Presentation suitable for students of Hotel front Office, 2nd Semester! (National Council For Hotel Management, NOIDA)

2. Learner is expected to know...
• What is the meaning of Tariff in hotel
business?
• Why it is important?

3. Methods of Tariff Fixation: Steps
&Explanation
Cost-based Approach
Market-based Approach

4. Definition: Price
• Price is the value in ₹ (money) 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’s regular profit margins and costs of
production, plus other factors.

5. Price is the amount that both buyer
and seller agree upon.

6. (Supply)
(Demand)

7. When Price is low....
Suppliers are not willing to sell.
Buyers, on the other hand, love lower
prices.

8. When Price is higher...
Buyers are not willing to buy.
Suppliers, on the other hand, love
high price levels.

9. The Price point at which both buyers
and sellers agree to buy and sell equal
quantity of something, an equilibrium
is said to have been reached.

11. Demand is more than
supply
Supply is more than
demand

12. Got it?

13. What is the process of pricing?
• Pricing can be defined as a process of
determining the value (₹) that is to be
received by an organization in exchange of its
products or services, offered to buyers in the
market.

16. 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 (match up to) or Prevent Competition: ...
• Profit Maximization: ...
• Stabilise Price: ...
• Customer’s Ability to Pay: ...
• Resource Mobilisation: full use of manpower,
machines, time, building etc.

17. Return On
Investment
Attracting
Target
Market
Growth &
Competition
Cost
Management

18. 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/non-
profit
(vii) Marketing Method Used:

19. 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; or to grab larger
market share.
• Economy Pricing ...achieve low cost of production
so as to be able to offer lower prices.
• Price Skimming. ...very high initially, then lower
• Psychology Pricing. ...99.99 instead of 100
• Bundle Pricing… package pricing

20. Room Tariff Fixation
• Selling a room is like selling the combination of
room space and time.
• Space is permanent and can be used again and
again.
• But time keeps moving/lapsing.
• 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 so that, at least, fixed costs
can be paid for.

21. What did you expect hotel
management to be like, huh?!!!!

22. 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
to losses.
• Market- based
•Setting price of the room
by first looking at the price
being charged by
competing hotels.
•Then, the hotel also tries
to match up to the
competition and make the
price look attractive to the
buyer.

23. Rule of
Thumb
Approximate
1 Hubbart’s
Formula
Accurate &
Scientific
2
Cost-based methods

24. Competition
based
Market
Tolerance
Rate Cutting
Inclusive &
Non-inclusive
rates
Guest
Requirements
based
Market-based Pricing

26. 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.

27. Example of “Thumb Rules”?!!!
• Keep food cost in hotel kitchens @33%
• Change light bulbs in the hotel after every six
months
• If you make 10 sales calls, you succeed in
selling to 1
• 1 in every 10 persons is a southpaw (A person
who uses the left hand with greater skill than
the right)

28. 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 after some time of
operating the hotel.

29. Hubbart’s Formula
• A gentleman named Mr Roy Hubbart in 1940s
created this idea/formula.

30. Scared of Mathematics?

32. Hubbart’s Formula is based on a
common business document
called...

33. 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 from it, all
expenses incurred, to generate that revenue.
(Revenue – Cost = Profit )
• It shows a company's financial progress during
the time period being examined, usually 1 year.

34. Understanding P&L Statement
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

35. Inverted P&L Statement= Hubbart’s
Formula
•That is why the Hubbart’s Formula is also called
as “Bottom-Up approach” to hotel room pricing.
• It starts with Net Profit, something found at
the bottom of a P&L statement, adds all
expenses upwards, such as interests, insurance,
depreciation and tax.
•This is the total revenue a hotel has to earn in 1
year, if it wishes to achieve its profit goals (ROI).
•This total revenue is divided by total number of
rooms that the hotel expects to sell in 1 year.
•The result is net revenue per room per day.

36. 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 the expected
profit earned from other departments must be
subtracted from room revenue so that room rates
can be kept as low as possible, and thus made
attractive to customers.
•In case a department is making a loss, then that
loss has to be made good (compensated for) from
room revenue.

37. Average Room Rate is equal to...
• Total revenue needed to be earned p.a.
• Total number of rooms that may be sold p.a.

38. Hubbart’s Formula Demonstration
In the following slides,
Hubbart’s Formula is explained
step-by-step.

39. 1 Owner’s Investment
+ Loan from bank &
others
= Total Investment

40. 2 Return on Investment
(ROI) per year
= Total Investment
X Fair rate of return
(15% to 20% per annum)

41. 3 Return on Investment
+ Tax
= Profit before Tax

42. 4 Profit before Tax
+ Direct & Indirect
Expenses
= Gross Operating
Income

43. 5 Gross Operating Income
+/- Other Departments
Loss(+) or Profit (-)
= Total required Revenue
from Room Sales per year

44. 6 Total Number of Rooms
available in the hotel
X Expected Occupancy
% (70-75% estimated)
= Rooms sold per day

45. 7 Rooms sold in 1 day
X 365 (days in a year)
= Total rooms sold in
1 year

46. 8 Total Revenue
needed in 1 year
(Divided by) Total
Rooms sold in 1 year
= Average Rate per
room per day

47. Market-based Pricing
Competition
based
Market
Tolerance
Rate Cutting
Bundled
Pricing
Guest Needs
based

48. Competition based Pricing
•All the competing hotels at one location make
up a “Competitive Set”.
•Each hotel in the Competitive Set has to
consider the actions of others, if it wishes to
remain attractive to guests.
•If my competitor makes an offer, then my
company will also have to make at least a
matching offer, if not a more attractive one.

50. 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.
•If my BAR is kept higher, callers looking to book
rooms on the same day will prefer to give their
business to my competitors.

52. 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.“

54. Rate Cutting
• The discounted pricing, especially during off-
season, or to compete for greater market share,
is known as Rate Cutting.
• Rate cutting may lead to mutually destructive
price war.
• That is why it is important to maintain healthy
relations even with our competitors.
• However, “price-fixing” with mutual consent is
illegal in almost all countries.
• It is considered cheating by customers and the
Government. Free market economy!

56. Bundled Pricing
• Hotels may package prices as inclusive or non-
inclusive of some other product or service.
• For example, Meal Plans & Meeting packages.
• Here, two or more products are made into a
package. The individual prices of both the
items are added up.
• Then, some discount is offered at this
combined price, to attract the guest.

59. 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.

60. A lady traveller in the hotel...
One day, each & every guest will become a unique
market segment by herself, needing personalized
everything.

61. Thank you for your interest in
hospitality

62. Good luck!

63. Compilation & Presentation
Praveen Jha
Senior Faculty
IHM Hajipur
Vaishali, Bihar