Establishing Room rates/Methods Used to Fix Room rates
There are three popular approaches to pricing rooms.
1. Market Condition Approach
2. Rule-of-Thumb Approach
3. Hubbarts formula Approach
Market Condition Approach
This approach is the common sense approach. Management looks at
comparable hotels in the geographical market and sees what they
are charging for the same product. The thought behind this is that
the hotel can charge only what the market will accept, and this is
usually dictated by the competition.
There are many problems with this approach of pricing, although it
is used very often.
1. If the property is new, construction costs will most likely be higher
than those of the competition. Therefore, the hotel cannot be
profitable as the competitor initially.
2. Second, this approach does not take the value of the property
into consideration . With the property being new , and perhaps
having newer amenities , the value of the property to the guest
can be greater.
3. This approach allows the competition to determine the rates and
this could significantly affect the profitability of the hotel
Rule –of-Thumb Appoacule of thumb approach sets the rates of a
room at rupee for each rupee 1,000 of construction and
furnishings cost per room, assuming a 70% occupancy. Example
Assume that the average construction and furnishings cost of
hotel room is rupees 10,00,000. Using , the 1 rupee per 1,000
approach results in an average selling price of rupees 1,000 per
room. Singles, doubles, suites and other types of rooms would be
priced differently, but the minimum average rate would be rupees
1,000.
Problems associated with this approach of pricing includes
1. The emphasis placed on the hotels construction cost fails to
consider the effects of inflation. Example, a well maintained
hotel worth rupees 15,00,000 per room today may have been
constructed at rupees 8,00,000 per room 10 years ago. The 1
rupee per 1,000 approach would suggest an average selling
price of rupees 7,00 per room, however, a much higher rate of
would appear appropriate.
2. The rule-of-thumb approach to pricing rooms also fails to
consider the contribution of other facilities and services
towards the hotels desired profitability.
Hubbart Formula Approach
A more recently developed approach to average room rate
determination is the Hubbarts Room Rate Formula. To determine the
average selling price per room , this approach considers the operating
costs, desired profit, and expected number of rooms sold. In other
words this approach starts with desired profit ,adds income taxs, than
adds fixed charges and management fee, followed by operating over
head expenses and direct operating expenses. It involves following
steps.
1. First all operating costs are calculated…….A
2. Next the rate of return on investment (R.O.I ) on Land, Building
and furniture, fixture and furnishing along with amount of
depreciation is calculated……B
3. Next total expenditure is calculated …….C
C = ( A+B )
4. Next deduct the credits /income from other sources than
rooms….D
5. Next amount to be realized from guest room sales to cover costs
and a reasonable return of present fair value of property is
calculated…….E
E = ( C-D )
6. Next number of rooms available for sale per day is obtained.
7. Next number of rooms available for sale per year is calculated
No. of rooms/day x 365
8. Less allowance for average vacancies…..say 20%
9. Next number of rooms expected to be occupied per year is
calculated ..no. of rooms available per year-no. of vacant rooms
……. .F.
10. Average daily rate required per occupied room t cover all
costs and get reasonable/ fair return on investment……H
H = E / F
There are three popular approaches to pricing rooms.
1. Market Condition Approach
2. Rule-of-Thumb Approach
3. Hubbarts formula Approach
Market Condition Approach
This approach is the common sense approach. Management looks at
comparable hotels in the geographical market and sees what they
are charging for the same product. The thought behind this is that
the hotel can charge only what the market will accept, and this is
usually dictated by the competition.
There are many problems with this approach of pricing, although it
is used very often.
1. If the property is new, construction costs will most likely be higher
than those of the competition. Therefore, the hotel cannot be
profitable as the competitor initially.
2. Second, this approach does not take the value of the property
into consideration . With the property being new , and perhaps
having newer amenities , the value of the property to the guest
can be greater.
3. This approach allows the competition to determine the rates and
this could significantly affect the profitability of the hotel
Rule –of-Thumb Appoacule of thumb approach sets the rates of a
room at rupee for each rupee 1,000 of construction and
furnishings cost per room, assuming a 70% occupancy. Example
Assume that the average construction and furnishings cost of
hotel room is rupees 10,00,000. Using , the 1 rupee per 1,000
approach results in an average selling price of rupees 1,000 per
room. Singles, doubles, suites and other types of rooms would be
priced differently, but the minimum average rate would be rupees
1,000.
Problems associated with this approach of pricing includes
1. The emphasis placed on the hotels construction cost fails to
consider the effects of inflation. Example, a well maintained
hotel worth rupees 15,00,000 per room today may have been
constructed at rupees 8,00,000 per room 10 years ago. The 1
rupee per 1,000 approach would suggest an average selling
price of rupees 7,00 per room, however, a much higher rate of
would appear appropriate.
2. The rule-of-thumb approach to pricing rooms also fails to
consider the contribution of other facilities and services
towards the hotels desired profitability.
Hubbart Formula Approach
A more recently developed approach to average room rate
determination is the Hubbarts Room Rate Formula. To determine the
average selling price per room , this approach considers the operating
costs, desired profit, and expected number of rooms sold. In other
words this approach starts with desired profit ,adds income taxs, than
adds fixed charges and management fee, followed by operating over
head expenses and direct operating expenses. It involves following
steps.
1. First all operating costs are calculated…….A
2. Next the rate of return on investment (R.O.I ) on Land, Building
and furniture, fixture and furnishing along with amount of
depreciation is calculated……B
3. Next total expenditure is calculated …….C
C = ( A+B )
4. Next deduct the credits /income from other sources than
rooms….D
5. Next amount to be realized from guest room sales to cover costs
and a reasonable return of present fair value of property is
calculated…….E
E = ( C-D )
6. Next number of rooms available for sale per day is obtained.
7. Next number of rooms available for sale per year is calculated
No. of rooms/day x 365
8. Less allowance for average vacancies…..say 20%
9. Next number of rooms expected to be occupied per year is
calculated ..no. of rooms available per year-no. of vacant rooms
……. .F.
10. Average daily rate required per occupied room t cover all
costs and get reasonable/ fair return on investment……H
H = E / F
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