UNIT-1 TARIFF STRUCTURE

Content 1.1 1.2 1.3 1.4 1.5 1.6 Introduction Tariff Card Different Rates Rate Types Basis of Charging Rooms Basis of Pricing a Room

1.1

INTRODUCTION

A front office will almost always have more than one room rate category for each of its guest r. Room rate categories generally correspond to types of rooms (suites, two beds, one bed, etc.) that are comparable in square footage and furnishings. Differences are based on criteria such as room size, location, view, furnishings, and amenities. Each room rate category is assigned a rack (standard or retail) rate based on the number of persons occupying the room. The rack rate is the standard price determined by front office management. The rack rate is listed on the room rate schedule to inform front desk agents of the selling price of each guest-room in the hotel. In a fully automated property, front office employees may be able to use a computer terminal to access rack rate data during the reservations or registration process. Often, rack rates (room rate schedule) must be reported to local and state authorities. Therefore, they must accurately reflect the appropriate accommodation charge for each room rate category. 1.2 TARIFF CARD

The RACK RATE is understood to be the highest published rate a hotel can charge for a specific room. Rack rates can differ between room types, configuration, and designation. On the back of most hotel room doors, a tariff sheet will be posted. The Tariff card mentions the rooms, their rack rates and types available for sale in the hotel and the rooms are named according to the services offered by the hotel (e.g. Standard, deluxe, etc.). It also states the taxes applicable on each category. This card could also give an overview of the hotel and its facilities (e.g. Coffee shops, Restaurants, banquets etc.). It is generally in the form of a single sheet. In most cases, hotels must adhere to the rate structure posted on the tariff sheet. Certain states allow for exceptions during unusually high demand events, such as yearly sporting competitions. The hotels that change their rack rates for these events must post that information on the in room tariff sheets well in advance
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Understanding that some rates will be lower and some higher.FORMAT OF A TARIFF CARD 1. Volume Account Rates Also called preferred rates. Hotels will base their volume requirements on many factors. Special rates are often quoted to groups and certain guests for promotional purposes during low occupancy period. It is offered generally to any guest who knows to ask for it. The target rate is simply an average rate goal a hotel sets to achieve for a certain day or market segment. the volume account must be measured to ensure that room night 2 . Organizations who know that they have a certain level of transient volume that they can bring to a certain hotel can negotiate for this volume discount. Both the group and transient room sales teams have their own target rates. the target rate serves as the predetermined average goal. or yearly basis. the corporate rate reflects a 10 to 20 percent discount off of the rack rate. the volume account rate trades a further discount off of the corporate rate in exchange for a guaranteed number of room nights within a specific time frame. The level of this discount is contingent upon the volume. Whether on a monthly. Primary among the requirements is a set time frame.3 DIFFERENT RATES Front office employees are expected to sell rooms at the rack rate unless a guest qualifies for an alternate room rate. quarterly. The corporate rate is widely accepted as the transient target rate for most hotels. Typically. which they strive to reach. Special room rate categories include: Corporate Rate This designation is designed to promote the corporate market segment.

Hotels will predetermine the number of room nights required to achieve each grade. Season rates Resorts and other location types that see a fluctuation in demand due to weather or the operation of a nearby attraction will vary their rates accordingly. A seasonal rate designation can apply to other rates as well. hotel location types see their weekday and weekend demand levels as illustrated in Figure 7-4. Those staying Sunday through Thursday are considered weekday occupants because the next morning is a traditional workday. Large corporations (such as IBM) often set per diems as well in areas where no volume accounts have been set. Traditionally. will definitely be higher than out-of season corporate rates. the central and state per diems are not the same. and other out-of-pocket expenses. A per diem for governmental employees usually covers hotel. — “C” Accounts are entitled to a 10 percent discount off corporate rate. federal and/or state governmental agencies set predetermined rates that they will reimburse their traveling employees for. as well as other state and local agencies may set their per diems at the same rupee amount. in many instances. Resort hotels (in season) will see demand grow on 3 . Those traveling on government business are usually asked for identification upon check-in before being granted the government rate. meals. These per diems are set a year in advance and published so that all interested hotels can offer it.These figures will vary based on market factors. and assign a rate discount accordingly. The hotel industry looks at the days of the week slightly differently than the public might. Government Rates Within most major cities. For example: — “A” Accounts are entitled to a 20 percent discount off corporate rate. Setting a per diem too low may preclude governmental employees from staying at a nicer facility. In-season corporate rates. However. Whatever criteria are used. Offering a different rate for in season and out-of-season (also called off-season) allows the hotel to alter their rate structure to compensate for this cyclical demand. these volume accounts are usually assigned a grade based on production. for example. This reimbursable rate is called a per diem. but traditionally the hotel location types will see their demand fluctuate with the days of the week.production levels are maintained. Weekend and Weekday Rates Hotels of all location types see fluctuation in demand during certain days of the week. It is not uncommon for hotels to lobby the government to raise the per diem if it is deemed too low. The Central government. — “B” Accounts are entitled to a 15 percent discount off corporate rate. Guests who stay at a hotel on a Friday or Saturday night are staying on a weekend night because the next morning is a non workday. The determination of what days is considered weekday and which are considered weekend is based on the next morning of occupancy.

