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 considered
In 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 I
Operating Expenses:
Example
Rooms Department
$450,000
Telephone Department
$75,000
Administrative and General
$200,000
Payroll Taxes and Employee Benefits
$225,000
Advertising and Promotion
$75,000
H/L/P (Heat, Light, Power)
$150,000
Repairs and Maintenance
$125,000
Total Operating Expense
Taxes and Insurance
Real Estate and Personal Property Taxes
Franchise Taxes and Fees
Insurance on Building and Contents
Lease Costs (Equipment and/or Vehicles)
Total Taxes and Insurance
$75,000
$25,000
$30,000
$45,000
Depreciation at Book Value
Building
FF&E (Furniture, Fixtures and Equipment)
Total Depreciation
$175,000
$125,000
$175,000
$300,000
Fair Market Return on Investment (ROI) of Property
Land
Building
FF&E
Total Fair Market ROI
TOTAL:
Deduct (Income from sources other than rooms)
Income from store rentals/leases
Profit [Loss] from food and beverage operations
Income from other sources (ancillary revenue)
Total Income from Other Sources
Amount Needed from Room Revenue to Cover Costs
and Realize a Fair Market ROI
$1,300,000
$500,000
$2,275,000
$25,000
$175,000
$15,000
$215,000
$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 II
Example
1. Amount Needed from Guest Room Sales (Schedual I)
2. Number of Guest Rooms Available
3. Number of Rooms Available on an Annual Basis
Item 2 multipled by 365 (175x365)
4. Less Allowance for Average Vacancy
5. Number of Rooms to be Occupied Based
on Average Occupancy
6. Average Daily Rate Required to Cover Costs and
Provide Reasonable ROI (Item 1 divided by Item 5)
$2,060,000
175
100%
30%
63,875
19,163
70%
44,712
$
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 III
Example
1.
2.
3.
4.
5.
6.
Amount Needed from Guest Room Sales (Schedule I)
Square Foot Area of Guest Rooms
Less Allowance for Average Vacancy (70,000 x 30%)
Net Square Footage of Occupied Rooms (70,000 x 70%)
Average Annual Rental per Square Foot (Item 1 divided by Item 4)
Average Daily Rental per Square Foot (365 divided by Item 5)
$2,060,000
70,000
21,000
49,000
42.04
$0.12
Figure 7-9
Other Rate Calculation
Methods
Cost Rate Formula
Market Tolerance
Shop 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
Weekday vs. Weekend
Traditional Demand Level
Resort
Airport
Downtown
Suburban
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Days of the Week
Figure 7-13
Rate Averages
Used 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