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. For example:
- 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.
- Offer a lower price if travel occurs over a weekend, which tends to exclude business travelers.
- 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 travellers 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.