RD 23 1

METHOD OF

PRICING A ROOM

How to calculate and set a room rate

RD 23 2

ROOM PRICE

THE ROOM RATE MUST COVER COSTSMUST GENERATE CASH FLOWMUST BE ATTRACTIVE &

COMPETITIVE FOR THE GUEST

RD 23 3

THE PRICE WILL VARY ON...

According to:The product and serviceThe market segmentationThe seasonThe room’s locationCompetition pressuresEconomic fluctuations

RD 23 4

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 5

CALCULATION METHODS

The «Rule of Thumb» methodThe 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 average occupancy of 65%Therefore, for every 1’000,- invested, one

calculates 1,- average room price, per room.

Example ......

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.100 x 1’000 ( Minimum Average Room Rate)

RD 23 8

HUBBART METHOD

A bottom line approachLinked with the break even pointNeeds a revenue forecastNeeds an expenditure forecast

RD 23 9

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 10

HUBBART FORMULA Cont ...

The result is the «Break-even» point (min)Return on investment is considered as a costRevenue is determined in advanceNot calculated from the SalesCalculated from what is needed to be

earned as revenue to cover costs.Additional revenue to forecast = profit

RD 23 11

THE HUBBART FORMULA

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

(Minimum Average Room Rate)