Summary Slide
Room Rate Structure
Hubbart Formula
Hubbart Formula–Schedule I
Diagram–Hubbart Formula–Schedule I
Hubbart Formula–Schedule II
Diagram–Hubbart Formula–Schedule II
Hubbart Formula–Schedule III
Diagram–Hubbart Formula–Schedule III
Other Rate Calculation Methods
Room Rate Designations
Room Rate Designations
Diagram–Weekday vs. Weekend
Rate Averages
Exercise
Figure 7-1
Room Rate Structure
The combination of all the rates offered at
a hotel is called the rate structure.
Hotel room rates are both quantifiable
and qualifiable.
Average Daily Rate (ADR) is a term used
in different ways. In this analysis, it is
used to determine a starting point in
establishing a hotel’s rate structure.
Figure 7-2
The Hubbart Formula
Roy Hubbart developed a method to calculate a
hotel room rate based on the costs incurred in
operating the hotel and a reasonable return on
investment for the investors
The Hubbart Formula incorporates three
schedules. I looks at specific financial
calculations, II looks at the rates per occupied
room, and III incorporates square footage into
the analysis.
Figure 7-3
Hubbart Formula–
Schedule I
Traditional room cost is considered
In addition, Return on Investment is
factored in to give owners/investors a fair
rate of return.
What hotel trend precipitated the need to
incorporate ROI? That is, what changed in
the industry and what other industries
became involved?
Figure 7-4
Hubbart Formula Example - Schedule I
Operating Expenses: Example
Rooms Department $450,000
Telephone Department $75,000
Administrative and General $200,000
Payroll Taxes and Employee Benefits $225,000
Advertising and Promotion $75,000
H/L/P (Heat, Light, Power) $150,000
Repairs and Maintenance $125,000
Total Operating Expense $1,300,000
Taxes and Insurance
Real Estate and Personal Property Taxes $75,000
Franchise Taxes and Fees $25,000
Insurance on Building and Contents $30,000
Lease Costs (Equipment and/or Vehicles) $45,000
Total Taxes and Insurance $175,000
Depreciation at Book Value
Building $175,000
FF&E (Furniture, Fixtures and Equipment) $125,000
Total Depreciation $300,000
Fair Market Return on Investment (ROI) of Property
Land
Building
FF&E
Total Fair Market ROI $500,000
TOTAL: $2,275,000
Deduct (Income from sources other than rooms)
Income from store rentals/leases $25,000
Profit [Loss] from food and beverage operations $175,000
Income from other sources (ancillary revenue) $15,000
Total Income from Other Sources $215,000
Amount Needed from Room Revenue to Cover Costs
and Realize a Fair Market ROI $2,060,000 Figure 7-5
Hubbart Formula–
Schedule II
The figure reached at the end of Schedule
I is used to determine the average daily
rate the hotel would need to charge to
meet its obligations (operating costs and
owner ROI).
Schedule II incorporates opportunity cost.
Schedule II also assumes an average
occupancy percentage.
How can using the 70% occupancy figure
sometimes cause problems?
Figure 7-6
Hubbart Formula Example - Schedule II
Example
1. Amount Needed from Guest Room Sales (Schedual I) $2,060,000
2. Number of Guest Rooms Available 175
3. Number of Rooms Available on an Annual Basis
Item 2 multipled by 365 (175x365) 100% 63,875
4. Less Allowance for Average Vacancy 30% 19,163
5. Number of Rooms to be Occupied Based
on Average Occupancy 70% 44,712
6. Average Daily Rate Required to Cover Costs and
Provide Reasonable ROI (Item 1 divided by Item 5) $ 46.07
Figure 7-7
Hubbart Formula–
Schedule III
Schedule III makes an assumption that
larger rooms are more expensive to
maintain.
A square footage calculation is made of
the area of all the guestrooms in a hotel.
What are some of the drawbacks of using
a strict square footage calculation?
Figure 7-8
Hubbart Formula Example - Schedule III
Example
1. Amount Needed from Guest Room Sales (Schedule I) $2,060,000
2. Square Foot Area of Guest Rooms 70,000
3. Less Allowance for Average Vacancy (70,000 x 30%) 21,000
4. Net Square Footage of Occupied Rooms (70,000 x 70%) 49,000
5. Average Annual Rental per Square Foot (Item 1 divided by Item 4) 42.04
6. Average Daily Rental per Square Foot (365 divided by Item 5) $0.12
Figure 7-9
Other Rate Calculation
Methods
Cost Rate Formula
Market Tolerance
Shop Around
What ways could a hotel determine its
rate structure?
Why are anti-trust concerns so important?
Figure 7-10
Room Rate Designations
Term used to specify the rate threshold
within the overall structure. It simply
“ranks” all the rates within the rate
structure.
Rack Rate
Corporate Rate
Volume Account Rate
What is a target rate?
Figure 7-11
Room Rate Designations
Additional rate designations include:
Government Rate
Seasonal Rate
Weekday/weekend Rate
Membership Rate
Industry Rate
Walk-in Rate
Premium Rate
Advance Purchase Rate
Package Rate
Per person and Group rates
Figure 7-12
Weekday vs. Weekend
Resort
Traditional Demand Level
Airport
Downtown
Suburban
Monday Tuesday Wednesday Thursday Friday Saturday Sunday
Days of the Week
Figure 7-13
Rate Averages
Used to determine the average revenue
figure of specific [Link] most
commonly used figure is ADR. Others
include:
Gross Average Rate
Net Average Rate
Group Average Rate
Transient Average Rate
Market Segment Averages
Room Specific Averages
Figure 7-14
Rate Structure Internet
Exercise
Using the Web sites and hotels you
identified in the Internet exercise of
Chapter 3, compare the different rates
available for a given day.
Why would a hotel identify several rates
within its rate structure this way?
Do the needs of guests differ greatly?
What are the benefits/drawbacks of
offering only one rate per day?
Figure 7-15