A walk-in is a hotel guest who arrives without a reservation. Industry rates can vary from 30 to 50 percent off rack rate. These hotels must meet two main criteria in order for them to be recommended: (1) A certain level of quality. The one restriction most hotels impose is a valid form of industry identification. Membership rates Organizations such as the Hotel and Restaurant Approval and Classification Committee (HRACC) and Federation of Hotel and Restaurant Association of India (FHRAI) have a large constituency of members who enjoy travel. and lower on weekends when most travelers are home. the walk-in rate may be set fairly high to maximize room revenue. a specific rate designation for these nicer 4 . These rates vary greatly. depending on the location and seasonality factors. They see this as an effective way to promote awareness of sister hotels and to instill a form of guest loyalty on the employee. This industry rate should not be confused with what is referred to as an “employee rate. But. because that formula only created a starting point for the rate structure. etc. but can be as much as 75 percent off rack rate. employees from other hotels. and cleanliness.weekends and drop during the week. Recognizing this. Hotels benefit from offering these rates because of the loyalty those members of these organizations exhibit. If it is recommended by their organization. Suburban hotels will see steady mid-week demand and a drop off on weekends. these organizations have developed travel guidebooks and other aids to help their members choose a hotel. Downtown hotels have a strong weekday demand cycle that corresponds to meetings and conventions. Premium rates Schedule III of the Hubbart formula looked at establishing an average room rate based on the size of the hotel room in question—the assumption being that larger rooms were nicer rooms. The International Association of Travel Agents (IATA) is a recognized industry group that issues a number for all legitimate travel agencies and their employees. These membership rates are typically 50 percent off rack rate. With few remaining rooms. A business card or paycheck stub may suffice as well. meeting planners. Walk in rates This type of rate designation may vary from night to night. (2) A special rate. Airport hotels traditionally have higher demand when business travel increases during midweek. Literally “walking in off the street” these guests can help fill any remaining hotel rooms. Industry rates Those who work in the travel industry (travel agents.” Many chains offer their employees a discounted rate at affiliated hotels when they travel. A spike can occur on Saturdays if suburban hotels have strong demand from the social market. service. An empty hotel may reduce the walk-in rate significantly. It is set each night by the front office or room’s manager based on the remaining unoccupied rooms in the hotel. the members can be sure that the hotel has met the two main recommendation criteria.) are often extended the professional courtesy of discounted rates.

