PLANNING AND EVALUATING FRONT
OFFICE OPERATIONS
Basis of Charging Room Tariff
Price is one of the major elements
involved in the marketing and positioning of a product or service. The price of
goods and services of a hotel should cover the cost of production and
overheads, and include a fair amount of profit, so that the hotel business
remains sustainable and profitable. The room of a hotel generates the maximum revenue,
so an accurate and competitive room rent is one of the prerequisites for
running a successful hospitality business. The rate of a hotel room is based on
the competition, cost, standard of services and amenities offered by the hotel,
the guest profile, location of the hotel, location of the room etc.
Three common
approaches to deciding room tariff are given as below:
Market based Pricing: Market based pricing is setting a price based on the
value of the product in the perception of the customer. The concept is based on
an idea of what the ultimate consumer of goods and services, i.e the guest is
willing to pay and then use this as a starting point. In this case, the hotel
works backwards as it first makes an accommodation product available at a price
that a guest is willing to pay rather than first readying the product and then
deciding its tariff on the basis of costs involved.
This approach is common sense
approach. Management looks at comparable hotels in the geographical market and
sees what they are charging for the same product. The thought behind this is
that the hotel can charge only what the market will accept, and this is usually
dictated by the competition.
There are many problems with this
approach, although it is used very often. First, if the property is new,
construction costs will most likely be higher than those of the competition.
Therefore the hotel cannot be as profitable as the competition initially.
Second, with the property being new and having newer amenities, the value of
property to guests can be greater. The market condition approach is really a
marketing approach that allows the local market to determine the rate. It may
not tale fully into account what a strong sales effort may accomplish.
Close observation of market trend
approach further divides it into four types:
- Competitive Pricing : Charge what the competition charges
- Follow the leader Pricing : Charge what the dominant hotel in the area charges
- Prestige Pricing : Charge the highest rate in the area and justify it with better product, better service levels, etc
- Discount pricing : Reduce rates below that of the likely competitors without considering operating costs
The Rule of Thumb: The rule of thumb approach sets the rate of a room at Rs. 1
for each Rs. 1000 spent on the project cost per room, assuming 70 % occupancy.
In case the occupancy percentage is expected to be more than 70% then the rate
of a room can be less than Rs. 1 and on the contrary if the occupancy is
expected to be less than 70 % then the rate can be more than Rs. 1. For
example, assume that the average construction and furnishing cost of a hotel
room is Rs. 30,00,000/- the average rack rate of hotel room in this hotel using
thumb rule will be Rs. 3000, as illustrated below.
1000: 1
30, 00,000: 3000
The inflation cost is kept in mind
while fixing the rack rate. For example if a hotel was built 50 years ago at
the cost of Rs. 50,000/- per room than as per the rule of thumb the rack rate
per room will be Rs. 50/- only which is not a financially viable rate option.
To find out the current rack rate either the present asset value is evaluated
or the net present value of Rs. Invested 50 years ago is calculated, keeping in
view the inflation and the resultant devaluation of currency.
The rule of thumb approach to pricing
rooms also fails to consider the contribution of other facilities and services
provided by the hotel in generating revenue. As hotel generates revenue from sources
like food and beverage, conference, laundry, telephone etc so it must be a part
of calculation while deciding room tariff for the hotel.
The Hubbart Formula : The Hubbart
formula, which is a scientific way of determining the room rent , was developed
by Roy Hubbart in America in the 1940s. It resolves all the problems of the
rule of thumb approach.
ROI + Operating expenses- Non room revenue
Projected rooms sold per day X 365
The following steps are involved in
calculating the room rent according to Hubbart formula :
- Calculate the desired Return on Investment by multiplying the desired rate of return by the capital investment.
- Calculate the desired profit after deducting the income tax.
- Calculate fixed expenses and undistributed operating expenses including depreciation, interest, insurance, Human resources, marketing, maintenance, electricity, general expenses etc
- Estimate non room revenue. Non room revenue department includes Food and beverage, conferences, health club, laundry etc
- Give average projected room occupancy for a day and multiply it by 365 to find the projected number of rooms sold per year.
- Calculate the average room rate by solving the equation of the formula.
Illustration:
Hotel ‘XYZ’ having 40 rooms is
constructed at a project cost of Rs 10 crores. The owner’s capital is Rs. 6
crores on which he is expecting 20 % ROI while the remaining capital is
arranged through a bank loan at an interest rate of 15% per annum. The income
tax rate is 30 % and the hotel is expected to make 60% occupancy. The operating
expenses are estimated to be Rs. 2 crores while the hotel is expecting Rs. 1
crore as non room revenue in the first year of its operation. Calculate Average
rack rate with the use of Hubbart formula
Solution:
Desired ROI- Rs. 60000000 x 20 % = 12000000
Total room nights = 24 x 365 = 8760
Total expenses = Rs. 20000000 +
6000000 ( bank interest) = 26000000
Non room revenue = Rs. 10000000
Pre- tax income - 30 x 12000000 = 5143857
70
5142857 + 12000000 = 17142857 /-
17142857
+ 26000000 - 10000000
8760
= Rs. 3783 /- is estimated as average rack rate for
the hotel as per Hubbart formula.
