Back Office Channel Managers Online Travel Agents Property Management Systems Revenue Management Systems Sales

What is Rate Mixing?

ratemixing6
Dennis Pitcock
Written by Dennis Pitcock

It wasn’t too long ago when hostels guests all assumed people staying in their dorm all paid the same for their night’s stay, more or less. They didn’t even second guess it. At the same time, they wouldn’t even dream of assuming the person sitting next to them on their flight paid the same. Well, the times and the hostel industry has finally caught up to the airlines and hotels, running diverse and aggressive rate strategies to meet their revenue demands.

Unfortunately that is not all hostel owners, actually its not even a majority of  hostel owners.  It is a few hostel owners, the Clinks, Generators, and Freehands running using sophistical software to give them an edge. Most others try hard manually to keep up, and the rest of the hostels just keep a few different rates for dates with peek demand, and lower the rates in the off season.

But it doesn’t have to be this way. You don’t need the fancy software to run a solid rate strategy (we’ll visit that later). In order to understand rate strategies, its best to start with understanding the basics of rate mixing, which is how the booking sites combines your different rates and then calculates an offer to present to your potential guests. Here you are starting with the end product, the guest reservation, which you can slowly build on. You will understand how your guest receive the offers (price + restrictions + inclusions) they did, and then you can work your way through your rate options to build a more robust strategy for your future.

First note that very few OTAs that offer this capability in the hostel space. Hostelworld and its other brands, are far away from offering these capabilities despite them being adapted by many big hostel groups on other channels and proven quite effective. Hotels have way more options, basically the sky is the limit. For us Dorms.com and Booking.com are our only hope, but you can still work with others if you sell many private rooms through traditional hotel channels. Now back to Rate Mixing.

Rate mixing is a simple concept. You combine two or more different rates to deliver the guest a good price, then group them according to the restrictions/inclusives to display as offers. Even if you don’t change your rates often, you still do rate mixing one way or another. So, as our first example, we’ll dive into the most simplistic, straight forward scenario there is. This is when you transition from one rate into another at a certain time of year. Think of a straight line, going through the days of 2 different rates, such as the image below.

Rate Mising Basic

In the image above, your season changes over the weekend. Your rack rate is $100 in the peak season, $90 in the shoulder season, and $10 more dollars on Friday and Saturdays, thus averaging out to $100 a night.To be honest, the diagram isn’t perfect. It isn’t a straight line like that. There is a shift in rates, so the correct visual representation is more like the image below.

RateMixing2

So, the line isn’t exactly straight, but it is as straight forward as it gets when combining rates. Typically, seasonal rates and weekend rates are programmed into what is called the Best Available Rate, which is a flexible daily rate in which promotions are ran. So for simplification, lets make a BAR example, the top line being the refundable rate and a new non-refundable version to run along with it (for more about them, click here).

ratemixing3

These rates are simple as you can see with the straight lines. You have two separate rates, and no other variations. So when you look on a booking site, you will see both of these price options, for all the inventories that they’re applied too.

Booking sites do not want to lose a customer, so they hide the grid of rates, and just provide the user with their offer options. They first show the cheapest option, and then sort by price, and where the prices match, the show the rate with the less restrictions or more inclusions (seen as a negative restriction really), and increment based on the different restrictions/inclusions that they use. For an example of this, see this image of an older booking portal offered by, Siteminder.  This grid layout is totally transparent to the user, but makes it impossible for a guest to get a low rate without making multiple reservations and moving rooms a couple times. This can turn away a potential guest, and isn’t an option for these highly competitive multi-million, if not billion dollar companies.

Now, let’s add an advance purchase rate to the mix. Say that you set a discount for people who book more than 45 days in advance. The booking window (the time the rate discount appears & disappears) opens in the middle of their search date. The booking site automatically includes it, and combines it with the other rates to give the user the best deal. This image shows how.

Rate mixing

Oops, I forgot to do the averages. I’ll leave that math to you. Did you notice 2 non-refundable rates? Well it is one too many. A booking site would only show the lowest price if there are more than one pricing option, assuming the conditions/restrictions are all the same. So the total of $380 will not be displayed to the user because what potential guest, in their right mind, will agree to pay more for the same exact offer?

