1. Establishing Room Rates
Yvonne Yang - RDM LRJJ

2. Contents
Tariff construction Positioning price Establish room rates Pricing rooms: Market Condition approach Rule-of-Thumb approach Hubbart Formula approach
Yvonne Yang - RDM LRJJ

3. Tariff construction How do hotels set their rates? A determination of:
Economic calculation
To price & to understand how consumers react to the pricing strategy
Marketing decision
Positioning
Revenue Mgr
Director of
Sales
Front-Office
Mgr
Yvonne Yang - RDM LRJJ

4. Tariff construction How much to charge for its accommodation
What is “Price”?
An amount ($) as an exchange to acquire goods or services
In order to understand:
How much to charge for its accommodation
2 fundamental methods of approaching the problem
How to be attractive and competitive with other hotels
Yvonne Yang - RDM LRJJ

5. Positioning Your Price
Approaches to Positioning Your Price
Skim - to skim, set your prices higher than the competition does so you can "skim off" the higher-paying customers. If the competition is charging $79, you might set your rates at $89 and $99, in hopes of getting the people who are willing to pay a bit more.
Match - to match, set one rate to match the competition and another rate slightly higher. For instance, if the competition is charging $79, you might also charge $79 for one type of room and have an $89 rate available for a better room or option.
Yvonne Yang - RDM LRJJ

6. Positioning Your Price
Surround - to surround, offer one price that's lower than the competition's price and one price that's higher. If the competition is charging $79, offer a $69 rate to attract the bargain-seekers, and offer an $89 rate for a slightly better room or option.
Undercut - to undercut, offer a price that is the same as your competition and a lower one as well. If the competition is charging $79, offer a $79 rate and a $69 in hopes of attracting more customers.
Penetrate - to penetrate, set your rates lower than those of the competition. If the competition is charging $79, offer rates such as $69 and $59 in hopes of getting consumers to try your products.
Yvonne Yang - RDM LRJJ

7. Positioning Your Price
The table above illustrates the five approaches to positioning your price against the competition's. In this example, the competition is charging $79.
Yvonne Yang - RDM LRJJ

8. Establishing Room Rates
Criteria's influencing room rates:
Size (square meters)
Type of room and bed
Location / View
Grade (Stars *)
Furnishing / Amenities (features)
Level of Service
Type of business
Etc…
What about?
Season ?
Weekday or Weekend?
Time of arrival?
Inclusive or non inclusive?
Per person or per room?
Yvonne Yang - RDM LRJJ

9. Pricing Rooms Market condition approach Rule of thumb approach
Hubbart formula approach
Yvonne Yang - RDM LRJJ

10. Market Condition Approach
The simplest and the most commonly used approach
Management looks at comparable hotels in the geographical market and sees what they are charging of the same product (normally 6 to 10 hotels)
These properties are called as “competitive set”
The competition can be based on location, property ratings, property type, brand identification, or other factors
Yvonne Yang - RDM LRJJ

11. Market Condition Approach
This could be done by “blind calls” to competing hotels, the following questions will be considered:
- Are our rates lower or higher than the competing hotels?
How are our rates affecting our revenue?
What is our occupancy percentage? What are the ones of the competing hotels?
If we increase or decrease our rates, will our total revenue improve?
Have any trends emerged during the past 3 to 6 months?
This also could be done by “industry report”: IBHS
Yvonne Yang - RDM LRJJ

12. Market Condition Approach
Disadvantages
If the property is new, construction costs will most likely be higher than those of the competition
This approach does not take the value of the property into consideration (newer facilities and amenities)
Reality
Rates might also be obtained through price order company such as certified accounting firm
Revenue managers among hotels might have direct discussion with competitors
Rates may also be available from public sources: Internet, GDS, CRS or published rate brochure
Yvonne Yang - RDM LRJJ

13. Rule-of-Thumb approach
Set the rate of a room at $1 for each $1000 of construction and furnishings cost per room, assuming a 70% occupancy.
Example: a hotel with the average construction and furnishings cost per room is $125,000, the minimum average room rate would be $125.
Yvonne Yang - RDM LRJJ

14. Rule-of-Thumb approach
A well-maintained hotel worth $100,000 per room today may have been constructed at $20,000 per room 40 years ago
The average selling price will be $20 per room
A much higher rate would appear to be appropriate since inflation, increased costs of labor, furnishings and supplies have not been taken into account (CPI)
This approach DOES NOT take inflation into account.
This approach DOES NOT consider other facilities and services (e.g.: F&B, recreation, laundry)
Yvonne Yang - RDM LRJJ

15. Rule-of-thumb Approach
Average per-room cost for hotel development:
Segment Per-room cost
Budget/Economy $52,800
Mid-range w/o F&B $85,600
Mid-range with F&B $103,100
Full Service $165,900
Luxury/Resorts $516,300
From Hotel & Motel; Jan. 12, 2012
Yvonne Yang - RDM LRJJ

16. Rule-of-thumb Approach
A hotel costs investors a total of $15,465,000/-, and has 300 rooms. Calculate an ARR with this information
A second hotel costs $9,895,000/- and has 60 rooms. Calculate an ARR
A boutique hotel costs 2,500, 00/- and has 12 rooms. Calculate an ARR
Yvonne Yang - RDM LRJJ

