Chain Scale Hopscotch: Benefits and Challenges of Moving Up and Down

Are there any advantages to moving up or down on the chain scales? Absolutely, say industry experts.

Any hotel chain knows of the existence of the chain scale, a ranking system based on hotels’ average daily rate and the number and quality of amenities and services they offer.

The chain scale offers six classes—luxury, upper upscale, upscale, upper midscale, midscale and economy— and chains can move from one to another as they make changes to hotels, such as adding (or subtracting) an amenity or altering their room rates.

Are there any advantages to moving up or down on the chain scales? Absolutely, say industry experts.

First, let’s look at why the chain scale is important.

The chain scale is “a critical benchmarking tool,” said Bryan Younge, managing partner, Horwath HTL, a hospitality consulting and strategic advisory firm in New York City. It “influences not only guest expectations but also investor underwriting, brand requirements and operational strategy. Hotels often adjust amenities, service levels or even design to align with a desired chain scale.”

Where a hotel is on the chain scale makes a big difference. “Higher chain scale positions typically offer stronger brand equity, greater pricing power and institutional appeal—but they also come with high capital intensity and sensitivity to demand fluctuations,” he said.

And, higher classes such as luxury and upper upscale often have a lower internal rate of return (IRR), he said.

For example, in a mature market like San Francisco, the IRR might just 8.65 percent (luxury) and 9.30 percent (upper upscale), while lower chain scale hotels like midscale and economy offer higher IRRs (above 11.5 percent) but also carry higher risk, “often tied to operational volatility or location-specifics,” said Younge.

The chain scale, he explained, “provides a vital framework for aligning development cost, brand standards and revenue potential. Developers lean heavily on chain scale to calibrate these trade-offs.”

Investors, said Younge, “started pulling together massive funds for hotels. But they needed clear definitions of what they were getting into.”

“Hotels use real-time benchmarking tools, brand-level analytics and third-party intelligence to track rate changes, amenity offerings, loyalty strategies and supply additions,” said Younge. There is certainly a ‘keeping-up’ dynamic, especially in higher chain scales where differentiation is more fragile and rate compression from peers can be costly if not addressed proactively.”

Hotels do move between chain scales, said Younge. It’s not a frequent occurrence, he added, but “strategic repositioning within or across adjacent classes does occur, particularly during brand conversions, renovations or asset repositioning events.”

This article was originally published in the September edition of Hotel Management magazine. 

Read the full article here.

Bryan Younge – Managing Partner at Horwath HTL. Connect with Bryan on LinkedIn.

This article originally appeared on Horwath HTL.