Now, let’s assume the user is looking to arrive on a day after a large group left. You need to fill it up afterward that group, so you dropped the rates in a flash sale, 30% off. You don’t even care that it is refundable, you need to build the occupancy.  Here is what happens.

Rate mixing 5

Here is a clear example of how a booking site will mix up the rates, and determine the cheapest refundable and non-refundable rates as well.  You can think of this grid as 2 dimension, and now we add more with what the call child or slave rates.

They aren’t as scary as the sound, and are named accordingly due to the dynamic nature, that they are linked to another rate, and change along with it. A child is linked to the parent, a slave is linked to the master. Basically you mirror your rates and add a discount to it which requires certain restrictions to be met. A common promotion would be a length of stay rate. So say you set one up that was for stays longer than 3 days, giving 10% off. The booking site would then show a refundable rate of $333 and non refundable rate of $310.5.

Here is an illustration without the data just to give you a picture. Just think three dimensional, where a rate can be move anywhere to fine the cheapest, least restrictive path. The Parent or Master Rate is the table on the top, and the other tables are the child or slave rates.

ratemixing6

The rates can get more complex. You can add breakfast to it in a % or just add a cost, or breakfast as a gimmick to long stays, etc. These child rates often need to be enabled one way on the other. Take a length of stay discount, the child rate is enabled when the user’s search dates are long enough. So imagine that LoS table completely disabled until then.  The same will work if the user is searching certain restrictions or inclusions, applied a special codes, is a member of distinct group (such as Booking.com Genius program) or even based of the ip address of their search (Geo-Deals). Also, rates that are a child of one, can be the parent of another. So you can have multiple nested rates, generations of rate linkage going on. Think of the movie Inception. Rates within rates within rates. The really is no end to how many you can set up, sky is the limit but remember the ore there are, the more you’ll have to keep track.

They get this all to work by running their prices through a bunch of if-then functions. Basically, if these prices include a restriction, then apply the restriction to the offer. If the price is missing a day with an inclusive, remove the inclusive from the offer. Remember restrictions are contagious. To elaborate, if the offer includes one night that is non-refundable, then the whole reservation becomes non-refundable. Inclusives are the opposite. Every night must include a free breakfast for it to be considered in the rate. If one night omits breakfast, the whole reservation will not include breakfast, regardless of the guest paying the same as the breakfast rate for the one night. Remember, inclusives often add to the price and the OTA will show a new rate based off what is included. Just think of all the rate calculations that haven’t been shown.

The end result for the OTA is that the web visitor is not bombarded with ugly tables and/or undesired rates (because there is a cheaper one with the same terms next to it). This allows the user to make a quick and easy choice, thus keeping the conversion rate high, but it is not just limited to the OTAs. Have you noticed that some hostels have a direct booking pages of some hostels look very similar to an OTAs booking page? Rate mixing has  has been so effective for the OTAs that many direct booking channels also use such functionality to help you boost your own conversion rate.

Now fancy hotels have sophisticated software that is configured to only take reservations with approved rate codes. This helps them track which rates are working, and can be used for later strategies. But most hostels don’t need these capabilities. An elaborate property management system such as Mews or channel manager such as Siteminder will allow you to build up your rates there, and then push them to all the channels. Even a simple, yet effective, channel manager such as Myallocator, will work too if you know how to manage. You can start with your rate strategy today. This trick to this is to set all your rates in each booking sites as slave, or child rates to the one rate Myallocator will push to them. Expect another article about how to do specifically do this soon.

Also, those hotels and hostels with all the fancy software don’t get off that easy. They still have to build the rates in each channel and link them.  So initially, they could be doing more work than you have to, but in the long run they don’t have to monitor as much.

The is the basic overview of how booking sites mix your rates. I must mention that the rate mixing algorithm varies slightly between every channel. They basically have the same functions but take different variables into consideration, and thus could offer something slightly different. Ask your account managers for more info on rates.

In the meantime, get mixing!

 

About the author

Dennis Pitcock

Dennis Pitcock

Dennis jumped into the hostel industry after a summer backpacking Europe in 2008. He went from being a guest to a manager within weeks, and currently does consulting for large and small hostels alike in 3 continents. Prior, he worked in eCommerce, so he has passion for the tech side of the industry and is now deeply entrenched in the hostel and activities industry.

2 Comments

Leave a Comment