; Pricing_ Forecasting
Learning Center
Plans & pricing Sign in
Sign Out
Your Federal Quarterly Tax Payments are due April 15th Get Help Now >>

Pricing_ Forecasting


  • pg 1
									                                          Hotel Marketing 


Each room in a hotel will almost always have more than one room rate. Rate categories generally
correspond to types of rooms that are comparable in square meterage and furnishing. Differences are
based on room size, location, view, furnishing, and amenities. The rack rate is the standard price
determined by the front office management and accepted by the GM. The rack rate is listed on the room
rate schedule to inform colleagues of the selling price of each room in the hotel. Often, rack rates must
be reported to local and or state authorities.
Today’s often applied rack rates:
                         Premium Rates
                         High Season Rates
                         Shoulder (or Mid) Season Rates
                         Off or Low Season Rates

Special room rate categories are as follows:
 Corporate or commercial rate offered to companies that provide frequent business for the hotel
 Group rate offered to groups, meetings, conventions etc.
 Promotional rate used among others during low occupancy period
 Incentive rate offered for agencies, airlines, tour operators, meeting planners
 Family rate spec for families (family plan)
 Package rate
 Complimentary rate

Fair Rating
     A sound room rate structure is fundamental to a sound hotel operation; every manager is sooner or
later faced with the question of what is the proper room charge. It is a matter of exceeding complexity
because room rates reflect markets and costs; investments and rates of return, supply and demand;
accommodations and competition; and not least of all, the quality of management.
     Divided into its two major components, room rates must be large enough to cover costs and a fair
return on invested capital, and reasonable enough to attract and retain the clientele to whom the
operation is being marketed. The former suggest a relatively objective, structured approach, which can
be analyzed after the fact. The latter is more subjective, involving many factors from the amount of local
competition to the condition of the economy at large. There is a little sense in charging a rate less than
what is needed to meet the first objective; there is little chance of getting a rate more than that limit
established by the second.

Double Occupancy
    Double occupancy refers to the use of the room by a second guest. Traditional rate making
increases the single-occupancy rate by a factor (normally not twice) whenever the room is double
occupied. However, the price spread between single and double occupancy has been narrowing. One
rate is being used more frequently because the major costs of a hotel room are fixed (debt service,
taxes, depreciation). Having a second or third occupant adds relatively few incremental costs (linen,
soap, tissue). Although far from universal, one charge for both single and double occupancy is gaining
    Several arguments support the movement toward a single (flat) room price. The fewer the rate
options, the less the confusion, and the more rapidly the telephone reservationist can close the sale.
Price is critical issue in package plans and tour sales. Rates can be shaved closely because the second

               Budapest Business School  Tourism & Hotel Management                                  1
                                          Hotel Marketing 

occupant represents a small additional expense. The surcharge is almost unnoticed if the extra persons
share existing beds. That is what makes family-plan rates attractive. An extra charge is levied if a
rollaway bed, which requires extra handling and linen, is required. Suite hotels are popular because the
extra hide-abed is permanently available.

Influences upon pricing decision-making:
Controllable factors,
                                over which the marketers has a large amount of control
                                Costs, marketing-pricing objectives, product offering, company

Uncontrollable factors,
                                over which there is little control, but which still influence
                                the pricing decision.

Controllable factors:            Costs

Fixed costs:
                                Irrespective of occupancy, do not vary with changes in sales volume.
                                (Rents, rates, salaries, insurance and depreciation)

Variable costs:
                                vary in proportion to sales (food, beverages, and laundry)

Semi fixed-costs:
                                vary in sympathy with, but not in proportion to sales
                                volume. (Power, telephone and wages)

Total costs:
                                are the aggregated fixed, variable and semi-fixed costs in
                                a specified budgetary period.

Average costs:
                                are total cost divided by number of units sold (room, guest night,
                                covers), also known as unit cost or average total cost.

Marginal costs:
                                is the increase in total cost caused by one more unit of
                                output. (I.e. accommodating 1 more guest)

Direct cost:
                                are those, which are traceable to a department or unit.

            Budapest Business School  Tourism & Hotel Management                                   2
                                           Hotel Marketing 

Indirect costs:
                                  are also known as joint or common costs;
                                  are not traceable to particular units or departments.
                                  (general management)

Controllable costs:
                                  are those which management has the capacity to restrain.
                                  (casual labor and food)

Uncontrollable costs:
                                  such as rates and insurance, cannot be restrained by the management.

