What is Rate Mixing?

It wasn't too long ago when hostel guests all assumed that everyone staying in their dorm paid the same for their night's stay, more or less. They didn't even second guess it. At the same time, they would never dream of assuming the person sitting next to them on their flight paid the same. Well, the times and the hostel industry have finally caught up to the airlines and hotels, running diverse and aggressive rate strategies to meet their revenue demands. Unfortunately, that's not true for all hostel owners; in fact, it's not even a majority of hostel owners. It is a few hostel owners, like the Clinks, Generators, and Freehands, using sophisticated software to give them an edge. Most others are trying hard manually to keep up, and the rest of the hostels just maintain a few different rates for dates with peak demand and lower the rates in the off-season. But it doesn't have to be this way. You don't need fancy software to run a solid rate strategy (we'll visit that later).

To understand rate strategies, it’s best to start with the basics of rate mixing, which is how the booking sites combine your different rates and calculate an offer to present to your potential guests. You begin with the end product: the guest reservation, which you can slowly build on. You will understand how your guests receive the offers (price + restrictions + inclusions) they do, 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 offer this capability in the hostel space. Hostelworld and its other brands are far from offering these capabilities despite them being adopted by many big hostel groups on other channels and proving 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 a good price to the guest, then group them according to the restrictions/inclusions to display as offers. Even if you don't change your rates often, you still do rate mixing one way or another.

As our first example, we'll dive into the most simplistic and straightforward scenario there is: transitioning from one rate to another at a certain time of year. Think of a straight line going through the days of two different rates, such as in the image below.

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 an additional $10 on Fridays 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.

So, the line isn't exactly straight, but it is as straightforward 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 run. To simplify, let's make a BAR example, with the top line being the refundable rate and a new non-refundable version running alongside it (for more about them, click here).

These rates are simple, as you can see with the straight lines. You have two separate rates, and no other variations. When you look on a booking site, you will see both of these price options for all the inventories that they’re applied to. 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. Where the prices match, they show the rate with fewer 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 it makes it impossible for a guest to get a low rate without making multiple reservations and moving rooms a couple of 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 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.

Oops, I forgot to do the averages. I'll leave that math to you. Did you notice two non-refundable rates? Well, that's 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, would agree to pay more for the same exact offer?

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

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 two-dimensional, and now we add more with what they call child or slave rates. They aren't as scary as they sound, and are named accordingly due to their dynamic nature; 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 them 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 three days, giving 10% off. The booking site would then show a refundable rate of $333 and a 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 moved anywhere to find 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.

The rates can get more complex. You can add breakfast to it as a percentage or just add a cost, or breakfast as a gimmick to long stays, etc. These child rates often need to be enabled one way or 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 for certain restrictions or inclusions, applies special codes, is a member of a distinct group (such as the Booking.com Genius program), or even based on the IP address of their search (Geo-Deals). Additionally, rates that are a child of one can be the parent of another. So you can have multiple nested rates, generations of rate linkages going on. Think of the movie Inception. Rates within rates within rates.

There really is no end to how many you can set up; the sky is the limit. But remember, the more there are, the more you'll have to keep track of. 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 that one night.

Remember, inclusives often add to the price and the OTA will show a new rate based on 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 with direct booking pages look very similar to an OTA’s booking page? Rate mixing has been so effective for the OTAs that many direct booking channels also use such functionality to help boost their own conversion rates.

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 a 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 it.

You can start with your rate strategy today. The trick is to set all your rates on each booking site as slave or child rates to the one rate Myallocator will push to them. Expect another article about how to do this specifically 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.

This 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!