They may require a room for a few hours’ sleep and a quick shower to freshen up.” There are two methods of implementing the premium designation: (1) Fixed premium rates are set. How far in advance a hotel sets its advance purchase rates depends largely on its booking cycle. Called bundling. A half-day rate may be imposed in these cases as well. Variable premium rates simply add the specific premium to the initial rate quoted for a standard room.g. transportation. The advance purchase rate concept was copied from the airline industry. The perceived benefit to the guest can be monetary savings. they are often nonrefundable and can carry a penalty for any change. or both. Variations on the hotel package can consist of: • Vacation Packages These bundle room rates and one or more of the following: airline tickets. Advance Purchase rates A relatively new trend in hotel rate structures. A specific premium is determined for each configuration. an advance purchase rate offers a greater discount based on the number of days in advance it is booked. They do not vary. convenience. (2) Variable premium rates are determined based on the other available rates. A hotel wishing to lengthen that booking cycle (and hence getting more reservations booked farther in advance) will offer advance-booking rates with greater discounts further out. Rooms with a special view might command a $20 premium over the same room type with no view (for example. tickets to local attractions or shows. Most often these are suites. Package rates can incorporate non hotel items as well. The transient demand is low outside the traditional booking cycle and increases drastically within it. but some hotels have built specially designed sleeping rooms complete with small conference tables and limited audiovisual equipment. Travelers arriving in from a long flight may come at all hours of the day. 10. those with views or other amenities. The booking cycle can be anywhere from a few days to a few months. Because the room is not used for the entire night. Often this entails pricing the package below the cost of purchasing the items separately. Room configurations above standard. As was reviewed previously. and “themed” 5 . can command a room rate premium. standard rates quoted for each configuration regardless of demand. Half-day rates are also commonly offered at airport hotels in major gateway cities. a hotel will package the room (and its rate) with another service or amenity. A guest wanting a junior suite may pay a $100 premium over the initial rate quote ($100 + government rate). corporate rate + $20). a half-day rate may be assigned based on half the value of the rack rate. Premium rates are applied to any room that offers something “extra. A 7. These rooms are often utilized for just a few hours to conduct interviews and small conferences.. Package rates A hotel package combines one or more hotel products or services to make the new entity more attractive. Similarly. or 21-day advance purchase rate will have a corresponding lower price. Half Day rates Some hotels offer certain guest rooms as an alternative meeting room. the individual booking cycle is the time between when an individual reservation is made and when that reservation is due to arrive. breakfast). Most traditional hotel packages combine a room with a meal (e.rooms is needed.

• Meeting Packages These can be valuable for the busy meeting planner. hotels may charge a preset amount for each additional occupant. lunches. Sometimes referred to as a Comprehensive Meeting Package. and quad occupancy (four guests). A concert package might include a ticket to a show and the musical artist’s latest compact disk in addition to the room. or Day Meeting Package. transportation. a single occupancy room has only one occupant. A Complete Meeting Package (or CMP) rate typically includes coffee breaks. includes everything the CMP rate did except for the sleeping room. As was introduced in the thread on the guest room. over time. Savvy hotels have even bundled their sleeping rooms with sought-after items. Hotel rooms that house many people will. Shopping packages may include discount coupons to local shops and a foot massage for tired feet. the cost of the meeting room and a sleeping room all bundled together. Group rates 6 . The DMP. This additional cost is due to the fact that hotel rooms suffer a greater “wear and tear” with more occupants. the CMP rate is often offered at conference centers with sleeping rooms. A themed amenity could include sunglasses and suntan lotion for a “Fun in the Sun” package. Savvy hotels have even bundled their sleeping rooms with sought-after items. A single occupancy rate assumes the same. Based on the number of people. A “Night on the Town” package might include a limousine ride and dinner. A themed amenity could include sunglasses and suntan lotion for a “Fun in the Sun” package. Tickets to a sold-out show that are bundled with a hotel room virtually guarantee a sale (whether the guest stays there or not). There are a few hotels that do not charge per person rates because they value the outlet and ancillary revenue that additional occupants will surely generate. dinners. per person rates can be variable or fixed. and/or audiovisual equipment. Variations of the meeting package may not always include the sleeping room. rooms that are occupied by more than one guest are called double occupancy (two guests). A concert package might include a ticket to a show and the musical artist’s latest compact disk in addition to the room. It is rare for a standard room to house more than four people. To review.amenities. require more maintenance and a greater frequency of renovations. Similar in design to the premium rates. tickets to local attractions or shows. triple occupancy (three guests). Tickets to a sold-out show that are bundled with a hotel room virtually guarantee a sale (whether the guest stays there or not). Sometimes called the rate spread. the difference between the single and double occupancy rates can range anywhere from 10 to 25 percent. A honeymoon package could include champagne and strawberries with the room. These bundle room rates and one or more of the following: airline tickets. Shopping packages may include discount coupons to local shops and a foot massage for tired feet. A honeymoon package could include champagne and strawberries with the room. and “themed” amenities. A “Night on the Town” package might include a limousine ride and dinner. Per person rates All the aforementioned rate designations are usually based on single occupancy.

