Very challenging aspect of the decision making process within the hospitality operations. One of the ways through which the hospitality operation can influence the demand for its products and services.
2. • The Importance of Pricing
and the Relationship
between Price and Quantity
• Approaches to Pricing
• Pricing Rooms
• Pricing Food and Beverage
Products
• Menu Engineering
• Revenue Management
3. ○ PRICING ○
• Very challenging aspect of the decision making process within the
hospitality operations.
• One of the ways through which the hospitality operation can
influence the demand for its products and services.
• Modifying pricing policies may not turn out to be the best way
possible to increasing sales and improving net incomes.
• The relationship between price and quantity is principally
explained by the principle of price elasticity.
5. ○ PRICE ELASTICITY OF DEMAND ○
• The measure of the responsiveness
in the quantity demanded for a
product or service as a result of
changes in the price of that product
or service.
• Allows a firm or business to predict
the change in total revenue with a
projected change in price.
*Always result in negative value, however by
convention, the negative values are ignored.
6. For our examples of price elasticity of demand, we will use the price elasticity of demand
formula.
• Widget Inc. decides to reduce the price of its product,Widget 1.0 from $100 to $75.The
company predicts that the sales of Widget 1.0 will increase from 10,000 units a month to
20,000 units a month.
• To calculate the price elasticity of demand, first, we will need to calculate the percentage
change in quantity demanded and percentage change in price.
• % Change in Price = ($75-$100)= -25%
• % Change in Demand = (20,000-10,000)/(10,000) = +100%
• Therefore, the Price Elasticity of Demand = 100%/-25% = -4.
• This means the demand is relatively elastic.
7. ○ VARIOUS LEVELS OF THE ○
PRICE ELASTICITY OF DEMAND
PERFECT
INELASTICITY
(n=0)
• Whatever changes affect
the price, the demand is
not affected.
• EXAMPLE:
-Emergency Services
-Drugs
-Essential Food Item
8. • occurs when the percentage change in
demand is less than the percentage
change in the price of a product.
For example, if the price of a product increases
by 15% and the demand for the product
decreases only by 7%, then the demand would
be called relatively inelastic.
• EXAMPLE:
-Gasoline
-Electricity
-Water, Drinks, Food
-Clothing
RELATIVE
INELASTICITY
(0< n < 1)
10. RELATIVE ELASTICITY
(PED = 1 < X < ∞)
• The proportionate change
produced in demand is greater
than the proportionate change in
the price of a product.
• The quantity demanded changes
by a larger percentage than the
change in price.
For example, if the price of a product increases
by 10% and then the demand for the product
decreases by 15%, then the demand would be
relatively elastic.
• EXAMPLE:
-Air-Travel
11. PERFECT ELASTICITY
(N=-∞)
• The slightest change in price
would lead to an infinite
change in the quantity
demanded.
• EXAMPLE:
-Pizza
-Bread
-Books
-School Supplies
12. ○ APPROACHES TO ○
PRICING
• Prices are set at a certain
rate based on the initial
costs.
RULE OF
THUMB
METHOD
• Prices are simply established
based on intuition.
• No research about costs, profits,
competition and the market as a
whole would have been carried
out.
INTUITIVE
METHOD
• Prices are tentatively set to
evaluate the effect it would
have on sales and
net incomes.
TRIAL AND
ERROR
METHOD
13. PRICE CUTTING METHOD
• Prices are set at levels below those of the competition.
HIGH PRICE METHOD
• Prices might be set higher than the competition due to product
differentiation.
COMPETITIVE METHOD
• Prices are set at the same level as those of the competition.
• In situations where there is a dominant operator in the market who
normally sets the price trend, this is called “follow-the-leader” method.
MARK-UP METHOD
• The difference between the costs of the product and the selling price.
14. ○ PRICING ROOMS ○
The supply of rooms is
generally fixed in the short
term and rooms are
characterized by the fact
that if its sales revenue for
a particular day is not
received then it is lost
forever.
Pricing of rooms should
be done in a way that the
fixed costs of the rooms
can be recovered as well
as the maximum
occupancy levels can be
obtained.
