12Oct

Group Pricing: Why the Minimal Acceptable Rate is a Trap

Author: Avanti Joglekar

By now, we’re all familiar with the challenges of forecasting and bidding for group business.  While those are all crucial to group business, the most important aspect is, of course, price.  As the goals behind group business shift from occupancy to revenue, the process of accurately pricing rooms has become infinitely more complicated.  Revenue managers have to consider comp sets, sales incentives, availability, and impacts on transient business before determining a room rate.  Due to a lack of technologically advanced tools and the multitude of considerations for group business, pricing rooms has primarily been a tedious, manual process.  

Revenue managers have relied on two approaches for rate setting, both of which place the property at a disadvantage.  The first method, called the minimal acceptable rate (MAR), is a predetermined lowest price for room bids.  The second, called the transient displacement analysis, is slightly more advantageous for the property.  It determines the rate at which group business breaks even with the anticipated transient business.  Both of these methods have the effect of negotiating rates down to an acceptable price for the bidder instead of prioritizing the property’s best interests.

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Besides forcing room rates lower during negotiations, both methods have other inherent issues.  Using the transient displacement analysis requires an entirely accurate transient forecast.  It also doesn’t consider more complex factors like cancellations and function space, so ultimately the hotel may not be better off by accepting the group business.

The MAR method is even more troublesome.  In addition to being geared towards breaking even at best, it’s also extremely time-consuming and usually not up to date with current market conditions.  When a revenue manager is wasting their time in calculating the MAR for a group bid, they could be losing valuable conversions.

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Thankfully there are much better ways to price group business.  Using a scientific approach, revenue managers are capable of understanding not only how to efficiently convert leads but also identifies opportunities to optimize profitability.  Rather than aiming for the lowest possible price, the science-based method measures potential room pricing against the likelihood of converting the group bid.  It can drill down into a granular level for your group segments by examining a multitude of factors instead of just the basics.

Data driven, scientific approaches are more accurate, more efficient, and more likely to convert bids into business.  For a detailed case explanation of the scientific pricing method for group business, plus a case study of its effectiveness, click here!

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