Its abbreviation (ARR) is universally understood to stand 7 . Complimentary Rate A room rate provided to employees. The purpose of room rate variance and price discounting is to tailor the product as closely as possible to the needs of the market. it is often extended leaders. tour operators.4 RATE TYPES Rate Measurement Averages Each of the various room designations will equate to a specific rupee amount based on the many factors discussed earlier. was to select a starting point for a hotel’s rate structure. It is difficult to categorize these rates as a specific designation because they can differ greatly. Therefore. in conjunction with the Hubbart formula. which fluctuate according to the class of business. Its intended use. The type of accommodation. Average room rate can also be used to determine the total (cumulative) average rate paid at a hotel on a given night. Many hotels have room rates tariff. decor and view from the room will influence the room rates charged to the guest. the room rates refer to the price at which a hotel sells its rooms. Family Rate A rate reserved for families with children. Incentive Rate The rate offered to guests in affiliated organizations travel agencies and airlines because of potential referral business. 1.Although analysis of group rates merits an entire text. they do make up a portion of a hotel’s rate structure. As the guests needs for accommodation become more sophisticated. special guests and/or important industry leaders. For the purposes of this text. How many corporate rates were sold last night? How high were the group rates? What are the average rates of each sleeping room? These questions and many others like them are best answered by reviewing rate averages. time of year and services included. size. A group rate is determined by many factors. meeting planners. The most common rate average measurement was reviewed earlier—average daily rate. there is an increase in the variation of room rates. Group rates are typically lower than transient rates because they are booked in advance and are contractually obligated. it is important to note that the number of groups and their differing rates may affect the other rate designations within a hotel’s rate structure. and others capable of providing hotel with additional room sales. They also provide revenue to the other two parts of the hotel success triangle (namely catering and outlet/ancillary revenue). The rate may also be offered to promote future business. Measuring each of these rates is important in determining hotel performance. The term “average room rate” is broad and has another meaning.

8 • • • • . association. The Average Room Rate includes all rooms in the inventory (occupied or not). Market segment rates Both transient and group rooms are comprised of their own specific market segments. An unhappy guest may be asked to come back again on a complimentary basis. The group average rate is often lower than the average daily rate or Rev PAR due to the fact that group rooms include comps and most group rates are lower to begin with. taxes. an average rate can be viewed for business and pleasure segments. Opportunity cost is incurred every night. Rev PAR Determined by calculating the room revenue generated strictly by occupied and paying rooms.). An out of. ARR was determined by using the revenue from strictly occupied rooms. The group market can analyze the rates averaged for the corporation. Each of these can be analyzed on its own to determine the average rate for that particular market segment. More in-depth analysis can be conducted on market sub segments by averaging their rates as well. It is for that reason hotels generally attempt to limit the number of comps and OOO rooms on any given night Group average rate Calculated from occupied rooms of groups of 10 or more rooms per night.order room (OOO) is “not occupiable” for one reason or another. Hotels give comps away for many different reasons. within the transient market. As was reviewed in the analysis of room cost. which literally reduces the number of rooms available at a hotel. The transient average rate looks at the revenue generated from all non–group-occupied and revenue-generating rooms. Other rate measurements averages include: • Average Room Rate It is determined by the combination of room revenue generated by rooms divided by the total number of rooms. An OOO room is said to be taken out of inventory. Groups with many rooms at a hotel are often given 1 comp for every 50 occupied rooms.for the revenue generated by all occupied sleeping rooms divided by the number of rooms. etc. Rev PAR excludes comps and out-of-order rooms. Transient Average rate The companion measurement to group average rate. The ARR measurement is used by most in the industry to compare a hotel’s performance in relation to past years and to other hotels in a competitive set. Comps literally translate into a rate of $0. A comp (industry term for complimentary) is a room given away on a gratis basis for a special guest. Each comp and OOO room reflects a lost opportunity to sell the room. and other market segments. Both comps and OOOs are excluded from Rev PAR because they were either not occupied or did not generate revenue. all rooms incur a cost regardless of the value of the rate (H/L/P. For example. Whereas ARR looks at all occupied rooms. Repairs due to damage or renovations may render a room inappropriate for occupancy. Casino hotels may give comps away to their high rollers. This does not mean that there is no cost incurred.

