www.lrjj.cn establishing room rates 1yvonne yang - rdm lrjj
Post on 28-Dec-2015
218 Views
Preview:
TRANSCRIPT
www.lrjj.cn
Establishing RoomRates
1Yvonne Yang - RDM LRJJ
www.lrjj.cn
Contents
Tariff construction
Positioning price
Establish room rates
Pricing rooms:
Market Condition approach
Rule-of-Thumb approach
Hubbart Formula approach
2Yvonne Yang - RDM LRJJ
www.lrjj.cn
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
Yvonne Yang - RDM LRJJ
www.lrjj.cn
Tariff construction
• What is “Price”?– An amount ($) as an exchange to acquire
goods or services– In order to understand:
• How much to charge for its accommodation
• How to be attractive and competitive with other hotels
Yvonne Yang - RDM LRJJ
www.lrjj.cn
Positioning Your Price
• Approaches to Positioning Your Price1. 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.
2. 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
www.lrjj.cn
Positioning Your Price3. 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.
4. 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.
5. 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
www.lrjj.cn
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
www.lrjj.cn
• 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?
Establishing Room Rates
Yvonne Yang - RDM LRJJ
www.lrjj.cn
Pricing Rooms
1.Market condition approach2.Rule of thumb approach3.Hubbart formula approach
9Yvonne Yang - RDM LRJJ
www.lrjj.cn
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
10Yvonne Yang - RDM LRJJ
www.lrjj.cn
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
11Yvonne Yang - RDM LRJJ
www.lrjj.cn
Market Condition ApproachDisadvantages 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
12Yvonne Yang - RDM LRJJ
www.lrjj.cn
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.
13Yvonne Yang - RDM LRJJ
www.lrjj.cn
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)
14Yvonne Yang - RDM LRJJ
www.lrjj.cn
Rule-of-thumb ApproachAverage 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
www.lrjj.cn
• 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
Rule-of-thumb Approach
Yvonne Yang - RDM LRJJ
www.lrjj.cn
Hubbart Formula Approach
“Bottom-up” approach
Method:1. Calculate desired profit
2. Calculate pre-tax profits3. Calculate fixed charges and management fees4. Calculate undistributed operating expenses5. Estimate non-room operated department profit/loss6. Calculate required rooms division income7. Determine rooms division revenue
8. Calculate average room rate
Yvonne Yang - RDM LRJJ
www.lrjj.cn
Hubbart Formula
• Example:– Look at desired Profit– Add all costs
– Gives Average Price per Room
Return
Costs
=ARR
Yvonne Yang - RDM LRJJ
www.lrjj.cn
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
www.lrjj.cn
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 0
Income before fixed charges 120,000
Plus: Undistributed operating expense 480,000
Required operated departments income 600,000
Less: Other departments' income 0
Rooms department income 600,000
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 75.49315
Case 1: Holiday Inn Answer
Yvonne Yang - RDM LRJJ
www.lrjj.cn
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 - $1,000.000
Yvonne Yang - RDM LRJJ
www.lrjj.cn
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
Case 2
www.lrjj.cn
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+100,000 300,000
Income before fixed charges 742,000
Plus: Undistributed operating expense 300,000
Required operated departments income 1,042,000
Less: Other departments' income 0
Rooms department income 1,042,000
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
www.lrjj.cn
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
www.lrjj.cn
Case 3 InformationAlternatives
#1 #2 #3 #4 #5
Desired ROI 14% 15% 16% 17% 18%
Interest Rate 12% 12% 13% 14% 14%
Tax Rate 30% 30% 30% 30% 30%
Estimated Annual Fixed Charges (excluding interest)
$700,000 $700,000 $700,000 $700,000 $700,000
Undistributed Operating Expense
$3,000,000 $3,000,000 $3,500,000 $3,500,000 $3,500,000
Departmental Profits
-Food
-Telephone $300,000 $300,000 $400,000 $450,000 $450,000
$10,000 $10,000 $10,000 $10,000 $10,000
Varible Cost per room sold
$15 $15 $20 $20 $20
Occupancy rate 65% 70% 65% 75% 80%
Yvonne Yang - RDM LRJJ
www.lrjj.cn
#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 $960,000 $1,040,000 $1,120,000 $1,120,000
Other Fixed Charges
$700,000 $700,000 $700,000 $700,000 $700,000
Undistributed Operating Expense
$3,000,000 $3,000,000 $3,500,000 $3,500,000 $3,500,000
Food Income -300,000 -300,000 -400,000 -450,000 -450,000
Telephone Income
-10,000 -10,000 -10,000 -10,000 -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 71,175 82,125 87,600
ADR $81.74 $77.34 $94.28 $85.09 $81.35
Case 3 Answer
Yvonne Yang - RDM LRJJ
top related