What is the meaning / definition of Markup in the hospitality industry?
Within revenue management in the hotel industry Markup is used to refer to the amount an OTA increases your net room rate, to set the sell rate.
OTA that work with a merchant model work with hotels on the basis of Net Rate. This means a hotel gives the OTA a rate, and the OTA will mark it up (increase) to set a sell rate.
For instance the hotel gives the OTA a rate of €80, and the OTA marks it up with €20, to sell at €100. In this case the mark-up % is 25%.
So the formula of Markup is:
Markup = Selling Price – Net Room Rate
Markup % = Markup / Net Room Rate
A common mistake made in the hotel industry is to confuse markup with margin. This is because OTA working with a net rate model also use a commission in the contract or distribution agreement with hotels. If we take the example above with a markup of €20 and a final sell rate of €100, the margin in this case would be 20% (while the markup is 25%).
Here some more formulas to put this in perspective:
- Net Rate = Sell Rate / (1 + Markup) >>> €100 / 1.25 = €80
- Net Rate = Sell Rate x (1 – Margin) >>> €100 x 0.8 = €80
- Sell Rate = Net Rate x (1 + Markup) >>> €80 x 1.25 = €100
- Sell Rate = Net Rate / (1- Margin) >>> €80 / (1 – 0.2) = €80 / 0.8 = €80
It is just math ,-) , and simply depends where you start your calculation … at the sell rate or the net rate.