g. non-smoking average rate). regardless of the check in time of the guest. CP = RR + B/F (Continental) Bermuda Plan: 9 . EP = RR Continental Plan: The rate covers room rate. the hotels day begins at this fixed time every day. Here the night spent in the hotel becomes the basis of charging the guest. drinks. Night Basis This is a modification of the 24 Hours system of charging. An all-inclusive rate will bundle all meals. Day Basis Sometimes a guest may stay in the hotel for a few hours only and may not spend the night in the hotel at all. 12 noon or 4 pm.. If the guest does not stay the night in the hotel. Average rates can be based on room types (e. activities. Sometimes early morning tea may be included in the room rate.. configuration (e. Food Plans A food plan indicates whether the rate charged to the guest for his accommodation is inclusive of meals or not. double average rate).g. The advantage of this form of charging is that the same room may be sold twice a day. and gratuities into the room rate. suite average rate). the plan can be referred to as inclusive of room rent only i. and designation (e. he is given a concession on the halt. This system is now outdated and not very popular. In such cases where he stays only for 6 hours maximum hotels may charge special discounted rate (which is usually 50% of the rack rate) and the rate is called “day rate or day use rate”.e. the hotels day begins at the check-in time of the guest and he / she will be charged for one day on the basis of 24 hours from his / her check-in time. which is optional.5 BASIS OF CHARGING ROOMS Check In / Check Out Basis In this system. a particular time of day is fixed as check-out time. 24 Hours Basis Here there is no fixed check out time of the hotel.• Room specific averages Another type of average rate is based on the room itself. No meals are included in the room rate. European Plan: The rate covers only room charges. which resorts often incorporate into their rate structure.. 1.g. eg. Thus. as most of the hotels do not provide tea. a continental breakfast and an early morning tea. Not to be confused with all-inclusive rates. As far as charging is concerned.

MAP = RR + B/F (American) + Lunch / Dinner. Most. The All.The plan includes the room rate. the rule-of-thumb approach. Early morning tea may be served. an American B/F. a property offering economy facility and limited guest services will most likely not be successful if its rates are positioned in the mid-price or upscale levels. The following sections examine three popular approaches to pricing rooms—the market condition approach. MARKET CONDITION APPROACH This approach is the common sense approach but also very time consuming. Before a hotel is constructed. Special rates represent discounts from the rack rate and therefore may adversely affect the average room rate and room revenue. The front office manager should examine the circumstances under which special rates are granted to ensure that front office staff are adhering to prescribed policies. hotels require the general manager or other senior member of the management team to approve complimentary rates before guests arrive. Establishing rack rates for room types and determining discount categories and special rates are major management decisions. an American Breakfast. lunch and dinner are also included. but it may or decrease the average room rate. For example. BP = RR + B/F (American) American Plan: This plan covers the room rate. Room rates often serve as a market positioning statement since they directly reflect service expectations to the hotel’s target market. it combines the room with breakfast and cocktails in the evening. AP = RR + B/F (American) + Lunch + Dinner. a complimentary room (provided at no charge) does not increase room revenue. an early morning tea and an American Breakfast. an owner may simply call around to hotels of 10 . Modified American Plan: This plan includes room rate. and competition. This rate is the standard plan for all-suite properties. Room rate positioning can be critical to a hotel’s success. who should obtain proper approval when applying a special room rate. SP = RR + Breakfast + Cocktails 1. depending upon the front office accounting system. This plan is also referred to as full board.6 BASIS OF PRICING A ROOM The front office manager must be sure that the sale of rooms at special rigidly controlled. a lunch or dinner and an early morning tea. and the Hubbart Formula. It is also referred to as half board. inflationary factors. To establish room rates that will ensure the hotel’s profitability management should carefully consider such factor as operating costs. All policies should be clearly explained to front office staff.Suite Plan: A relatively new package rate. For example.

