Summary Slide Room Rate Structure Hubbart Formula Hubbart Formula–Schedule I Diagram–Hubbart Formula–Schedule I Hubbart Formula–Schedule II Diagram–Hubbart Formula–Schedule II Hubbart Formula–Schedule III Diagram–Hubbart Formula–Schedule III Other Rate Calculation Methods Room Rate Designations Room Rate Designations Diagram–Weekday vs. Weekend Rate Averages Exercise

Figure 7-1

Room Rate Structure

The combination of all the rates offered at a hotel is called the rate structure.

Hotel room rates are both quantifiable and qualifiable.

Average Daily Rate (ADR) is a term used in different ways. In this analysis, it is used to determine a starting point in establishing a hotel’s rate structure.

Figure 7-2

The Hubbart Formula

Roy Hubbart developed a method to calculate a hotel room rate based on the costs incurred in operating the hotel and a reasonable return on investment for the investors

The Hubbart Formula incorporates three schedules. I looks at specific financial calculations, II looks at the rates per occupied room, and III incorporates square footage into the analysis.

Figure 7-3

Hubbart Formula– Schedule I

Traditional room cost is consideredIn addition, Return on Investment is

factored in to give owners/investors a fair rate of return.

What hotel trend precipitated the need to incorporate ROI? That is, what changed in the industry and what other industries became involved?

Figure 7-4

Hubbart Formula Example - Schedule IOperating Expenses: Example

Rooms Department $450,000Telephone Department $75,000Administrative and General $200,000Payroll Taxes and Employee Benefits $225,000Advertising and Promotion $75,000H/L/P (Heat, Light, Power) $150,000Repairs and Maintenance $125,000

Total Operating Expense $1,300,000

Taxes and InsuranceReal Estate and Personal Property Taxes $75,000Franchise Taxes and Fees $25,000Insurance on Building and Contents $30,000Lease Costs (Equipment and/or Vehicles) $45,000

Total Taxes and Insurance $175,000

Depreciation at Book ValueBuilding $175,000FF&E (Furniture, Fixtures and Equipment) $125,000

Total Depreciation $300,000

Fair Market Return on Investment (ROI) of PropertyLandBuildingFF&E

Total Fair Market ROI $500,000TOTAL: $2,275,000

Deduct (Income from sources other than rooms)Income from store rentals/leases $25,000Profit [Loss] from food and beverage operations $175,000Income from other sources (ancillary revenue) $15,000

Total Income from Other Sources $215,000

Amount Needed from Room Revenue to Cover Costsand Realize a Fair Market ROI $2,060,000 Figure 7-5

Hubbart Formula– Schedule II

The figure reached at the end of Schedule I is used to determine the average daily rate the hotel would need to charge to meet its obligations (operating costs and owner ROI).

Schedule II incorporates opportunity cost.

Schedule II also assumes an average occupancy percentage.

How can using the 70% occupancy figure sometimes cause problems?

Figure 7-6

Hubbart Formula Example - Schedule IIExample

1. Amount Needed from Guest Room Sales (Schedual I) $2,060,000

2. Number of Guest Rooms Available 1753. Number of Rooms Available on an Annual Basis

Item 2 multipled by 365 (175x365) 100% 63,8754. Less Allowance for Average Vacancy 30% 19,1635. Number of Rooms to be Occupied Based

on Average Occupancy 70% 44,7126. Average Daily Rate Required to Cover Costs and

Provide Reasonable ROI (Item 1 divided by Item 5) 46.07$

Figure 7-7

Hubbart Formula– Schedule III

Schedule III makes an assumption that larger rooms are more expensive to maintain.

A square footage calculation is made of the area of all the guestrooms in a hotel.

What are some of the drawbacks of using a strict square footage calculation?

Figure 7-8

Hubbart Formula Example - Schedule IIIExample

1. Amount Needed from Guest Room Sales (Schedule I) $2,060,0002. Square Foot Area of Guest Rooms 70,0003. Less Allowance for Average Vacancy (70,000 x 30%) 21,0004. Net Square Footage of Occupied Rooms (70,000 x 70%) 49,0005. Average Annual Rental per Square Foot (Item 1 divided by Item 4) 42.04 6. Average Daily Rental per Square Foot (365 divided by Item 5) $0.12

Figure 7-9

Other Rate Calculation Methods

Cost Rate Formula Market ToleranceShop Around

What ways could a hotel determine its rate structure?

Why are anti-trust concerns so important?

Figure 7-10

Room Rate Designations

Term used to specify the rate threshold within the overall structure. It simply “ranks” all the rates within the rate structure. Rack Rate Corporate Rate Volume Account Rate

What is a target rate?

Figure 7-11

Room Rate Designations

Additional rate designations include: Government Rate Seasonal Rate Weekday/weekend Rate Membership Rate Industry Rate Walk-in Rate Premium Rate Advance Purchase Rate Package Rate Per person and Group rates

Figure 7-12

Monday Tuesday Wednesday Thursday Friday Saturday Sunday

Days of the Week

Tra

dit

iona

l Dem

and

Lev

elResort

Airport

Downtown

Suburban

Weekday vs. Weekend

Figure 7-13

Rate AveragesUsed to determine the average

revenue figure of specific rates.The most commonly used figure is ADR. Others include: Gross Average Rate Net Average Rate Group Average Rate Transient Average Rate Market Segment Averages Room Specific Averages

Figure 7-14

Rate Structure Internet Exercise

Using the Web sites and hotels you identified in the Internet exercise of Chapter 3, compare the different rates available for a given day.

Why would a hotel identify several rates within its rate structure this way?

Do the needs of guests differ greatly?What are the benefits/drawbacks of

offering only one rate per day?

Figure 7-15