Discretionary costs:
                                  are incurred at the discretion of a particular person (gm)
                                  (refurbishment of a room, etc).

Relevant costs:
                                  are those, which are pertinent to a given decision.

Opportunity costs
                                  are not taking a particular course of action.

Uncontrollable factors
Demand, Competition, type and structure of the industry
(Competition: monopolistic, oligopoly)

                  The summation of all sacrifices made by a consumer in order to experience the benefits
                  of a product or service.

1., Cost oriented techniques:
1.1., Cost-plus pricing:
                  Is used largely in the catering operations. The cost-plus method is widespread. Either a
                  percentage mark-up is added to the cost or a set amount.
                  C=costs, f=percentage mark-up, P=price
                  P=C+f (C) (mark-up 1)

              Budapest Business School  Tourism & Hotel Management                                   3
                                           Hotel Marketing 

1.2., Factor pricing
Similar to cost-plus pricing, here food costs are multiplied by a standard factor to produce a retail price.
Factors vary by style of food service. From 1 or to2 but a factor of 4 also not uncommon in a highly
fashionable restaurant. A coffee bar could apply a factor of 30 for tea or coffee but a factor of 2,5 to a

1.3.,The break-even method: (fedezeti pont számítás)
                 This has relevance to the not-for-profit sector of the hotel industry (students hostels
                 etc.) It is necessary to establish what level of volume will result in total costs being met
                 by the income available. It is usual to assume that variable costs are the same for each
                 unit of output so that there is a linear relationship between variable costs and sales
                 TC=FC+VC (TC – total costs, FC- fixed costs, VC- variable costs)
                 TR= QxP ( Total revenue = quantity multiplied price.
                 Break-even occurs when TC=TR
                 In our example break-even occurs when as follows:
                 fixed costs are 500.000,-
                 variable costs are USD 5 /bed night ,
                 Price: USD 30
                 BEP occurs at 20.000 bed nights-
                 any further sales would create a profit.

                 A faster method: UC=P-VC
                 (UC- unit contribution) 30-5=25
                 BEP= FC 500000 = 20.000
                        UC 25

2., Profit oriented techniques:
2.1.,Target rate of return or the Hubbart formula approach (Bottom-up)
                 The target rate of return method starts with the level of return required from the
                 investment. The particular approach adopted for hotels is known as the Hubbart
                 formula. By taking an estimate of the total investment cost, both fixed and working
                 capital, stating the target rate of return and estimating (ROI- return on investment) the
                 fixed and semi-fixed operating costs, it is possible to calculate the required gross
                 operating income. If the profit from non-rooms is estimated, the required rooms profit
                 can be calculated by taking non-rooms profit away from the gross operating income. By
                 taking non-rooms profit away from the gross operating income, the required rooms
                 revenue per annum is established. By dividing this by the estimated number of room
                 nights, the average room rate is determined.
                 The advantage of this method is that it focuses on profit, it takes into account and
                 integrates costs, revenues and prices, and it is relatively simple to calculate. Its major
                 weaknesses are that it ignores price elasticity of demand and the impact of local
                 competition, it requires forecasts of future costs and occupancy rates which are difficult

             Budapest Business School  Tourism & Hotel Management                                           4
                                          Hotel Marketing 

                  to establish with any accuracy, and it regards pricing as independent of the rest of the
                  market mix.
                  Example of the Hubbart formula:
Hotel Magic with 200 rooms:
We plan 68,5 % occupancy i.e. 50,000 room nights for the coming year
All in USD
a.      Total investment cost                                    900,000,-
b.      Target rate of return                                      90.000,- 10% of a
c.      General operating costs                                  200.000,-
d.      Required gross operating income                          290.000,- b+c
e.      Non rooms profit                                           20.000,-
f.      Required rooms profit                                    270.000,- d-e
g.      Rooms operating costs                                    230.000,-
h.      Required rooms revenue                                   500.000,- f+g
i.,     Number of room nights                                        50.000
j.      Average room rate                                             10,00 h divided by i

Single and double rates: double occupancy 40% of 200 rooms= 80 rooms,
                           Single occupancy 60 % of 200 rooms = 120 rooms

Double room rate should be USD 5 higher than single

                120x+80(x+5)= 10x200
                200x= 1600
                x= 8
Single rate: USD 8,00 double rate is USD 13,00

