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Room Pricing Methods and Formulas

The document discusses methods for pricing hotel rooms. It explains that room rates must cover costs, generate cash flow, and be attractive to guests. The price varies based on factors like location, season, competition and costs. Rates have a floor set by fixed costs and a ceiling limited by competitors' prices. The Rule of Thumb method sets rates at 1/1000th of construction costs, assuming 65% occupancy. The Hubbert method calculates the minimum rate needed to cover estimated operating costs, investment returns, and number of rooms sold. It determines the break-even point rather than calculating from actual sales.

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Cealpahu
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317 views11 pages

Room Pricing Methods and Formulas

The document discusses methods for pricing hotel rooms. It explains that room rates must cover costs, generate cash flow, and be attractive to guests. The price varies based on factors like location, season, competition and costs. Rates have a floor set by fixed costs and a ceiling limited by competitors' prices. The Rule of Thumb method sets rates at 1/1000th of construction costs, assuming 65% occupancy. The Hubbert method calculates the minimum rate needed to cover estimated operating costs, investment returns, and number of rooms sold. It determines the break-even point rather than calculating from actual sales.

Uploaded by

Cealpahu
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
  • Introduction
  • Room Price
  • Floor and Ceiling
  • Calculation Methods

METHOD OF

PRICING A ROOM

How to calculate and set a


room rate
RD 23 1
ROOM PRICE
✪ THE ROOM RATE
❖MUST COVER COSTS
❖MUST GENERATE CASH FLOW
❖MUST BE ATTRACTIVE &
COMPETITIVE FOR THE GUEST

RD 23 2
THE PRICE WILL VARY ON...
According to:
✪ The product and service
✪ The market segmentation
✪ The season
✪ The room’s location
✪ Competition pressures
✪ Economic fluctuations
RD 23 3
FLOOR AND CEILING
✪ The maximum price (ceiling) will be
suppressed by a competition’s price
strategy
✪ The minimum (floor) will be governed
by the fixed costs that must be covered.

RD 23 4
CALCULATION METHODS

✪ The «Rule of Thumb» method


✪ The HUBBART method

RD 23 5
THE RULE OF THUMB METHOD

✪ 1/1000th of the total cost of construction


(and equipment) of the property
✪ Assumes an average occupancy of 65%
✪ Therefore, for every 1’000,- invested, one
calculates 1,- average room price, per room.

Example ......
RD 23 6
Rule of Thumb - Example

10’000’000,- was the amount


invested in a 100 hotel-room, ...

10’000’000 = 100,- A.R.R. MIN.


100 x 1’000 ( Minimum Average Room Rate)

RD 23 7
HUBBART METHOD
✪ A bottom line approach
✪ Linked with the break even point
✪ Needs a revenue forecast
✪ Needs an expenditure forecast

RD 23 8
HUBBART FORMULA
✪ Estimated Operating Costs (EOC)
✪ Return on Investment (ROI) or Return on
Capital (ROC)
✪ Income from other sources (IOS)
✪ Number of Rooms sold (RMS)

… Will give you the minimum price


RD 23 9
HUBBART FORMULA Cont ...
✪ The result is the «Break-even» point (min)
✪ Return on investment is considered as a cost
✪ Revenue is determined in advance
✪ Not calculated from the Sales
✪ Calculated from what is needed to be
earned as revenue to cover costs.
✪ Additional revenue to forecast = profit
RD 23 10
THE HUBBART FORMULA

E.O.C. + R.O.I. - I.O.S. = A.R.R.


R.M.S.

(Minimum Average Room Rate)

RD 23 11

RD 23 1 METHOD OF PRICING A ROOM How to calculate and set a room rate
RD 23 2 ROOM PRICE % THE ROOM RATE OMUST COVER COSTS OMUST GENERATE CASH FLOW OMUST BE ATTRACTIVE & COMPETITIVE FOR THE GUE
RD 23 3 THE PRICE WILL VARY ON... According to: %The product and service %The market segmentation %The season %The room’s loc
RD 23 4 FLOOR AND CEILING % The maximum price (ceiling) will be suppressed by a competition’s price strategy %The minimum
RD 23 5 CALCULATION METHODS %The «Rule of Thumb» method %The HUBBART method
RD 23 6 THE RULE OF THUMB METHOD %1/1000th of the total cost of construction (and equipment) of the property %Assumes an ave
RD 23 7 Rule of Thumb - Example 10’000’000,- was the amount invested in a 100 hotel-room, ... 10’000’000 = 100,- A.R.R. MIN
RD 23 8 HUBBART METHOD %A bottom line approach %Linked with the break even point %Needs a revenue forecast %Needs an expendit
RD 23 9 HUBBART FORMULA %Estimated Operating Costs (EOC) %Return on Investment (ROI) or Return on Capital (ROC) %Income from
RD 23 10 HUBBART FORMULA Cont ... %The result is the «Break-even» point (min) %Return on investment is considered as a cost %

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