but the minimum average room rate would be $80. if a hotel was built five years ago and inflation has increased at an annual rate of 3 percent the $1 per $1. The thought behind this is that the hotel can charge only what the market will accept and this is usually dictated by the competition.000 approach would suggest an average selling price of $20 per room. Another way of accounting for inflation would be to index current costs against original costs.S. The emphasis placed on the hotel’s construction cost fails to consider the effects of inflation.16 per $1.000 today. management might consider the current replacement cost of the hotel.S. The $1 per $1. and supplies. Called “shopping. the value of the property to guests can be greater. The suggested rate of $20 per room does not take into account inflation and increased costs of labor. One must be cognizant of antitrust laws in that the potential for abuse is high. and many others. Therefore. Many industries “shop” their competition. and other room types would be priced differently.similar product type. directories from the American Automobile Association. suites. and size. this approach does not take the value of the property into consideration. published rate brochures. Using the $1 or $1. First if the property is new. The market condition approach is really a marketing approach that allows the local market to determine the rate. construction costs will most likely be higher than those of the competition.” or “call-around. With the property being new. It can. The prevalent “low price guarantee” is an example of vendors who know when they have the lowest price.” these hotels must never share who they are when they make the call. For example. Rates can be found in many public sources.000 of construction and furnishings cost per room.000 per room 40 years ago. For example. location type. An ongoing record of what transient rates are offered on any given night would give the new hotel an idea of what the market tolerance is in the area.000 approach results in an average selling price of $80 per room.000 per room today may have been constructed at $20. assuming 70% occupancy.000. rather than its original construction and furnishings cost as a basis for the rule-of-thumb application. Second. it does do better than simply guessing what the rate should be. these hotels would serve as direct competitors to the newly built hotel. In the U. There are many problems with this approach. such discussion would be considered a violation of U. a well-maintained hotel worth $100. assume that the average construction cost of a hotel room is $80. the hotel cannot be as profitable as the competition initially. It may not take fully into account what a strong sales effort may accomplish. It is when the competitors band together to raise prices that a crime is committed. 11 .000 five years ago would require $1. Singles. Although this isn’t the most scientific approach. allow the competition to determine the rates ‘and this could significantly effect the profitability of a hotel’s operation. much higher rate would appear to be appropriate. RULE OF THUMB APPROACH The rule of thumb approach or cost rate formula sets the rate of a room at $1 for each $1. In these cases. It is common in the industry for hotels in a competitive set to call each other to see what rate each is offering each night. anti-trust laws. however. For example. Called the competitive set. doubles. Hotel’s management must not determine the rates of other hotels through direct discussion with competitors. although it is used very often. furnishings. and perhaps having newer amenities. such as global distribution systems. in effect.

6. The sum of pretax profits (Step 2). undistributed operating expenses (Step 4). this approach considers operating costs. The Hubbart Formula is considered a bottom-up approach to pricing rooms because its initial item-net income (profit) appears at the bottom of the income statement. However. guests pay for services such as food. As pointed out.The rule-of-thumb approach to pricing rooms also fails to consider the contribution of other facilities and services toward the hotel’s desired profitability. The front office manager must understand the effects of room rate and room occupancy on room revenue to ensure that the hotel meets its revenue goals and financial obligations. if a lower occupancy percentage is expected. income (Step 5) equals the required rooms department income. 4. In any hotels. If these services contribute to profitability. data processing. and expected number of rooms sold. transportation. The second item income taxes are the next item from the bottom of the income statement. Calculate pretax profits by dividing desired profit (Step 1) by 1 minus the hotel’s tax rate. and energy costs. that is. regardless of the hotel’s occupancy level. telephone. interest expense. Calculate the required rooms department income. Calculate the hotel’s desired profit by multiplying the desired rate of return (ROT) by the owners’ investment. the hotel will have to capture a higher average rate to generate the same amount of room revenue. building mortgage. then adds fixed charges and management fees. The cost rate formula or rule-of-thumb approach should also consider the occupancy level of the hotel. Hotels tend to have a very high level of fixed expenses (especially depreciation and mortgage expenses). and so on. Calculate fixed charges and management fees. Calculate undistributed operating expenses. property operation and maintenance. and other operated department losses less other operated department. desired profits. 3. and laundry. human resources. adds income taxes. and so forth. For example. rent. a mortgage payment is the same every month. insurance. food and beverage department income or loss. The Hubbart Formula. telephone department income or loss. To determine the average selling price per room. amortization. Estimate non-room operated department income or loss. the hotel may have less pressure to charge higher room rates. beverages. and management fees. marketing. the rule-of-thumb approach assumes 70 percent occupancy when determining the appropriate average room rate. 2. This calculation includes estimating administrative and general. land. The Hubbart Formula approach involves the following steps: 1. followed by operating overhead expenses and direct operating expenses. HUBBART FORMULA APPROACH A more recently developed approach to average room rate determination is the Hubbart Formula. in 12 . property taxes. fixed charges and management fees (Step 3). 5. This calculation includes estimating depreciation. this approach starts with desired profit. In other words.

