What is rack rate?
The rack rate is the standard, undiscounted price for a hotel room. Think of it as the “sticker price” for your accommodation, typically displayed on your website or communicated to guests who book directly. While it’s rare for guests to pay this rate, it’s a crucial benchmark for your pricing strategy.
Rack rates are also a point of reference for discounts, promotions, and packages, providing a clear benchmark that even newcomers can rely on to craft effective pricing strategies. They simplify the often complex world of revenue management, giving you a reliable foundation to build upon as you grow your confidence in managing rates.
In this article, we’ll discuss the definition of rack rates for hotels, what factors should determine pricing, and what software is available to support these decisions and implications of pricing higher or lower than the competition.
Rack rate vs bar rate and net rate
So how does a rack rate differ from bar rates or net rates?
- Bar rate: Best available rate (BAR) is often lower than the rack rate and fluctuates based on demand, season, and occupancy.
- Net rate: This is the rate after subtracting any commissions or fees, often used in negotiations with online travel agencies (OTAs) or corporate bookings.
Understanding these distinctions ensures you’re setting and communicating your pricing effectively.
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Why is setting rack rates important for small accommodation providers?
Defining a rack rate means you have a foundation for success as a small hotelier. You – and your guests know – the worth of your rooms and services, allowing you to carve out your niche in the market. Plus, OTAs and other industry partners will normally negotiate based on your rack rate, so you really need to have one if you’re going to operate smoothly with other players.
What are the benefits of standard rack rates?
Clear, consistent rack rates offer numerous advantages:
They provide transparency, fostering trust and simplifying booking decisions for guests and partners.
With a defined baseline, you can easily adapt discounts and packages to market changes or special events without creating confusion or cutting into your bottom line.Finally, a clearly defined rack rate also gives you greater credibility and strengthens your reputation among industry partners as a reliable and well-managed property.

Rack rate formula: How is it calculated?
It’s important to remember that your rack rate is simply a place to start. There’s no specific formula for determining the best one for your hotel. There are, however, starting points.
- Calculate your total costs, including utilities, cleaning, maintenance, staff wages, and so on. Make sure to include taxes, insurance, supplies and amenities as well. This is operating costs, fixed costs, and variable costs.
- Determine your profit margin. Decide how much profit you want to make this year; the percentage of profit you need.
- Calculate the cost per room by dividing your total costs by your number of rooms.
- Set your average rack rate by:
Rack rate = cost per room + (cost per room x profit margin).
You don’t stop there though. This is just a starting point, and you must take into account demand fluctuations, special events, seasonal trends, room types, and so on. Competitor pricing is crucial, as a rack rate set too high and that isn’t dynamic, is one that will result in vacant rooms.
Rack rate example
Let’s say your small B&B has total yearly costs of $80,000 and you’re targeting a 20% profit margin. With 5 rooms available, your rack rate calculation would look like this:
Cost per room = $80,000 / 5 = $20,000 per room per year.
Rack rate per year = $20,000 + ($20,000 x 0.2) = $24,000 per room per year.
Then, you can take this and divide it by all the days you are available to get a daily average rack rate. For the sake of argument, let’s say you’re available all year round.
Rack rate per night = $24,000 / 365 days = $65 per night.
What is the average rack rate in hotels?
The average rack rate in hotels varies widely depending on the property type, location, and market positioning. There isn’t a one size fits all even within a single city, let alone across the entire industry! Remember, focus on your competitors and your own determining factors.
Which factors determine your rack rate?
Several factors come into play when setting your rack rate. Here’s a breakdown to make it manageable:
- Operating costs: Ensure you cover fixed and variable expenses such as utilities, staffing, and maintenance.
- Market demand: Adjust for seasonality, local events, and travel trends.
- Competitor pricing: Research nearby hotels with similar amenities to find a competitive range.
- Room type and features: Larger rooms, better views, or added perks often justify a higher rack rate.
- Target audience: Know your guests—leisure travellers might prioritise affordability, while business travellers often value convenience.
Pro Tip: Use a mix of manual research and automated tools to ensure your pricing remains competitive and aligned with market trends.
Best practices for rack rate pricing strategies
Once your rack rate is set, it’s time to optimise it. Here’s how:
Understanding competitor rack rates
Conduct regular checks on competitor pricing. Tools like Little Hotelier can automate this process and help you stay competitive.
Operational and financial planning
Use rack rates as a foundation for budgeting and forecasting. It’s a dependable benchmark for your revenue targets.
Marketing and promotions
Rack rates provide a reference point for creating compelling deals. “Save 20% off our standard rate” carries more impact when guests understand the original value.
Negotiations with OTAs
OTAs often negotiate based on your rack rate. A well-structured rate ensures you don’t undercut your profit margins.
Revenue management and yield optimisation
Dynamic pricing strategies, where rates adjust based on demand, should revolve around your rack rate to maintain profitability.
By Dean Elphick
Dean is the Senior Content Marketing Specialist of Little Hotelier, the all-in-one software solution purpose-built to make the lives of small accommodation providers easier. Dean has made writing and creating content his passion for the entirety of his professional life, which includes more than six years at Little Hotelier. Through content, Dean aims to provide education, inspiration, assistance, and, ultimately, value for small accommodation businesses looking to improve the way they run their operations (and live their life).
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