2.11., The Scholarly method
Step 1. Estimated operating expenses
                Taxes, insurance, etc.
                Depreciation (standard rates on present fair value)
                Reasonable return desired on present fair value of property
                Total estimated expenses and fair return desired
Step 2. Total estimated expenses and fair return desired
                Credits from sources other than rooms
                Amount to be realized from guestroom sales to cover costs and desired
                reasonable return on fair value of property
Step 3. Amount to be realized from guestroom sales to cover costs and desired

             Budapest Business School  Tourism & Hotel Management                                    5
                                          Hotel Marketing 

                 reasonable return on fair value of property
                         divided by
                 Number of rooms to be occupied at estimated average occupancy
                 Minimum daily rate per occupied room to cover cost and desired reasonable return on
                 present fair value

2.2., Rule of thumb or pro mille approach:
Until recently it was the method hoteliers kept using. This approach sets the rate from each invested
USD 1000 less USD 1 proportionally for the room rate i.e. Assuming that the construction costs of the
100 room hotel amounted USD 8.000.000 so the average per room cost should be USD 80.000;
Thus the minimum room rate is USD 80 at a 70% occupancy rate. The calculation laid on the hotel
construction costs and fails to consider the desired profitability, depreciation or mortgage payments etc.

3., Sales oriented techniques:

3.1., Marketing oriented pricing (MOP):
this method is suitable for pricing decisions on new products or new hotels. The technique is
considering of costs, competition, the nature of demand, company objectives and the form of distribution
channel through which a product passes before reaching the consumer.
Steps or flow-chart:
                         1., define the target market
                         2., identify competitors
                         3., decide product position and set rack rates
                         4., design alternative channel configurations
                         5., set channel sales objectives
                         6., research margins necessary to achieve company and channel sales
                         7., calculate hotel revenue
                         8., apply target profit statement
The hotel has 100 rooms i.e. 36.500 room nights per annum and sales targets are achieved then the
hotel revenue will be USD 996.450 and average rate USD 27,30
50 % direct sales to guests, 30 percent through travel agents and 20 percent through tour operators.

MOP calculation:
Customer pays (USD) travel agent receives tour operator rec. Hotel receives
30                                                                                          30
30                                                  3                                       27
30                                                                  9                       21

Hotel revenue:
Channel                  Room nights (%)                  Achieved room rate                Revenue
Direct                   50% 18.250                              30                         547.500
TA                       30 10.950                               27                         295.650

             Budapest Business School  Tourism & Hotel Management                                    6
                                          Hotel Marketing 

TO                        20  7.300                                21                        153.000
Total:                  100 36.500                                 27,30(avrg)               996.450

Step 8 returns the question of target profit.
If the target profit for the hotel was set at USD 300.000 we can compute total costs of running the hotel
for 1 year, given the sales mix, must not exceed USD 696.000


If total costs exceed this ceiling, profits will be below target and the hotelier must look for ways
increasing achieved room rate (perhaps by reformulating channel sales objectives or examining the
discount structure), investigating new channels, reducing costs, or raising rack rates. The hotelier can
also calculate the effect of underachieving sales targets through each channel.

3.2., Prestige pricing:
This involves taking advantage of the way in which price and quality are perceived by consumers to be
interrelated. For some products a high price reflects the subjective prestige value of the product.

3.3., Leader pricing:
Some companies feel that of the mix of products they market, one in particular acts as an attraction and
creates sales for the other, less attractive items.
(also called as bait-pricing in which a low priced article is promoted with a view to trading up the

3.4., Psychological pricing:
this pricing is more important where products are intangible or difficult to evaluate.
Some consumers buy only between maximum and minimum prices, which they find economically and
psychologically comfortable. An American survey revealed that
58 % of menu prices ended up in 9, 35% in 5 and 6 % in 0. The numbers 1,2,3,4,6 and 7 were never
used as terminal digit.

4., Competitor oriented techniques:

4.1., Price follower-ship:
In the hotel business price follower-ship is common place , particularly where price differentials have
been established. One 3 star hotel sells rooms at USD 99,95 the second at 95,95, the third at 89,95 etc.
The lower priced hotel following any price changes instituted by the price leader. Prices are generally
reviewed twice per annum (April and October). That is to say a hotel establishes its price based on
what a competitor is charging. It is particularly likely where independent operators are in competition
with a chain hotel. Its advantage that it is inherently competitive and very easy to calculate. But it is
dangerous approach as it takes no account of costs or profit objectives, which may different from the

             Budapest Business School  Tourism & Hotel Management                                        7
                                         Hotel Marketing 

5., Miscellaneous:

5.1., Mixed pricing:
This a combination of cost oriented and competition oriented versions.
Advantage: always monitoring the cost structure and competition.

