Topic 3: Setting the Room Rate

Objectives and Student Goals: Objectives of this topic are to develop within the students... ...An understanding of the market forces acting against the full rack rate. Describe the numerous discounting options available to guests. Explain the impact of discounting on a particular property as well as the industry. ...A working knowledge of the Hubbart Room Rate Formula. Perform a simple calculation and describe the inherent shortcomings with this approach to forecasting the room rate. ...An ability to utilize the Building Cost Room Rate Formula. Calculate the building cost rate and list circumstances when such a simple number might prove useful to a hotel manager. ...A practical knowledge of the Ideal Average Room Rate. Detail the insight a manager gains when comparing such a theoretical number against actual performance statistics. ...An ability to understand and define basic vocabulary terms and industry jargon specific to room rate factors and calculations. ...An appreciation for the positive impact to a hotel's average daily rate from a front office staff well trained in the art of up-selling. At the conclusion of this topic, the student should be able to List at least ten types of discounts commonly offered hotel guests. Calculate a Hubbart Room Rate Formula. Calculate a Building Cost Room Rate Formula. Calculate an Ideal Average Room Rate. Recount the basic steps of up-selling the room rate to a registering hotel guest. Show why high lodging taxes harm the industry and explain current lodging tax trends. Summary of Module 3, Topic 3 The published retail price of a room is referred to as the rack rate. Few guests actually pay the rack rate, however, because hotels offer numerous discounting options. Some of the more common discounts include; corporate or commercial rates, AAA or AARP members, frequent travelers, government employees, advanced nonrefundable purchases, hospitality industry professionals (including travel agents), and extended stay guests. Determining the rate is as much an economic calculation as it is a marketing decision. From the standpoint of economics, the room rate needs to be high enough to cover fixed

and variable costs and earn a return on investment. From the marketing view, the rate needs to be low enough to be attractive and competitive with other hotels in the region. One of the most widely used room rate calculations is the Hubbart Room Rate Formula. The Hubbart formula requires management to project annual expenses (and profits) for all departments in the hotel as well as forecast the hotel's annual occupancy rate. The resulting room rate calculation is determined by dividing the total projected expenses (plus a reasonable profit for the investment) by the number of rooms sold for the year. The simplest rule of thumb method for determining a room rate is the Building Cost Room Rate Formula. The axiom behind this formula is the room rate should equal $1 for every $1,000 of construction costs. Although far from accurate, this approach provides a quick glimpse at approximate room rate requirements. The Ideal Average Room Rate is a hypothetical yardstick against which to measure actual room rate performance. The ideal rate suggests that all price categories in the hotel (suites and standards alike) are sold with equal weight. By comparing actual performance against the ideal theoretical rate, a hotel can determine its success in up-selling to the more expensive rooms as well as the appropriateness of its rate structure in the marketplace. No matter how many rate calculations are performed, the job of selling rooms comes down to the front desk staff. A well-formulated room rate policy requires conscientious training of reservations and front office staff. Armed with good knowledge of the hotel's product as well as a repertoire of reasons why the guest should consider spending an extra $10 dollars or so, the team works wonders with the hotel's average room rate.

Key Concepts of Chapter 9

Assorted Room Rate Formulas. Determining the rate is a matter of both economics and market forces. No rate calculation is one hundred percent accurate, but each provides management a general indication of how and where to price the room in order to cover costs and earn a reasonable return on investment. Two of the most common room rate calculations are the Hubbart Room Rate Formula and The Building Cost Room Rate Formula. Another, the Ideal Average Room Rate, is a theoretical average rate against which management can compare actual room rate performance. Discounting. The act of lowering the retail (rack) rate of a room in order to stimulate demand is known as discounting. Although it seems logical in theory, widespread discounting has hurt the lodging industry. Little, if any, new demand (occupancy) is ever created by reduced prices. Rather, guests are merely attracted from one property to another because of the more favorable discounted rates. Although the discounting property experiences a short-term surge in occupancy, the phenomenon is only temporary. In retaliation, other properties undoubtedly reduce their rates, occupancy returns to its previous levels, and profits suffer from the overall reduction in room prices.

Elasticity of Demand. Demand for most products is elastic--when the price goes down, increased new demand results. Demand for some types of hotels is actually inelastic-lowering the price creates little or no new demand. The hotel industry has always believed it is relatively inelastic. That is, reductions in rate produce less new business than is lost from lowering the unit price. Different markets have different degrees of elasticity. Tour properties are more elastic, and commercial demand is more inelastic. Hotels experience different degrees of elasticity according to the season. Time is Money. Although rooms are sold by the day, as opposed to the hour, time is still a factor in certain aspects of the room charge. Very early check-ins and late check-outs are commonly assessed a fee for guests who spend a significant amount of additional time in the room. Likewise, many hotels offer day rate rooms for limited hours between say 8am and 4pm. American Plan resorts are especially alert to check-in and check-out times in order to account for the number of meals guests receive on arrival and departure.

Key Vocabulary for Chapter 9

Professional Vocabulary: Day Rate. Special rates exist when occupying the room during the daytime only. Also called part-day and use rates, hotels offer deep discounts for guests who stay from roughly 8am to 5pm same day (truckers, quick meetings, etc.). Double Occupancy. Double occupancy refers to the use of a hotel room by a second guest. The hotel usually increases the single room rate by a factor (though usually not twice) whenever a second guest is present. Employee Rates. One benefit of working for a major chain is the courtesy rate the chain provides its long-standing employees. After working a minimum number of months, employees become eligible for substantial room discounts during personal travel. Employee rates are usually sold on an available basis only. Lodging Taxes. Also known as bed, room, or hotel taxes, these taxes are charged by the local municipality, county, or state on all rooms sold in that locale. Though hotel managers have little control over the taxes charged, they are responsible for collecting them. Lodging taxes run as high as 15 percent in some major cities. Per Diem. Per diem literally means "by the day." It reflects the allotted amount a guest will be reimbursed for meals and/or lodging per day by the agency or company for whom s/he works. Most government offices and many private companies establish varying per diems depending on the city or region of the country visited. Rack Rate. The published retail price of a room is referred to as the rack rate. Few guests pay full rack rate, however, because of the widespread availability of room rate discounts. In spite of the prevalence of discounting, hotels initially quote rack rate when responding to a reservation or walk-in room request.

Rate-Cutting. There is a distinct difference between rate-cutting and discounting. Ratecutting occurs in an inelastic market when one property drops its room prices in an effort to lure customers from competing hotels. More Vocabulary Listed below are some other vocabulary words for this chapter. All of these words are defined in the glossary of your book. Arrival Time Hubbart Room Rate Formula Building Cost Rate Formula Ideal Average Room Rate