17. Hubbart Formula Approach
“Bottom-up” approach
Method:
Calculate desired profit 
Calculate pre-tax profits
Calculate fixed charges and management fees
Calculate undistributed operating expenses
Estimate non-room operated department profit/loss
Calculate required rooms division income
Determine rooms division revenue
Calculate average room rate
Yvonne Yang - RDM LRJJ

18. Hubbart Formula = ARR Example: Return Costs Look at desired Profit
Add all costs
Gives Average Price per Room
Return
Costs =
ARR
Yvonne Yang - RDM LRJJ

19. Case 1
Holiday Inn Hotel, a proposed 30-room with a fully equipped restaurant, will cost $750,000 to construct. An estimated additional $50,000 will be invested in the business as working capital. Of the total $800,000 investment, $400,000 is to be secured from the Bank of China at the rate of 10% interest and cash $400,000 provided by the owners. The projected occupancy rate is 80% for the year. The owners desire a 15% annual return on their investment after the hotel pays income taxes of 25%. The estimated undistributed expenses, not including income taxes and interest expense total $480,000. The estimated direct operating expense of the room department are $7 for each room sold. Consider a year to have 365 days.
Yvonne Yang - RDM LRJJ

20. Case 1: Holiday Inn Answer
Item
Calculation
Amount
Owner's investment
400,000
Desire net Income for the owner（ROI: 15%）
400,000*0.15=60,000
60,000
Income tax rate:25%
Pretax income=60,000/1-0.25
80,000
Plus: Interest expense :10% annual interest
400,000*0.1=40,000
40,000
Income needed before interest expense and taxes
120,000
Plus: Estimated depreciation, property taxes, and insurance
Income before fixed charges
Plus: Undistributed operating expense
480,000
Required operated departments income
600,000
Less: Other departments' income
Rooms department income
Plus: Rooms direct expense
30*0.8*365*7=61,320
61,320
Rooms Revenue
661,320
Number of rooms sold
30*0.8*365=
8,760
Required average room rate
Yvonne Yang - RDM LRJJ

21. Case 2
The proposed Harris Place (a 50 room, room only lodging facility) is to be built in mid-Michigan. Jeremy 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 Facility:
Land - $400,000
Building - $2,000,000
Equipment - $1,
Yvonne Yang - RDM LRJJ

22. Case 2
Financing
Equity (desired return on investment (ROI = 15%) $1,000,000
Debt (8% annual interest rate) $2,400,000
Income Tax Rate: 40%
Property Taxes: $120,000 per year
Fire Insurance: $30,000 (annual)
Depreciation of Building: 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%
Yvonne Yang - RDM LRJJ

23. Hubbart Formula Case 2 Answer
Item
Calculation
Amount
Owner's investment
1,000,000
Desire net Income for the owner（ROI: 15%）
1,000,000*0.15
150,000
Income tax rate:40%
Pretax income=150,000/1-0.4
250,000
Plus: Interest expense :8% annual interest
2,400,000*0.08
192,000
Income needed before interest expense and taxes
442,000
Plus: Estimated depreciation, property taxes, and insurance
120,000+30,000+50, ,000
300,000
Income before fixed charges
742,000
Plus: Undistributed operating expense
Required operated departments income
1,042,000
Less: Other departments' income
Rooms department income
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
Yvonne Yang - RDM LRJJ

24. Case 3
Barbara Rope, a wealthy investor, is considering investing $2,000,000 in a 300 room hotel. Debt financing would total $8,000,000. She desires to know the average room rate her hotel will have to charge, given the following alternatives.
Yvonne Yang - RDM LRJJ

25. Case 3 Information Yvonne Yang - RDM LRJJ Alternatives #1 #2 #3 #4 #5#1 #2 #3 #4 #5
Desired ROI
14%
15%
16%
17%
18%
Interest Rate
12%
13%
Tax Rate
30%
Estimated Annual Fixed Charges (excluding interest)
$700,000
Undistributed Operating Expense
$3,000,000
$3,500,000
Departmental Profits
-Food
-Telephone
$300,000
$400,000
$450,000
$10,000
Varible Cost per room sold
$15
$20
Occupancy rate
65%
70%
75%
80%
Yvonne Yang - RDM LRJJ

26. Case 3 Answer Yvonne Yang - RDM LRJJ #1 #2 #3 #4 #5 Net Income#1 #2 #3 #4 #5
Net Income
$280,000
$300,000
$320,000
$340,000
$360,000
Pretax Income
$400,000
$428,571
$457,143
$485,714
$514,286
Interest Expense
$960,000
$1,040,000
$1,120,000
Other Fixed Charges
$700,000
Undistributed Operating Expense
$3,000,000
$3,500,000
Food Income
-300,000
-400,000
-450,000
Telephone Income
-10,000
Room Department Expense
$1,067,625
$1,149,750
$1,423,500
$1,642,500
$1,752,000
Room Revenue
$5,817,625
$5,928,321
$6,710,643
$6,988,214
$7,126,286
Est. Room Sold
71,175
76,650
82,125
87,600
ADR
$81.74
$77.34
$94.28
$85.09
$81.35
Yvonne Yang - RDM LRJJ