5.2., Rate upon room-size
Rate establishing upon room size is also possible:
We have a 50 room hotel and on 70% average occupancy
we need an USD 1505 daily income.
Our room measures are as follows:
Room type A 20 rooms 15 m2 ttl:          300 m2
Room type B 20          20 m 2 ttl:      400 m2
Room type C 10           25 m2 ttl:      250 m2
Ttl:                                             950 m2
At 70 % occupancy we use daily 950x0,7= 665 m2
Requested daily income should be USD 1505          1505:665= USD 2,26
Our room rates should be:        Room A 15x2,26= 33,90
                                 Room B 20x2,26= 45,20
                                 Room C 25x2,26= 56,21

Or our in our case with Hubbart:
We have 200 rooms each approx 20 sqm, the total daily space are 4000 sqm,
Considering our 68,5 % occupancy in sqm 4000x68,5%=2740 sqm daily;
Our required room revenue USD 500000/year and 500000/365=1.369,86/day
Price for 1 sqm 1369,86/2740= 0,4999 ≈ 0,50
0,50 x20 sqm= USD 10

Other types:
      Product-Mix Strategy:
       Flights: Business Class, First Class, Economy Class
       Supplement Strategy:
       Room rate incl. breakfast or HB, Open Bar etc.
       Package rate:
       for travel acys group rate with HB
       discount on cash payment at cashier
       Discount or rebate on bulk order
       Discriminated pricing:
       student 50% discounts
       Yellow room has higher rate than red one
            Budapest Business School  Tourism & Hotel Management         8
                                         Hotel Marketing 

        Danube side room is more expensive
        Timely related:
        happy hour from 18-19 hours all drinks for half price
        Market value pricing.
        To promote later sales offering very low rates sometimes
        Special event price:
        Gourmet-week, game-dishes

Different Plans
The plan is the basis for making the room rate charge. It identifies which meals, if Any are included in
the rate. There is much less ambiguity about the hotel’s plan than about other measures of size, class
and type. Almost every hotel in the US operates on the European Plan.
European Plan (EP): The European Plan came to North America (New Orleans) with the French chefs
who fled the French Revolution. In 1855, the parker House introduced the plan to Bostonian society;
and things were never the same again. Rates quoted under this plan apply to the room
accommodations only. Extra charges at prevailing menu prices are made for each meal taken. Evidence
of the widespread use of the European Plan is the lack designation. Quoted rates always assume the
European plan unless otherwise stated. The pure European plan is less common is Europe than in the
United States
American Plan (AP): Rates quoted under American plan include room and three meals: breakfast,
luncheon, and dinner. The AP is origin in colonial America, where guests ate at a common table with
other guests and often with the host. The country moved westward, carrying its colonial habits from the
East. Hotels remained as the community’s major dining accommodation. The American plan was still
popular when the affluent resorts began to open in the nineteenth century. The automobile gave tourists
mobility and made other restaurants accessible. Guests who are charged for meals missed called
breakage, found the AP to restrictive. Changing eating habits also contributed to the decline in the
American plan.
Full Pension: or en pension is an European equivalent of the American plan, except a continental
breakfast, not a full breakfast, is served.
Modified American Plan (MAP): The modified American plan is an astute compromise by which the
hotel retains some of the AP advantages, and the guest feels less restricted. Guests get breakfast and
dinner as part of the room rate quote, but not luncheon.
Half pension or demi-pension (DP): is the European equivalent of the modified American plan. It
includes lodging and breakfast, and one other meal, which may or may not be specified. Granting either
luncheon or dinner gives the guest still greater flexibility.
Continental Plan (CP) : Mainland or Continental Europe retained one element of the American plan’s
move overseas. Under the Continental plan (CP) breakfast is included with the room rate. This
continental breakfast, consisting of coffee or chocolate, roll, and a bit of cheese, cold meat or fish in
Holland or Norway), is on the wane even in Europe.
Do not miss it with Café complet, a midmorning or afternoon coffee snack- is sometimes mistakenly
called a continental breakfast. Café complet is not included within the room rate.

            Budapest Business School  Tourism & Hotel Management                                    9

To top