Establishing Room Rates
Approaches to Consider
When it comes to establishing room rates in hotel front office operations, there are several approaches that can be utilized. In this chapter, we will explore three commonly used approaches: the
- Market Condition Approach,
- Rule of Thumb Approach,
- Hubbert Formula Approach.
Each approach has its own unique characteristics and can be applied based on the specific needs and circumstances of the hotel.
Establishing Room Rates
Market Condition Approach:
The Market Condition Approach involves setting room rates based on the current market conditions and the competitive landscape. This approach takes into account factors such as demand, occupancy rates, and pricing strategies of similar hotels in the area. For example, if a hotel is located in a popular tourist destination during peak season, the room rates may be set higher to capitalize on the high demand. Conversely, during off-peak periods or in a less competitive market, the rates may be adjusted to attract more guests.
Establishing Room Rates
Rule of Thumb Approach:
The Rule of Thumb Approach is a more simplified method of establishing room rates. It involves setting rates based on predetermined guidelines or industry standards. For instance, a hotel may determine that their room rates should be set at a certain percentage above the average cost per room to cover expenses and generate a profit. This approach provides a quick and straightforward way to determine room rates without extensive analysis.
Establishing Room Rates
Hubbert Formula Approach:
The Hubbert Formula Approach is a more complex method that takes into account various factors such as fixed costs, variable costs, and desired profit margins. This approach requires a detailed analysis of the hotel’s cost structure and revenue goals. The formula considers factors such as labor costs, overhead expenses, and the desired return on investment. By using this approach, hotels can calculate room rates that align with their specific financial objectives.
It’s important to note that these approaches are not mutually exclusive, and hotels often use a combination of methods to determine their room rates. Additionally, market conditions and other external factors can influence the choice of approach. Therefore, it is crucial for hotel managers to regularly evaluate and adjust their room rates based on changing circumstances to ensure competitiveness and profitability.
Establishing Room Rates
Hubbert Formula Approach:
The Hubbert Formula Approach is a comprehensive method used to establish room rates in hotels. It takes into account various factors such as fixed costs, variable costs, and desired profit margins. By using this approach, hotel managers can calculate a room rate that aligns with their financial goals. Let’s dive into the details of how the Hubbert Formula works for establishing a single room rate and provide an example to illustrate its application.
Determine Fixed Costs:
Fixed costs are expenses that remain relatively constant regardless of the occupancy level of the hotel. These costs can include mortgage or lease payments, property taxes, insurance, and other overhead expenses. It’s essential to accurately calculate the total fixed costs for the hotel.
Example: Let’s say a hotel has a total of $100,000 in fixed costs per month.
Calculate Variable Costs per Occupied Room:
Variable costs are expenses that fluctuate based on the occupancy level of the hotel. These costs can include housekeeping, amenities, utilities, and guest services. To calculate the variable costs per occupied room, divide the total variable costs by the number of occupied rooms.
Example: If the total variable costs amount to $50,000 per month and the hotel has 500 occupied rooms, the variable costs per occupied room would be $100 ($50,000 / 500).
Determine Desired Profit Margin:
The desired profit margin represents the percentage of revenue that the hotel aims to earn as profit. This margin takes into account the hotel’s financial goals, return on investment, and industry standards. The profit margin is typically expressed as a percentage.
Example: Let’s assume the hotel aims for a 20% profit margin.
Calculate the Room Rate:
To calculate the room rate using the Hubbert Formula, add the fixed costs, variable costs per occupied room, and the desired profit margin. Divide the sum by the number of occupied rooms.
Example: Using the figures from the previous steps, the calculation would be as follows:
Room Rate = (Fixed Costs + Variable Costs per Occupied Room) / Number of Occupied Rooms
= ($100,000 + $100) / 500
= $200
In this example, the calculated room rate using the Hubbert Formula would be $200 per night.
It’s important to note that the Hubbert Formula Approach is a starting point and should be further refined based on market conditions, competitor analysis, and guest demand. Regular monitoring and adjustments to room rates are necessary to ensure the hotel remains competitive and financially sustainable.
Keep in mind that this example is simplified for illustrative purposes, and actual calculations may involve more detailed analysis and consideration of other factors specific to the hotel’s operations.
Here an example Establishing Room Rates