75% occupancy is estimated. 50.000 Pretax Income = Net income 1−t $375000 1−4 Pretax Income = Pretax income = $625.000 . Exhibit 14 contains the calculations used in the Hubbart Formula reveals.000 inclusive of land.500.000. equipment. is to cost $9. thus.000 Plus: Interest expense Principal x interest rate =interest expense $7. Illustration of the Hubbart Formula: The ABC HOTEL. 7.essence.000 provided by the owner’s desire a 15 percent annual return on their investment. 8.000 x . building.750 rooms will be sold during the year (200 x .000 Administrative and general expenses 120. plus other direct operating expenses.000 Income needed before interest expense and taxes 13 1.000. (Step 7) by the expected number of rooms to be sold.500.000 Transportation expenses 200.000 Depreciation expenses 300.000 is needed for working capital bringing the total cost of construction and opening to $10.000 The room department estimates direct operating expenses $10 per occupied room.000 Insurance expenses 50.000 Energy and related expenses 300.500.000 Telephone department 50.000 x .525. Additional expenses are estimated follows: Property tax expenses $ 2.000 The other operated departments’ income (losses) are estimated as Food and beverage department $150. places the overall financial burden of the hotel on the rooms department. plus rooms department direct expenses of payroll and related expenses. 54.15 = $375.000 Rentals and other departments 100. The required rooms department income (Step 6). a 200-room property. An additional $100.000 at 12 percent annual interest and cash of $2. An average room rate of $67.81 EXHIBIT 1: CALCULATING AVERAGE ROOM RATE: HUBBART FORMULA Item Calculation Amount Desired net income Owners’ Investment ROI $2.12 = +900.500. Determine the rooms department revenue. and furniture. Calculate the average room rate by dividing rooms department revenue 9. The hotel is financed with a loan of $7.000 Data processing expenses 80. The income tax rate is 40%.75 x 365). equals the required rooms department revenue.900.000 Human resources expenses 40.000 Property operation and maintenance expenses 200.

000 $3. and insurance Income before fixed charges Plus: Undistributed operating expense Required operated departments income Departmental results excluding rooms Less: Food and beverage department income Rentals and other department income Plus: Telephone department loss Rooms department income Plus: Rooms department direct expense 54.750 x $10 = $547.05 x 1.365. Since the proposed hotel would be new. Assume that the ABC HOTEL has a double occupancy rate of 40 percent (that is.712.500 547.05). Suppose a hotel company is planning to build a new property.000 3. management assumes the competitor’s average price will increase at five percent per year to $55.66 Considering this situation.000 2. management ponders whether the proposed hotel.25 $3. opening in two years.41 $3.165. hotel developers will have to finance the additional deficit in the first year ($75 for the targeted average rate versus expected 14 .000 (150. after three years of successive five per cent price increases. A more reasonable average room rate might be $65.000) (100.000 1.00 $68. Using the Hubbart Formula. the hotel’s daily average room rate would be increased to just over $75 as follows: Annual increase at 5% Initial room rate (new hotel) At the end of year 1 1 At the end of year 2 At the end of year 3 $3.500 Rooms revenue Number of rooms sold Required average room rate +600. two out of every five rooms sold are sold at double rate) and a room rate differential of $10.25 $71. property taxes.58 Selling Price $65. has too high a targeted room rate. To evaluate its potential. management computes an average target room rate of $75. Knowing the current average rate for competing hotels in the area is only $50. It relies on management’s best estimates of total rooms occupied and the single/double occupancy mix to determine target rates. appears to be too great.240. A difference of nearly $20. however. management reasons that a price premium may be acceptable.81 Exhibit 15 contains the formula for calculating room rates for single rooms (x) and double rooms (x + y). The Hubbart Formula is most useful in setting target average prices a: opposed to actual average prices. $50 x 1.13 (that is.000 3.Plus: Estimated depreciation. If these estimates are incorrect the targets will be incorrect.000) 50.750 $ 67.125.500 ÷ 54. It is important to note that the Hubbart Formula generates an average room rate as a target price at the hotel’s point of profitability. where the price differential between single and double rates is presented by the variable y.