15. ○ VARIOUS METHODS OF ○
SETTING ROOM RATES
• THE RULE OF A THOUSAND APPROACH
Basic rule of thumb approach in which the price of a hotel room is set at
one thousand (1/1000) of the investment costs incurred in the development of the
room. Assume that the total cost of building a 75-room hotel is $ 12,500,000.00 and
that 30% of this investment relates to other non room related activities.
TOTAL ROOM INVESTMENT = $ 12,500,000.00 x 70%= $ 8,750,000.00
COST OF ONE ROOM = $ 8,750,000.00 = $116,666.67
75
ROOM SELLING PRICE = $ 116.67
16. THE BOTTOM UP APPROACH
(Hubbart Formula or required rate if return)
This approach involves determining
what room rate must be charged in order to
generate the annual revenue that will be
sufficient to cover all costs and taxes as well as
to meet the owner’s expected profit levels.
Progresses from the bottom line of the
income statement upwards towards sales
revenues.
17. OPERATING COSTS + REQUIRED RETURN – INCOME OF OTHER DEPARTMENTS = Average Room Rate
EXPECTED NUMBER OF ROOM NIGHTS
STEP 1 Calculate the total amount invested in the hotel.
STEP 2 Decide on the required annual rate of return on the investment.
STEP 3 Estimate the overhead expenses.
STEP 4 Combine S2 and S3 to find the required gross operating income.
STEP 5 Estimate the probable profits from all other sources.
STEP 6 Deduct S5 from S4 to find out how much profit you need to make
from room sales.
STEP 7 Estimate rooms department’s expenses.
STEP 8 Add S6 and S7 to find out how much you need to make from the
rooms.
STEP 9 Estimate the number of room nights you are likely to achieve per
year.
STEP 10 Divide S8 by S9 to find out the average room rate you should
charge.
18. ADMINISTRATIVE and GENERAL 1,140,000
SALES and MARKETING 825,000
UTILITIES 500,000
POM 570,000
DEPRECIATION 1,640,000
INSURANCE, LICENSE and PROPERTY TAXES 740,000
INTEREST 850,000
19. STEP 1 TOTAL INVESTMENT = $22,500,000
STEP 2 10% of $22,500,00 = $2,250,000 (pre tax income=$3,214,286)
STEP 3 Overhead Expenses= $6,265,000
STEP 4 The required gross operating income ($3,214,286 + $6,265,000) = $9,479,286
STEP 5 Profits from other sources are expected to amount to $1,400,000
STEP 6 Total room revenue needed of $8,079,286
STEP 7 Add the departmental cost of $3,000,000 to the needed amount of $8,079,286
STEP 8 The hotel needs to make $11,079,286 from room sales.
STEP 9 300 rooms x 365 days = 109,500 = 100% room occupancy
Therefore = 74,460 = 68% room occupancy
STEP 10 Average room rate = $11,079,286 = $148.79
74,460 Room Nights
20. RELATIVE ROOM SIZE APPROACH
• Permits the establishment of room rates that would take into effect the relative sizes of
the various rooms within the hospitality operation.
21. To cross check if, based on the above occupancy
levels and room rates, the expected revenue will be
attained the following can be done:
22. DIFFERENTIAL ROOM PRICING
• In situations where the hotel has different types of rooms, the pricing methods are as well
adapted to the specific room types.
CALCULATING SINGLE and DOUBLE RATES
Assume that ASR Hotels has another property with 180 rooms and an overall occupancy
percentage of 72.17%. The 180 rooms are distributed between the three room types as
follows:
23. Proceed by attributing the weights for the various occupancy levels types.
These weights are established based only on the management’s judgement.
24.
25. INTEGRATING THE EFFECTS OF SEASONALITY
• A further step in understanding differential room pricing is to bring in the notion of the effects
that seasonality has on hotel occupancy. Hotels normally experience 2 seasons: HIGH and LOW.
26. ROOM RATE DISCOUNTING
• The discounting of room rates is generally practiced in the hospitality
industry. Discounting room rates simply means reducing the room price to
levels below the rack rate.
• RACK RATE- defined as the maximum rate that will be quoted for a room.
• