PRICING

I- Establishing Room Rates:

The front office manager shall assign to each room category a rack rate. In accordance, front
office employees are expected to sell rooms at rack unless a guest qualifies for an alternative
room rate (ex: corporate or commercial rate, group rate, promotional rate, incentive rate,
family rate, day rate, package plan rate, complementary rate).
hile pricing rooms, the hotel shall keep in mind that rate should !e !et"een a minimum
(determined !y cost structure) and a maximum (determined !y competition structure)
!oundary as depicted !elo":
#inimum (Hurdle Rate) $ %oom %ate $ #aximum (Rack Rate)
Cost Structure $ %oom %ate $ Competition Structure
hile esta!lishing room rates, management shall !e careful a!out its operating costs,
inflationary factors, and competition. &enerally, there are three popular approaches to pricing
rooms:
'. (ost )pproach
*. #arket (ondition )pproach
+. %ule,of,thum! )pproach
-. .u!!art formula )pproach
'. Cost Approach:
This )pproach/s starting 0oint is on finding the 0er %oom occupied daily 1irect and
Indirect 2xpenses.
(onsider the 3ollo"ing 2xample:
4amel .otel has estimated the 3ollo"ing Indirect 2xpenses (i.e. 5ndistri!uted 2xpenses
and 3ixed (harges) for the upcoming 6ear:
Expense !pe Amount Allocation to
Rooms "i#ision
Rooms "i#ision
Expense
)dministrative 7 &eneral 2xpenses $ %&&'&&& (& ) $ *%&'&&&
5tility 2xpenses $ +,&'&&& -& ) $ *.+'&&&
1e!t 2xpenses $ (&&'&&& -& ) $ +*&'&&&
1epreciation 2xpenses $ (%&'&&& ,& ) $ +*&'&&&
%ent 2xpenses $ *&&'&&& -& ) $ -&'&&&
#arketing 2xpenses $ ,%'&&& .& ) $ %+'&&&
#aintenance 2xpenses $ */&'&&& -& ) $ 0.'&&&
Insurance 2xpenses $ *&&'&&& -& ) $ -&'&&&
1A2 $ *'.*%'&&& N3A $ *'&/+'&&&
3urthermore, suppose that 4amel .otel has *%& %ooms (0& of them are single and the
remaining are dou!le) and that the 3orecasted 8ingle %oom 9ccupancy %ate is .& ) and
the 1ou!le %oom 9ccupancy %ate is .% ).
Ans4er:
Total :um!er of 2xpected 8ingle %ooms 8old per 6ear ; <= > =.?= > +@A ; +,'+.&
Rooms.
Total :um!er of 2xpected 1ou!le %ooms 8old per 6ear ; @= > =.?A > +@A ; *.',*%
Rooms
1aily per %oom Indirect 2xpenses ; B ',=-*,=== C (*@,*?= D '?,@'A) ; $ +(5+*.
#oreover, suppose that 4amel .otel estimated the follo"ing daily per room 9perating
2xpenses (i.e. 1irect 2xpenses):
3rills 2xpenses (8ingle): B E.A
3rills 2xpenses (1ou!le): B ?.*A
8taff 2xpenses (8ingle): B ?
8taff 2xpenses (1ou!le): B <
Faundry 2xpenses (8ingle): B @.A
Faundry 2xpenses (1ou!le): B E.*A
Total 8ingle 1aily per room 1irect 2xpense ; B E.A D B ? D B @.A ; $ ++
Total 1ou!le 1aily per %oom 1irect 2xpense ; B ?.*A D B < D B E.*A ; $ +/5%
Total 1aily 8ingle %oom 2xpense ; B *+.*' D B ** ; $ /%5+* (.urdle %ate)
Total 1aily 1ou!le %oom 2xpense ; B *+.*' D B *-.A ; $ /-5-* (.urdle %ate)
"etermining Rack Rate:
The ans"er found a!ove is the minimum price of 8ingle and 1ou!le rooms as to have no loss
or profit from our operationsG This condition is refereed to as the Hreak,2ven priceG
In order to find the rack rate (i.e. the maximum price potential guests can !e charged), the
hotel shall apply some of the a!ove,mentioned methods:
a) 6ultiplier 6ethod7
5nder this very method, hotels shall try to set a #ultiplier, !y "hich the %oom (ost shall !e
multiplied, in order to come up "ith the hotel %oom %ack %ate (for each room type):
Multiplier = 1 / (Desired Room Cost Percentage)
Desired Room Cost Percentage = (Forecasted Total Room Cost) / (Forecasted Total
Room Revenue)
8uppose that 4amel .otel/s #anagement decided, prior to a certain price demand analysis,
to have a 1esired %oom 8ingle (ost 0ercentage of EA I and a 1esired 1ou!le (ost
0ercentage of @= I.
8ingle #ultiplier ; ' C =.EA ; *5((
1ou!le #ultiplier ; ' C =.@= ; *5,-
8ingle %ack %ate ; B -A.*' > '.++ ; $ ,&5+.
1ou!le %ack %ate ; B -E.E' > '.@E ; $ -05%+
!) 6ark-up 6ethod
5nder this very method, an addition (or add,on) to the (ost of a 0roduct "ill !e applied to
come up "ith the 8ingle and 1ou!le %ack %ates.
8uppose 4amel .otel decided to have a *A I #ark,up on %oom (osts for !oth 8ingle and
1ou!le %ooms.
8ingle %ack %ate ; B -A.*' > (' D =.*A) ; B -A.*' > '.*A; $ %,5%*
1ou!le %ack %ate ; B -E.E' > '.*A ; $ %05,/
Fater, the hotel might adJust this figure to a "hole num!er and communicate it as its Fist
0rice (for guest and accounting convenienceG)
The most important handicap of the (ost )pproach pricing is that it does not take into
consideration ho" much (ustomers are actually "illing to pay for the .otel 8ervices, and
ho" other .otels are actually charging for their %ooms.
*. 6arket condition approach:
5nder this very approach, management shall look at compara!le hotels in the geographical
market, see "hat they are charging for the same product, and Kcharge onl! 4hat the market
4ill acceptL.
8ome dra"!acks of this approach are that it does not take into consideration the value of the
property, and "hat a strong sales effort may accomplish. Fast !ut not least, there is al"ays
su!Jectivity in coming up "ith sets of criteria against "hich hotel rooms can !e compared and
measured for similarity.
+. Rule o8 thumb approach:
In this very approach, the rate of a room shall !e $ * for each $ *'&&& of construction and
furnishing cost per room, assuming a -&) occupancy rate.
To illustrate suppose a *%&,room hotel has costed $ 0'%&&'&&& of (onstruction and
3urnishing (osts. Therfeore, the cost per room is $ ,('(((5(( "hich "ould mean that the
price per room shall !e $ ,(5((.
This approach, ho"ever, fails to take into consideration the inflation term, the contri!ution
of other facilities and services to"ards the hotel/s desired profita!lity, and assumes a ceratin
level of occupancy rate.
-. Hubbart 8ormula approach:
This very approach considers operating costs, desired profits, and expected num!er of
rooms sold (i.e. demand). The procedure of calculating a room rate is as follo"s:
a) (alculate the hotel/s desired profit !y multiplying the desired rate of return (%9I) !y the
o"ner/s investment.
!) (alculate pre,tax profits !y dividing the desired profit !y ' minus hotel/s tax rate.
c) (alculate fixed charges and management fees. This calculation includes estimating
depreciation, interest expense, preperty taxes, insurance, amortiMation, !uilding mortgage,
land, rent, and management fees.
d) (alculate undistri!uted operating expenses. This includes estimating administrative and
general expenses, data processing expenses, human resourecs expenses, transportation
expenses, marketing expenses, property operation and maintenance expenses, and energy
costs.
e) 2stimate non,room operating department income or loss, that is, 37H department income
or loss, telephone department income or loss
f) (alculate the required room department income "hich is the sum of pre,tax profits, fNxed
charges and management fees, undistri!uted operating expenses, and other operating
department losses less other department incomes.
g) 1etermine the rooms department revenue "hich is the required room department income,
plus other room department direct expenses of payroll and related expenses, plus other
direct operating expenses.
h) (alculate the average room rate !y dividing rooms department revenue !y the expected
num!er of rooms to !e sold.
1ou!les sold daily ; dou!le occupancy rate > total num!er of rooms > occupancy I
8ingles sold daily ; rooms sold daily O num!er of dou!le rooms sold daily
8ingles sold daily > x D dou!les sold daily > (x D y) ; (average room rate) > (total num!er
of rooms sold daily)
here: x ; price of singlesP y ; price differential !et"een singles and dou!lesP x D y ; price
of dou!les.
II, "iscounting:
In all (omputations done so far, the %oom 0rice that "e have found is "hat is called the
%oom %ack %ate (i.e. The #aximum %ate a .otel can charge a &uest). 6et, most often,
only alk,ins (i.e. &uests "ithout a %eservation) are charged a %ack %ate, "hich "ould
mean that a !ig proportion of guests actually pay a 1iscount on the %ack %ate.
1iscounting is a method used !y #anagement to make their 0roducts and 8ervices
attractive to (ustomers. This very method may differ according to seasonality, type of
(ustomer, #arket 8egment, and Type of 0roduct
There is an important relation !et"een 9ccupancy and 1iscount 0ercentage:
E9ui#alent 1ccupanc! : ;Current 1ccupanc!< = ;;Rack Rate - 6arginal Cost< 3 ;Rack
Rate= ;*-"iscount Percentage< - 6arginal Cost<<
To illustrate, suppose that an 9ccupied 8ingle %oom has a daily varia!le cost of $ *& and that
management are right no" selling at 8ingle %ack %ate $ %& and managing to have 8ingle
9ccupancy of -& ). 8uppose, furthermore that management decided to discuss the effect of a
'= I discount on 8ingle %ack %ate on the eventual demandG )nd hence, "hether to discount
or notG
Ans4er:
In order not to !e economically affected !y the discount, the minimum 9ccupancy at that
discounted price (i.e. at $ /%), shall !e:
2quivalent 9ccupancy ; E= I > ((B A= , B '=) C (B A= > (' O '= I) , B '=)) ; E= I > (-= C
+A) ; .& )
#anagement, shall at this very stage, conduct a feasi!ility study on the effect of that pre,
determined 1iscount on 1emand and if the effect proves to yield an occupancy "hich is more
than .& ), discounting can !e applied. If, not than the discounting idea shall !e discardedG
III, 1ther Pricing echni9ues:
'. 6arket-skimming Pricing7
8etting a .igh 0rice for a ne" 0roduct to skim maximum %evenues layer !y layer from the
8egments that are "illing to pay the .igh 0rice
*. 6arket-penetration Pricing7
8etting a Fo" 0rice for a :e" 0roduct in order to attract a Farge :um!er of (ustomers and a
Farge #arket 8hare.
+. 1ptional Product Pricing:
0ricing 9ptional or accessory 0roducts that are !eing sold along "ith a #ain 0roduct.
-. Capti#e Product Pricing:
8etting a 0rice for 0roducts that must !e used along "ith a #ain 0roduct (ex. 3rills no more
free of (harge !ut (harged a 0rice to (ustomers)
A. Product >undle Pricing:
(om!ining 8everal 0roducts and 9ffering the Hundle at a %educed 0rice (i.e. 0ackaging 7
1iscounting)