Chapter Nine
PowerPoints developed by
Bharath M. Josiam, Ph. D.
Professor, Hospitality Management
University of North Texas, Denton, TX, USA
And
Edited by Gary K. Vallen, Ed. D.
Professor, School of Hotel and Restaurant Management
Northern Arizona University, Flagstaff, AZ, USA
Check-In Check-Out: Managing Hotel Operations, 9e
Gary Vallen, Jerome Vallen
Objectives of Chapter 9
Understanding why hotels are unable to get the rack rate
Understanding the negative impact on revenues from
discounting
Understanding the Hubbart Room Rate formula
Understanding the Building Cost Room Rate formula
Understanding the Ideal Average Room Rate
Understanding terms/jargon specific to room rate factors
and calculations
Premium Periods
Ability to charge more than rack rate during special
events
May be illegal and prosecuted as price gouging
Double Occupancy
Charging per person, rather than per room
1.
2.
3.
4.
5.
6.
(Exhibit 9-14)
Operating Expenses
1,102,800
Taxes and Insurance
273,000
Depreciation
294,750
Reasonable ROA
414,000
Total
2,084,550
Less Income from other sources
139,200
Amount needed from room sales
$ 1,945,350
Revenue from room sales needed
$1,945,350
Number of rooms available (Per Day)
88
Rooms available per year (item 2x 365)
32,120
Less allowance for vacancies (@ 30%)
9,636
Number of rooms to be sold (@70%)
22,484
ADR per room to get ROA (item1/item5)
$ 86.52
(Exhibit 9-14)
Short comings of the formula
It is inward looking at what we need, rather than outward
looking at market conditions
Many assumptions are problematic
What is reasonable ROA?
What occupancy rate is attainable?
Occupancy is a function of room rate!!
What about role of other departments like F & B?
Should low estimates force us to increase rates?
Should high estimates force us to lower rates?
Summary
It is a worthwhile formula to use as a guideline, after
recognizing the problems inherent in it.
A 200 room hotel, costing $14 million, should have a room rate of $70
($14 million /200 rooms/ $1,000) = $ 70
Occupancy%
Single Room
80%
Double Room
80%
Junior Suite
60%
Luxury Suite
60%
Average
70%
Occupancy%
Single Room
60%
Double Room
60%
Junior Suite
80%
Luxury Suite
80%
Average
70%
Objectives of Chapter 9
Understanding why hotels are unable to get the rack rate
Understanding the negative impact on revenues from
discounting
Understanding the Hubbart Room Rate formula
Understanding the Building Cost Room Rate formula
Understanding the Ideal Average Room Rate
Understand terms/jargon specific to room rate factors and
calculations
1.
2.
3.
4.
5.
6.
A 300 room hotel, costing $25 million, should have a room rate of $
($
million /
rooms/ $1,000) = $