RISHABH DEOVANSH 1841115175

GROUP D SEMESTER 5
METHODS OF ESTABLISHING
ROOM RATE
CRITERIA INFLUENCING ROOM RATES:
SIZE (SQUARE FEET)
TYPE OF ROOM AND BED
LOCATION/VIEW
GRADE (STARS)
FURNISHING/AMENITIES
LEVEL OF SERVICE
TYPES OF BUSINESS
WHAT ABOUT
 SEASON
WEEKDAY OR WEEKENDS
TIME OF ARRIVAL
 PRICING ROOMS

1. MARKET CONDITION APPROACH

2. RULE OF THUMB APPROACH
3. HUBBART FORMULA APPROACH
MARKET CONDITION APPROACH
Under this very approach, management shall look at comparable
hotels in the geographical market, see what they are charging for
the same product, and “charge only what the market will
accept”. Some drawbacks of this approach are that it does not
take into consideration the value of the property, and what a
strong sales effort may accomplish.
 Establishing Room rates/Methods Used to Fix Room rates
 There are three popular approaches to pricing rooms.1.
 
Market Condition Approach2.
 
Rule-of-Thumb Approach3.
 
Hubbarts formula Approach
Market Condition Approach
 This approach is the common sense approach. Management looks atcomparable
hotels in the geographical market and sees what theyare charging for the same
product. The thought behind this is thatthe hotel can charge only what the
market will accept, and this isusually dictated by the competition.There are
many problems with this approach of pricing, although itis used very often.
 RULE OF THUMB APPROACH
This method sets the rate of a room at Rs.1/- for each Rs.1000/- of construction
and furnishings cost per room assuming a 70 percent occupancy. For example, if
the average construction cost of a hotel room is Rs.80000/-, the average room
rate will be Rs.80/- according to this method. The emphasis on the hotel’s
construction cost fails to consider the effects of inflation. It also fails to consider
the contribution of other facilities and services towards the hotel’s desired
profits.
The rule-of-thumb approach should also consider the hotel’s actual occupancy
level instead of a fixed 70 percent occupancy.
 Rule-of-thumb Approach
Average per-room cost for hotel development:

Segment Per-room cost

• Budget/Economy ₹36,96,000

• Mid-range w/o F&B ₹59,92,000

• Mid-range with F&B ₹72,17,000

• Full Service ₹1,15,50,000

• Luxury/Resorts ₹3,61,20,000
 HUBBART FORMULA
It is a bottom-up approach to pricing rooms. This approach
considers operating costs, desired profits, and expected number
of rooms sold to determine the average rate per room. It is
considered a bottom-up approach because its initial item – net
income (profit) – appears at the bottom of the income statement.
The second item – income taxes – is the second item from the
bottom of the income statement, and so on. The Hubbart Formula
approach involves the following eight steps:

P.T.O
•Calculate the hotel’s desired profit by multiplying the desired rate of return (ROI) by the owner’s
investment.
•Calculate pre-tax profits by dividing the desired profit by 1 minus hotel’s tax rate.
•Calculate fixed charges and management fees. This calculation includes estimating depreciation,
interest expense, preperty taxes, insurance, amortization, building mortgage, land, rent, and
management fees.
•Calculate undistributed operating expenses. This includes estimating administrative and general
expenses,data processing expenses, human resourecs expenses, transportation expenses,
marketing expenses, property operation and maintenance expenses, and energy costs.
•Estimate non-room operating department income or loss, that is, F&B department income or loss,
telephone department income or loss …
•Calculate the required room department income which is the sum of pre-tax profits, fıxed charges and
management fees,undistributed operating expenses, and other operating department losses less other
department incomes.
•Determine the rooms department revenue which is the required room department income, plus other
room department direct expenses of payroll and related expenses, plus other direct operating expenses.
•Calculate the average room rate by dividing rooms department revenue by the expected number of
rooms to be sold.
HUBBART FORMULA
RETURN
 EXAMPLE
 LOOK AT DESIRED PROFIT
 ADD ALL COSTS
COST

 GIVES AVERAGE PRICE PER ROOM

ARR
 CASE
- The proposed Harris Place (a 50 room, room '"""
lodging facility) is to be built in mid-Michigan.
Kamala Harris, the owner is concerned about the
ADR, construction costs, borrowing costs, and
their impact on future profits. He provides
you with the following information.

Proposed Costs of the Lodging

• Land - $400,000
• Building - $2,000,000
• Equipment $1,000.000
Financing $1,000,000
•Equity (desired return on investment (ROI = $2,400,000
15%)
•Debt (8% annual interest rate)
•Income Tax Rate: 40%
•Properly Taxes: $120,000 per year
•Fire of $30,000
Insurance:
•Depreciation Building:(annual)
40 year life straight line method, ($50,000
per year)
•Depreciation of Equipment: 10 year life, straight line
method, ($100,000 per year)
•Undistributed Operating Expense: $300,000
annually
•Rooms Department Direct Operating Expenses: equal $30,000
annually
•Expected Paid Occupancy: 70%
•Determine the required ADR to achieve Jeremy Harris' goal of earning an
ROI of 15%
CASE ANSWER
ITEMS CALCULATION AMOUNT
Owner's investment 1,000,000
Desire net Income for the owner C ROI: 1,000,000*0.15 150,000
15 %)
Income tax rate:40% Pretax income=150,000/1-0.4 250,000
Plus: Interest expense :8% annual 2,400,000*0.08 192,000
interest
Income needed before interest 442,000
expense and taxes
Plus: Estimated depreciation, property 120,000+30,000+50,000+100 300,000
taxes, and insurance ,000
Income before fixed charges 742,000
Plus: Undistributed operating expense 300,000
Required operated departments 1,042,000
income
Less: Other departments' income 0
Rooms department income 1,042,000
Plus: Rooms direct expense 30,000
Rooms Revenue 1,072,000
Number of rooms sold 50*0.7*365=12,775 12,775
Required average room rate 83.91