Schedule II looks at the rates per occupied room. 15 . operating deficits should always be included in the hotel’s financing plan. As stated fore. but it is understood to be a fair market value based on equity and interest expense on debt. This ROI level can vary widely. Schedule I attempts to determine the costs incurred with the hotel operation and incorporate a reasonable return on investment (or ROI). Operating expenses. In this respect. In order to operate. The numbers used in the Hubbart formula examples presented here (Figure 7-1. Schedule III incorporates square footage into the analysis. and Figure 7-3) are for illustrative purposes only. What the Hubbart formula does differently from strict room cost analysis is to incorporate a fair market ROI for the investor. into its calculations: Schedule I looks at specific financial calculations. or schedules. The Hubbart formula incorporates three different sections. and depreciation are understood to include all the same criteria used to determine room cost (Figure 7-1). taxes/insurance. OR Here is how the Hubbart formula works. most hotels do not generate profits during the first few years of operation. the hotel will need to devise some method of financing the shortfall.average rate when the hotel opens). Figure 7-2.

the Hubbart calculations would yield a higher room rate than the room cost 16 . Determining this occupancy percentage is where the Hubbart formula gains detractors. The 70 percent figure is used by many as a benchmark of performance. Schedule II is similar to the opportunity cost calculation in that it considers the total number of room nights available for sale in a year (365 days times the number of rooms available per night). as does the demand. With the same data. Schedule II yields a required average rate of $46. market supply. Again. Occupancy expectations must be based on detailed analysis of competition.Schedule II of the Hubbart formula (Figure 7-2) uses the figure reached at the end of Schedule I to determine the Average Room Rate the hotel would need to charge to meet its obligations—those obligations being operating costs and owner ROI. based on occupancy of 70 percent. and population. prior to reviewing market factors.07. among others. the results are close but not the same. When comparing the Hubbart formula to room cost calculation. What would be a fair occupancy percentage? Some hotel markets consistently run very high occupancy levels. Hotel room supply in an area can vary. the variables in determining occupancy can sway this number. Other areas are susceptible to market fluctuations. It goes further in that it takes into consideration an estimated occupancy percentage. local economic factors. A very general rule of thumb is to insert an expected occupancy figure of 70 percent.

In Schedule III. the Hubbart formula incorporates a square footage provision. the Hubbart formula attempts to address the issue of these varying rooms by making an assumption that larger rooms are more expensive to maintain. For example: A standard guest room may have an area of 375 square feet. 2. Few hotels today build all their rooms to the exact same specifications. size. assuming that the better rooms are the larger rooms. 17 . assume that it has a total square guest room area of 70.12 × 375). With Schedule III (Figure 7-3). a higher average rate could be applied to the better room types. With that assumption. This measurement is simply a sum of the square footage available in each guest room. The Hubbart formula assumes an average occupancy.analysis. This provision requires a measurement of the total square guest room area.12 × 450).12 was determined to be needed to meet the costs and reasonable ROI determination. The flexibility of this calculation allows the hotel manager to apply different rates to differing room types and configurations. Using the same hotel from the example. Room cost analysis does not include the ROI provision that Hubbart does. Schedules I and II of the Hubbart formula do not take into account the variables in the modern hotel structure. A junior suite may have an area of 450 square feet. The cost of maintaining each room for every night is included in determining room cost. and configuration could command higher rates than a standard room. an average square foot calculation of $0. Variances in room type. Again. profit would not come into play. Room cost includes opportunity cost. The suite would command a higher rate because of its bigger area $54 ($0. The average daily rate of the standard room would be $45 ($0. In strictly looking at the costs incurred in room sales.000 square feet. While useful in determining an average rate for a generic hotel. There are two main reasons for this: 1.

18 .

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