Planning and evaluating Front office operations - V SEMESTER

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. 

Types of Room Rates

Room rates are of two types:

      (1)    Rack Rate

Hotel generally designates a standard rate for each of the category of rooms offered to guests. This rate which is the published tariff of the hotel and is without any discount is known as the Rack rate. In common parlance, rack rate may be referred as the MRP of a hotel room. Traditionally, a wooden rack or rate board was placed in the lobby or at the reception, hence the name rack rate.        

     

      (2)   Discounted Rate

To attract business and to compete in the market hotels offer different types of discounted room tariff. Discounted tariff is lower than the rack rate. Sometimes hotels offer discounts to please a guest for a courtesy as it is expected that the guest may send a lot of business to the hotel in future. Some of these discounted rates are given as below:

     

      (a) Corporate rate: Corporate discount is offered to companies and corporate houses. Business hotels particularly rely on this rate but it may also be a part of resorts as now-a-days various companies organize conferences and training programs at resort destinations. Corporate rate is of two types                                                                                                                                                                                      

 Regular corporate rate: It is a unilateral offer. When hotels offer a fixed percentage of discount without any commitment from the corporate house it is known as regular corporate rate.

 CGVR: It stands for company guaranteed volume rate. It’s a bilateral contract between the hotel and the corporate house. In this case hotels offer a higher discount compared to regular corporate rate but on a condition that company will give a guaranteed volume of business during the year.

    b)      Airline rate: It is usually offered by airport hotels or the transit hotels. It is a discounted rate given to airline companies when they give business in the form of stay of their crew members or layovers.

   c)      Travel Agent rate: Travel agents work on a commission basis. They are like a retail shop of tourism services. Usually 10 % commission is offered to the travel agents for the business provided by them.  Travel agents are also offered a discounted rate so that they market the hotel product ahead of the competition which is also being marketed by them.

    d)      Seasonal rate: Usually resorts have a very pronounced peak season, mid season / shoulder period and off season. They charge rack rate during peak season and discounted rates during the rest of the year. Resorts close to the cities may also offer a discounted rate on week days compared to the weekends.

    e)  Week end rate: Business hotels get low occupancy on weekends as most of the commercial establishments and offices are closed on such days. To attract business on weekend, special discounted tariff is offered by these hotels.

  

 f)       FHRAI Rate: Federation of hotels and restaurants association of India is a trade association which is a representative body of hospitality industry in India. Member hotels and restaurant are offered a membership card which is usually given to owner and general manager of the hotel. FHRAI card holder gets a fixed discount in all member hotels which is 30% on Room, F & B, and Laundry. The discount is reduced to 25% if mode of payment is through credit card.

    g)      Group Tariff: 10 or more than 10 persons travelling together are known as group. Group tariff is lower than the rack rate as it constitutes bulk business. Group rates are usually negotiable on the basis of the size of group, length of stay, past relationship with the group operator, season, etc.

    h)      Package:  Package is a bouquet of product and services which bought collectively will cost less to the consumer in comparison to the same set of services bought individually. As an example if rack rate is Rs. 5000/ 1 3 night package may cost Rs. 12,000. Packages generally include a meal plan, sightseeing, air port pick up etc.

   i)        Complimentary rate: When the room is offered without any charge to a guest it is known as complimentary rate. It may be offered to a relative or friend of the owner, to compensate for a lapse in service, as a reward to a regular guest or during FAM Tour/familiarity tours for opinion makers such as travel writes, food critics, travel agency heads, etc.

   j)        House Use:  When the room is offered without any charge to a person who is staying in the hotel for hotel’s own use it is known as house use rate. It may be in the case of a resident manager or manager on duty or a technician who is staying the hotel for some kind of repair and maintenance work.

    k)      Crib rate:  A special rate applicable to children below 12 years of age, and accompanying their parents. A special crib cot is provided in such cases.

    l)        Introductory rate: New hotels offer a special discounted rate for initial 2-3 months to attract business and to familiarize the market with their product. This kind of discounted tariff is known a crib rate. 

      
         Forecasting Room Availability

      The most important short-term planning performed by front office managers is forecasting the number of rooms available for sale on any future date. Room availability forecasts are used to help manage the reservation process and to guide front office staff in effective rooms management. Forecasting is especially important on nights when a full house is possible.

    Forecasting is a difficult skill to develop. The skill is acquired through experience, effective record keeping, and accurate counting methods.

           The factors that affect forecasting are mentioned as below:

Ø  MICRO FACTORS

·         Reservations already received for the  forecasted period

·         Past history of No Show, under stay and over stay in the hotel.

·         Competition

·         Brand image of the hotel

·         Change in management

·         Reservation Lead time ( difference between the time reservations are received and date of arrival)

·         Ratio of guaranteed and non-guaranteed reservations

Ø  MACRO FACTORS

·         Events / Activities in the city during the period of forecast

·         Economical factors ( Recession, Tax structure, GDP , Demonetisation etc)

·         Political factors ( stability of government, government policies, terrorism and disruptive elements etc)

·         Environmental and climatic factors