What is a Rate Fence?

Rate fences are rules or restrictions that allow customers to segment themselves into appropriate rate categories based on their needs, behavior, or willingness to pay. Rate fences are commonly used in the airline and hotel industries to force customers into higher-paying or lower-paying groups.

Advantages of Rate Fences

There are several advantages to the use of rate fences, which are as follows:

Maximize revenue. Rate fences are used to maximize the amount of revenue generated by a business. For example, a hotel could use rate fences to encourage customers to stay in more expensive rooms, as well as to prolong their stays for additional days.
Increase demand. Rate fences can increase demand through the use of highly targeted discount deals, as well as by offering promotions in very specific sales channels where they are not likely to be seen by the firm’s best, highest-paying customers.
Segment the market. By using rate fences, you can segment your market based on customer behaviors, preferences, and purchasing power. This allows you to narrowly focus your pricing for each identified market segment.

Examples of Rate Fences

There are multiple ways in which rate fences can be imposed. For example, a business could offer a lower price that is nonrefundable and must be paid in advance, which is intended to block out business travelers who are more likely to change their reservations at the last minute. As another example, a business could offer a lower price if travel occurs over a weekend, which tends to exclude business travelers. A third option is to offer a lower price if purchases are made well in advance, which will probably exclude business travelers, who tend to schedule travel at the last minute.

In all of the preceding examples, rate fences are intended to force business travelers to pay the highest possible price, while allowing vacationers or incidental travelers access to lower prices. By doing so, a business is maintaining its highest pricing for its best customers, while using rate reductions to attract additional customers.