An Easy-to-Understand Definition For Hoteliers

Gone are the days when prospective guests had to look above the ‘Room Rack’ to see the various prices for hotel rooms.

With so many changes in the hospitality industry, now guests can simply perform a quick internet search to reveal rates, promotions, and discounts at a variety of accommodations across various booking platforms.

Even though the times have changed, “Rack Rate” as a term still has staying power; revenue managers still talk of “raising the rack rate” and any hotelier you meet won’t bat an eye when asked “what is our rack rate tonight”

What does rack rate mean?

Let’s start with a basic definition of rack rate. It is simply a hotel’s published retail rate with no discounts or special offers applied. This makes it a very important rate because it is one of the primary rates that customers see when shopping, and also the rate that most promotions, special offers, discounted rates, and other room types prices derive from.

Hoteliers have a big incentive to set their rack rate at just the right amount; since it is typically the highest rate in the sell-order hoteliers love to sell rooms at rack.

To incentivize guests to book at the rack rate, hoteliers will offer the most generous cancellation policies along with the rate. A hotel’s rack rate acts as a starting point for shoppers when assessing all of a hotel’s various rate offering.

Rack has several synonyms that you may have heard, most commonly including BAR (Best Available Rate), and Flexible Rate or Best Flexible Rate. Also other terms such as retail rate, standard rate, rate-of-the-day, room rate, and base rate can also be used interchangeably with ‘rack rate’, and any hotelier should recognize these terms as meaning roughly the same thing.

RACK rate Vs. BAR rate

In modern-day revenue management, the terms “rack Rate” and “Best Available Rate” are used interchangeably and mean essentially the same thing, to confirm I put out the feelers with our own in house revenue strategy services team to see what real life managers thought:

The revenue managers who thought that there was a clear distinction were mostly making nuanced arguments around what exactly can be considered BAR (and the effect of qualified discounts and loyalty programs), but that’s a story for another blog. The overwhelming consensus was that BAR and Rack are interchangeable.

Here’s a good summary of what revenue managers think about the term in 2024:

That said, let’s operate under the assumption that Rack as a term isn’t going anywhere, but using it interchangeably with BAR is totally acceptable.

How do hoteliers determine rack rate?

Determining the hotel’s rack rate is the million dollar question for revenue managers. There is no right or wrong answer to this question, but as a general rule, the more quality data and analytics that go into determining a rack rate, the more likely the rack rate is to be successful.

A rack rate is a valuable tool for Revenue Managers. It serves many purposes beyond being simply the “rate of the day.” Dozens of dynamic discounts and packages flow from it. It can also act as a “canary in the coal mine” for pricing strategies. A grossly overpriced rack rate won’t be booked, while one that’s too low will be booked quickly. This allows Revenue Managers to gauge the effectiveness of their pricing strategies in real-time based on guest demand.

Revenue managers have 2 main options when determining their rack rate, setting the rate manually, or utilizing an automated dynamic pricing system.

Determine manually

This is typically the most common approach, and is often done on recurring revenue strategy calls or at the start of the day when revenue managers are assessing overnight pickup and previous night’s results. Setting a rack rate is one of the key parts of an effective revenue management strategy, so it’s important that RM’s get it right.

Revenue managers will look through all available data, including rate shops, their business intelligence tool, market demand data, and benchmarking data to determine the best price point for their rack rate.

A revenue manager might assess market conditions such as published rack rates from competitors for a pricing reference point, existing market mix such as transient vs. group bookings, historical data, and recent pickup trends from last-minute bookings before setting a price.

Once a rack rate is set in the PMS or RMS, the rate is often manually updated several additional times depending on pickup and feedback from prospective customers.

Utilize automated dynamic pricing

For revenue managers who don’t have the time for more detailed manual analysis, they can entrust an automated dynamic pricing system to ingest the relevant data, and then push an optimal rack rate to the property management system automatically.

The benefits of a dynamic pricing system are that rate can change instantly, and do not require a revenue manager to be present. This can be useful for reacting to unexpected demand, or sudden changes in market conditions.

A dynamic pricing solution will look at all of the same factors that a human looks at, but will be able to analyze a much larger amount of data, and isn’t restricted to only working hours.

Understand rack rate in the context of a dynamic pricing strategy

If revenue managers choose to utilize a dynamic pricing strategy for setting their rack rate, they should consider a few factors.

First, they should determine exactly how much control they want an automated system to have – most dynamic pricing systems will allow certain rules that only change the rack rate when certain conditions are met, so a system may only change the rack rate when occupancy is below 80%, and turn control over to the revenue manager when this threshold is exceeded.

Revenue managers can also define a set highest price or lowest price that they want the system to generate. Below is an example or Lighthouse Pricing Manager’s autopilot feature:

Also, when utilizing a dynamic pricing strategy, revenue managers should understand and continuously monitor the inputs that determine the rack rate – for example, competitor weights, what constitutes low and high demand, and even factors like rate rounding should be periodically revisited to ensure that the dynamic pricing solution always selects the best possible rack rate.

Set more competitive rates with better insights

Whether you choose a manual, or dynamic pricing approach, it is important to ensure that you have the right tools to arrive at the right rack rate. At a minimum, hotels that want to set a good rack rate should at a very least utilize a rate shopping tool, a market demand tool, and a business intelligence solution.

By using these tools in combination, you can avoid guesswork and setting rack rate by “gut feel”. Thankfully, Lighthouse offers these solutions for hoteliers looking to incorporate data driven insights.

About Lighthouse

Lighthouse (formerly OTA Insight) is the leading commercial platform for the travel & hospitality industry. We transform complexity into confidence by providing actionable market insights, business intelligence, and pricing tools that maximize revenue growth. We continually innovate to deliver the best platform for hospitality professionals to price more effectively, measure performance more efficiently, and understand the market in new ways.

Trusted by over 65,000 hotels in 185 countries, Lighthouse is the only solution that provides real-time hotel and short-term rental data in a single platform. We strive to deliver the best possible experience with unmatched customer service. We consider our clients as true partners – their success is our success.