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Room rate is the rate charged daily for a hotel room, the front office manager shall assign to each room category a rack rate which is a full price without discount that a hotel quotes as a room charge. In accordance, front office employees are expected to sell rooms at rack rate unless a guest qualifies for an alternative room rate (ex: corporate or commercial rate, group rate, promotional rate, incentive rate, family rate, package plan rate, complementary rate…).
While establishing room rates, management shall be careful about its operating costs, inflationary factors, and competition. Generally, there are three popular approaches to pricing rooms:
1. Market condition approach
2. Rule-of-thumb approach
3. Hubbart formula approach
1. 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.
2. Rule of thumb approach:
In this very approach, the rate of a room shall be $ 1 for each $ 1,000 of construction and furnishing cost per room, assuming a 70% occupancy rate. This approach, however, fails to take into consideration the inflation term, the contribution of other facilities and services towards the hotel’s desired profitability, and assumes a certain level of occupancy rate.
Example: Calculate the room rate using rule of thumb approach.
(A 200 room hotel, costing $14 million, should have a room rate of)
Answer: = $14 million / 200 rooms / $1,000 = $70
3. Hubbart formula approach:
This very approach considers operating costs, desired profits, and expected number of rooms sold (i.e. demand). The procedure of calculating a room rate is as follows:
a) Calculate the hotel’s desired profit by multiplying the desired return on investment (ROI) by the owner’s investment.
b) Calculate pre-tax profits by dividing the desired profit by 1 minus hotel’s tax rate.
c) Calculate fixed charges and management fees. This calculation includes estimating depreciation, interest expense, preperty taxes, insurance, amortization, building mortgage, land, rent, and management fees.
d) 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.
e) Estimate non-room operating department income or loss, that is, F&B department income or loss, telephone department income or loss …
f) 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.
g) 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.
h) Calculate the average room rate by dividing rooms department revenue by the expected number of rooms to be sold.
Example: Calculate the room rate using Hubbart formula approach.
(A 100 room hotel, costing $14 million, desired return on investment (ROI) = 0.14, Taxes= 0.15, Fixed charges and management fees = 600000, Undistributed operating expenses = 750000, non-room operating department income = 800000, other room department direct expenses = 1150000, expected occupancy percentage 70%).
Answer:
Desired profit = ROI (0.14) * Investment (14000000) = 1960000
Pre-tax profits = Desired profit / (1- Taxes "0.15) = 1660000
Fixed charges and management fees = 600000
Undistributed operating expenses = 750000
Non-room operating department income = 800000
Other room department direct expenses = 1150000
Required room department income
= Pre-tax profits + fıxed charges and management fees + undistributed operating expenses - other department incomes
= 1660000 + 600000 + 750000 – 1800000 = 1216000
Rooms department revenue
= room department income + other room department direct expenses
= 1216000 + 1150000 = 2366000
Average room rate
= rooms department revenue / ( Hotel number of rooms * expected occupancey percentage) =
= 2366000 / (100*365*0.70) = 92.6
The basic formula to calculate price of the rooms on a particular day is by Revenue per Available Room (RevPAR). The basic aspects considered are room rates and occupancy period.
Revenue per Available Room (RevPAR) is the popular concept of hotel industry. The best concept on the basis of room usability and accordingly charges are applied. The calculation takes place on the basis of per-room. A firm with a higher RevPAR can loose money on the basis of less room hiring basis.
The price(rate) of hotel room is defined by the hotel occupancy and earlier hotel approved budget and the market competitive rate
The price(rate) of hotel room is defined by the hotel occupancy
The hotel management have to take a look at the market condition ( compset )compare hotels in the same geographical area and check what they are offering for the same hotel category services.
The best way to calculate price of the rooms on a particular day is by Revenue per Available Room (RevPAR). In addition, checking the room rates for other same level hotels' competitors.
The best way to calculate manpower to a particular hotel is as follows:
eg. for 100 rooms,
If in the larger four & five star hotels (along with the heritage hotels) employ on an average 162 people per 100 rooms, compared to 122 in the One, Two & Three Star Hotels and 58 in the unorganized sector.
In average for 100 rooms 4*, 5* hotels not more than 1.6 in one room and in 1*, 2*, 3* hotels 1.2 in one particular room. this is in almost all standard.
Based on approved budget, the price of the hotel room is consisting of room Cost, desired profit considering hote forecasted occupancy and market share
one of the good tools is revenue management system it helps to develop effective pricing straegies, customer segments , ensure demand forecasting in local market and staying a ware of competitor strategies.
Rate for the room is depend on the market competitive rate and on season, based on budget and previous history.
The management shall have to take a look at the market condition, compare hotels in the same geographical area and see what theyre charging for the same services and charge only what the customers will accept. though their maybe setbacks to this aproach as it doesnt take into consideration the value of the property.
