What is the meaning / definition of Markup in the hospitality industry?
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.
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