$99.”
Caller: “I’ll take it.”

1
For a discussion of how discounts are (or are not) negotiated through a reservations system, see: Robert C. Lewis and Christopher Roan,

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