Hubbart's Formula: Tariff fixation methods in Hotels
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The document discusses various methods for determining hotel room tariffs, including cost-based and market-based approaches. The cost-based approach includes the rule-of-thumb method, which sets the price per room at ₹1-2 per day based on costs, and Hubbart's formula, which uses an inverted profit and loss statement to calculate the required average room rate. The market-based approach considers competitor pricing, market tolerance rates, bundled/package pricing, and customizing rates based on guest needs. Hubbart's formula provides a scientific way to determine room rates based on costs, revenues, occupancy rates, and desired profit levels.
Hubbart's Formula: Tariff fixation methods in Hotels
- 1. Methods of Tariff Fixation Cost-based Approach Market-based Approach
- 2. Definition: Price • Price is the value in ₹ that is put to a product or service. • It is the result of a complex set of calculations, research, understanding and risk taking ability. • A pricing strategy takes into account market segment’s ability to pay, market conditions like level of supply & demand, competitor actions, industry profit margins and costs of production, plus others.
- 3. Price is the amount that both buyer and seller agree upon.
- 4. What is the process of pricing? • Pricing can be defined as a process of determining the value (₹) that is received by an organization in exchange of its products or services.
- 5. The Main Goals In Pricing • Pricing for Target Return on Investment (ROI): ... (a fair rate of return on investment in business) • Market Share Increase: ... • To Meet or Prevent Competition: ... • Profit Maximization: ... • Stabilise Price: ... • Customer’s Ability to Pay: ... • Resource Mobilisation: full use of manpower, machines, time, building etc.
- 7. 7 important factors that determine the fixation of price are: (i) Cost of Production: high/low (ii) Demand for Product: high/low (iii) Price of Competing Firms: high/low (iv) Purchasing Power of Customers: high/low (v) Government Regulation: controlled/free (vi) Objective or Goal of Company: profit (vii) Marketing Method Used:
- 8. Other Methods Of Pricing • Pricing at a Premium. With premium pricing, businesses set prices higher than their competitors. ...e.g. brand new hotel! • Pricing for Market Penetration. ...much lower than competition for first entry. • Economy Pricing ...low cost of production so low prices • Price Skimming. ...very high initially, then lower • Psychology Pricing. ...99.99 instead of 100 • Bundle Pricing… package pricing
- 9. Room Tariff Fixation • Selling a room is like selling space and time. • Space is permanent and can be used again and again. • But time keeps moving. • If a room is not sold today, then income for that day is lost for ever. • Hotels have very high fixed costs, which must be met daily. • Pressure on a hotel manager is very high to make regular sales.
- 10. The Two Major Methods • Cost- based Setting price of the room by first adding all the costs of production and sales, and adding a desired profit %. (Mark-up) This method makes sure that hotel does not run in loss. • Market- based Setting price of the room by first looking at the price being charged by competing hotels. Then, the hotel also tries to make the price look attractive to a buyer.
- 11. Rule of Thumb Approximate 1 Hubbart’s Formula Accurate & Scientific 2 Cost-based methods
- 13. Rule of Thumb Method • The English phrase rule of thumb refers to a principle with broad application, that is not supposed to be strictly accurate or reliable, for every situation. • It refers to an easily learned and easily applied procedure or standard, based on practical experience rather than theory.
- 14. Rule-of-Thumb for Hotel Rates If a hotel has spent ₹ 1000/- for making one room, it should charge ₹ 1/- for tariff per day. (in the year 1960, it was ₹ 1/-. Now it should be ₹ 2/-) This is an experience-based calculation. Since this rate never changes, with change in time, this number may not be useful any more.
- 15. Hubbart’s Formula • A gentleman named Mr Roy Hubbart in 1940s created this idea.
- 16. Hubbart’s Formula & P&L Statement • What is P and L statement? • A Profit and Loss (P & L) statement measures a company's sales and expenses during a specified period of time. The function of a P & L statement is to total all sources of revenue and subtract all expenses related to the revenue. (Revenue-Cost= Profit ) • It shows a company's financial progress during the time period being examined, generally 1 year.
- 17. Understanding P&L Statement Sales Revenue/Income from Sales (minus) Cost of GoodsServices Sold (minus)Total or Specific General Expenses (minus) Depreciation Expense (minus) Interest Expense (minus) Tax Expense = Net Profit
- 18. Inverted P&L Statement= Hubbart’s Formula That is why the Hubbart’s Formula is also called as “Bottom-Up approach”. It starts with Net Profit, adds all expenses, interests, insurance, depreciation and tax. This is the revenue a hotel has to earn in 1 year if it wishes to achieve its profit goals. This total revenue is divided by total number of rooms the hotel expects to sell in 1 year. The result is net revenue per room per day.
- 19. Unique Idea in Hubbart’s Formula A hotel earns approx. 65% of its revenue from rooms, but it earns remaining 35% from other outlets like F&B and Laundry. Hubbart’s formula suggests that profit earned from other departments must be subtracted from room revenue so that room rates can be lower and attractive to customers. In case a department is making loss, then that loss has to be made good from room revenue.
- 20. Hubbart’s Formula Demonstration In the following slides, Hubbart’s Formula is explained step-by-step.
- 21. 1 Owner’s Investment + Loan from bank & others = Total Investment
- 22. 2 Return on Investment (ROI) per year = Total Investment X Fair rate of return (15% to 20%)
- 23. 3 Return on Investment + Tax = Profit before Tax
- 24. 4 Profit before Tax + Direct & Indirect Expenses = Gross Operating Income
- 25. 5 Gross Operating Income +/- Other Departments Loss(+) or Profit (-) = Total required Revenue from Room Sales per year
- 26. 6 Total Number of Rooms in hotel X Expected Occupancy % (70-75%) = Rooms sold per day
- 27. 7 Rooms sold in 1 day X 365 = Total rooms sold in 1 year
- 28. 8 Total Revenue needed in 1 year (Divided by) Total Rooms sold in 1 year = Average Rate per room per day
- 29. Market-based Pricing Competition based Market Tolerance Rate Cutting Bundled Pricing Guest Needs based
- 30. Competition based Pricing All the competing hotels make a “Competitive Set”. Each hotel in the Competitive Set has to consider the actions of others to remain attractive to guests.
- 31. Market Tolerance Basis Every hotel offers a “best available rate” to callers requesting same day booking. These are the lowest possible rates acceptable to hotel management. A hotel can call up the competing hotels to find out their “BAR” and then may adjust their own prices accordingly.
- 32. Best Available Rate Also known as Best Rate Guaranteed (BRG) & Rate Parity, it is the practice of selling the room at same price by hotel & Online Travel Agents (OTA). Galileo, a Global Distribution System provider, defines BAR as "a rate available to the general public that does not require pre-payment and does not impose cancellation or charge penalties and/or fees, other than those imposed as a result of a hotel property's normal cancellation policy.“
- 33. Rate Cutting • The discounted pricing, especially during off- season, or to compete for greater market share is known as Rate Cutting.
- 34. Bundled Pricing • Hotels may package prices as inclusive or non- inclusive of some other product or service. • For example, Meal Plans & Meeting packages.
- 35. Guest Requirement • All guests have unique travel plan, purpose of journey, eating & sleeping habits. They also differ on the basis of nationality, religion, race, occupation and income levels. • A hotel has to assess their situation and offer a tailor-made rate to each guest, if possible. • This will satisfy the guest and help increase sales of hotel product and services.