1. HMFOM MODULE 6: ROOM RATE STRUCTURE (2)
RAQUEL S. FELOMINO

2. ESTABLISHING ROOM RATES
A hotel has different types of rooms on the basis of room size, location, view, décor, furnishings, amenities, etc. Therefore the front office generally has more than one room rate category depending on the types of rooms.
Rack rate is the standard rate fixed by front office management for a particular category of rooms. The rack rate is applicable for all guests except those who are authorized for any discounts. Although rack rates are important, guests may ask for and qualify for discount rates.

3. METHODS OF ESTABLISHING ROOM RATES
1. HUBBART FORMULA APPROACH
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.

4. Hubbart’s Formula & P&L Statement
What is P and L statement?
•A Profit and Loss (P & L) statement measures a company's sales and expenses during a specified period of time. The function of a P & L statement is to total all sources of revenue and subtract all expenses related to the revenue. (Revenue-Cost= Profit )
• It shows a company's financial progress during the time period being examined, generally 1 year

5. Understanding P&L Statement
Sales Revenue/Income from Sales (minus) Cost of Goods\Services Sold (minus)Total or Specific General Expenses (minus) Depreciation Expense (minus) Interest Expense (minus) Tax Expense = Net Profit

6. Inverted P&L Statement=Hubbart’s Formula
That is why the Hubbart’s Formula is also called as “Bottom-Up approach”.
It starts with Net Profit, adds all expenses, interests, insurance, depreciation and tax.
This is the revenue a hotel has to earn in 1 year if it wishes to achieve its profit goals.
This total revenue is divided by total number of rooms the hotel expects to sell in 1 year. The result is net revenue per room per day

7. Unique Idea in Hubbart’s Formula
A hotel earns approx. 65% of its revenue from rooms, but it earns remaining 35% from other outlets like F&B and Laundry. Hubbart’s formula suggests that profit earned from other departments must be subtracted from room revenue so that room rates can be lower and attractive to customers. In case a department is making loss, then that loss has to be made good from room revenue.

8. Hubbart’s Formula in 8 Steps:
1. Calculate the hotel’s desired profit by multiplying the desired rate of return (ROI) by the owner’s investment. 2. Calculate pretax profits by dividing desired profit (Step 1) by 1 minus the hotel’s tax rate. 3.Calculate fixed charges and management fees. This calculation includes estimated depreciation, interest expense, property taxes, insurance, building mortgage, land, rent and management fees. 4.Calculate undistributed operating expenses. This calculation includes estimating expenses for the following categories – administrative and general, information technology, human resources, transportation, marketing, property operation and maintenance, and energy costs. 5.Estimate non-room operated department income or loss, that is, food and beverage department income or loss, telecommunications department income or loss and so on. 6.Calculate the required rooms department income. The sum of pretax profits (Step 2), fixed charges and management fees (Step 3), undistributed operating expenses (Step 4), and other operated department income (Step 5) equals the required rooms department income. 7.Determine the rooms department revenue. The required rooms department income (Step 6), plus rooms department direct expenses of payroll and related expenses, plus other direct operating expenses equals the required rooms department revenue. 8.Calculate the average room rate by dividing rooms department revenue by the expected number of rooms to be sold.

9. Hubbart’s Formula in 8 Steps:
1. Owner’s Investment + Loan from bank & others = Total Investment 2. Return on Investment (ROI) per year = Total Investment X Fair rate of return (15% to 20%) 3. Return on Investment + Tax = Profit before Tax 4. Profit before Tax + Direct & Indirect Expenses= Gross Operating Income 5. Gross Operating Income +/- Other Departments Loss(+) or Profit (-) = Total required Revenue from Room Sales per year 6. Total Number of Rooms in hotel X Expected Occupancy % (70-75%) =Rooms Sold per day 7. Rooms sold in 1 day X 365 = Total rooms sold in 1 year 8. Total Revenue needed in 1 year (Divided by) Total Rooms sold in 1 year = Average Rate per room per day

10. EXAMPLE
Holiday Inn, a 200 room property, is projected to cost Rs /- inclusive of land, building, equipment and furniture. An additional Rs /- is needed for working capital, bringing the total cost of construction and opening to Rs /-. The hotel is financed with a loan of Rs /- at 12 percent annual interest and cash of Rs /- provided by the owners. The owners desire a 15 percent annual return on their investment. A 75 percent occupancy is estimated. Thus rooms will be sold during the year (200 x x 365). The hotel’s income tax rate is 40 percent and additional expenses are estimated as follows: (next page)

11. Con’t) Property tax expenses Rs.250000/- Insurance expenses Rs.50000/-
Depreciation expenses                                                 Rs /-
Administrative and general expenses                     Rs /-
Data processing expenses                                           Rs /-
Human resources expenses                                        Rs.80000/-
Transportation expenses                                             Rs.40000/-
Marketing expenses                                                      Rs /-
Property operation and maintenance                     Rs /-
Energy and related expenses                                     Rs /-
The other operated departments’ income (losses) are estimated as follows:
Food and beverage department                                         Rs /-
Telecommunications department                             Rs.50000/-
Rentals and other departments                                                Rs /-
The rooms department estimates direct operating expenses to be Rs.10/- per occupied room.

13. METHODS OF ESTABLISHING ROOM RATES
MARKET CONDITION/ MARKET TOLERANCE- In this method, the management looks at similar hotels in the area and sees what they are charging for the same product. These properties are often called the competitive set, which is made up of a number of properties in a market that are a property’s most important competition.
The competition can be based on location, type, brand or other factors. According to this approach, the hotels will charge only what the market will accept. This information is available through various public domain sources and periodic blind calls to competing hotels. A blind call does not identify the hotel making the call and simply asks for availability and rates on specific dates

14. METHODS OF ESTABLISHING ROOM RATES
3. COST RATE FORMULA Setting price of the room by first adding all the costs of production and sales, and adding a desired profit %. (Mark-up) This method makes sure that hotel does not run in loss.

15. METHODS OF ESTABLISHING ROOM RATES
The English phrase rule of thumb refers to a principle with broad application, that is not supposed to be strictly accurate or reliable, for every situation. It refers to an easily learned and easily applied procedure or standard, based on practical experience rather than theory.

16. Competition-Based Pricing
All the competing hotels make a “Competitive Set”
Each hotel in the Competitive Set has to consider the actions of others to remain attractive to guests.

17. Market Tolerance Basis
Every hotel offers a “best available rate” to callers requesting same day booking. These are the lowest possible rates acceptable to hotel management. A hotel can call up the competing hotels to find out their “BAR” and then may adjust their own prices accordingly.

18. Best Available Rate
Also known as Best Rate Guaranteed (BRG) & Rate Parity, it is the practice of selling the room at same price by hotel & Online Travel Agents (OTA). Galileo, a Global Distribution System provider, defines BAR as "a rate available to the general public that does not require pre-payment and does not impose cancellation or charge penalties and/or fees, other than those imposed as a result of a hotel property's normal cancellation policy.“

19. Rate Cutting
The discounted pricing, especially during offseason, or to compete for greater market share is known as Rate Cutting.

20. Bundled Pricing
Hotels may package prices as inclusive or noninclusive of some other product or service.
For example, Meal Plans & Meeting packages.

21. Guest Requirement
All guests have unique travel plan, purpose of journey, eating & sleeping habits.
They also differ on the basis of nationality, religion, race, occupation and income levels.
A hotel has to assess their situation and offer a tailor- made rate to each guest, if possible. This will satisfy the guest and help increase sales of hotel product and services.