Hurdle rate in the hotel industry

Definition of hurdle rate

Translated into German, the word means “price hurdle.” The term comes from financing and describes the imputed base interest rate or minimum return for investors. It is defined by the return expectations of these investors or even management.

In financial projects, the hurdle rate is understood as the appropriate compensation for the existing risk. Riskier projects generally have higher price hurdles than lower-risk projects.

In the context of revenue management for the hotel industry, the hurdle rate is the lowest acceptable room rate for a specific date.

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How is the price hurdle used in the hotel industry?

The hurdle rate is the threshold above which it is worthwhile for a hotel to sell a room on a specific day or within a certain period of time. As a result, below this value, it makes more sense for the hotelier or channel manager to leave the room vacant. This price hurdle is therefore a tool for achieving high profitability.

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In other words, the hurdle rates are like Restrictions to see. This is because the rooms can only be booked if their price is greater than or equal to this rate. Of course, this applies to direct bookings as well as to OTAs.

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Terms related to Hurdle Rate

The term itself has so many synonyms and aliases that we would like to list a few for you here.

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Bid price/bid price and last room value (LRV) are used as synonyms. This is particularly true in some software solutions.

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When it comes to group bookings, the “lose-it rate” is synonymous. Accordingly, this is the minimum price that should no longer be accepted as a group booking for certain rooms and dates.

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Opportunity costs are a relative term. Traditional business administration does not mean real costs, but lost profit, which is missing or less when deciding on one of several alternatives.

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The counterpart to the hurdle rate is the rack rate: The highest price a guest pays for a room. A room cannot be sold for more than its rack rate. In general, rack rates are offered for walk-in guests and are subject to change daily.

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There are differences with regard to the lower price limit. Because the hurdle rate can be seen for a specific day or period of time. In addition, it depends on the booking situation in general. On the other hand, the Price floor best calculated per room category. It is always valid, regardless of the date or booking period.

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How is the price threshold calculated?

There is no generally valid formula for calculation outside of a revenue management system. On top of that, the rate does not represent an explicit price, but rather a “hurdle.” Many conditions are taken into account for this: What does the workload look like at this date or period? How is the booking made — via an OTA or directly? How long does the guest stay?

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It also depends on which pricing concepts the hotel generally applies. One example is the BAR method, the Best available rate.

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However, what is generally true and is important for the hurdle rate: The entire value of a booking always counts.

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See the video below for an example.

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