IHM GURDASPUR

PLANNING & EVALUATION

AMRITESH KUMAR

INSTITITE OF HOTEL MANAGEMENT

GURDASPUR
SCOPE
• Basis of charging room tariff

• Hubbert Formula

• Numrerical On Hubbert Formula

B.SC H & HA INSTITITE OF HOTEL MANAGEMENT

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5TH SEMESTER Front office
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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.
 

B.SC H & HA INSTITITE OF HOTEL MANAGEMENT

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5th
Semester F O GURDASPUR
 CENTRALISED RESERVATION
SYSTEM (CRS)
• a computerized reservation system for a chain or group of hotels to
enable
them to sell their rooms effectively.
- The hotels, their sales offices and Central Reservation Offices are
linked
through a CRS for an effective and real time management of room
inventory.
- It is primarily a Wide Area Network.

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 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.

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• Close observation of market trend approach further divides it into four
types:

•   1)  Competitive Pricing : Charge what the competition charges

•    2)  Follow the leader Pricing : Charge what the dominant hotel in the
area charges

•    3) Prestige Pricing : Charge the highest rate in the area and justify it
with better product,  better service levels, etc

•   4) Discount pricing : Reduce rates below that of the likely

competitors without considering   operating costs

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 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
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 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

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• Numerical:-

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
 

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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. 
 

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