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Where would a hotel manager start in determining the fair price for a guest
room? What is a fair value? This question has daunted innkeepers from the
beginning. Charge rates too high, and no one will stay with you. Setting rates
too low, and the owner makes less money. For many years in the beginning
of the modern hotel era, hotel managers simply guessed. As unscientific as this
approach sounds, it did work to an extent. After a hotel has been in business
for a while, managers would know by instinct and past experiences what rates
to set. In some ways, this instinctual approach had merit. It allowed for flexibility
to expand and evolve into chains and franchise operations, they needed to
borrow capital. It is the banking industry that forced a change in the way
hotels set their rates. The guessing approach didn’t translate well into the language
Roy Hubbart to develop a way to compute room rates.1 Mr. Hubbart came up
with 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.
Going beyond simple room cost, the Hubbart formula allowed the hotel to scientifically
This quantifiable approach was well received. Financing for any business
Though this rate formula has its detractors today, it was a valuable milestone
in the evolution of the industry. Here is how the Hubbart formula works.
II looks at the rates per occupied room; Schedule III incorporates square
same criteria used to determine room cost (Figure 7-1). What the Hubbart formula
market ROI for the investor. This ROI level can vary widely, but it is understood
The numbers used in the Hubbart formula examples presented here (Figure
7-1, Figure 7-2, and Figure 7-3) are for illustrative purposes only.
Schedule II of the Hubbart formula (Figure 7-2) uses the figure reached
at the end of Schedule I to determine the average daily rate the hotel would
that it considers the total number of room nights available for sale in a year
(365 days times the number of rooms available per night). It goes further in
run very high occupancy levels. Other areas are susceptible to market fluctuations.
Hotel room supply in an area can vary, as does the demand. Occupancy
local economic factors, and population, among others. A very general rule
market factors.
this number. When comparing the Hubbart formula to room cost calculation,
the results are close but not the same. With the same data, the Hubbart
calculations
would yield a higher room rate than the room cost analysis. There are
1. Room cost analysis does not include the ROI provision that Hubbart does.
In strictly looking at the costs incurred in room sales, profit would not
2. Room cost includes opportunity cost. The cost of maintaining each room
for every night is included in determining room cost. The Hubbart formula
I and II of the Hubbart formula do not take into account the variables in
the modern hotel structure. Few hotels today build all their rooms to the exact
command higher rates than a standard room. With Schedule III (Figure 7-3),
the Hubbart formula attempts to address the issue of these varying rooms by
room area. This measurement is simply a sum of the square footage available
in each guest room. Using the same hotel from the example, assume that it has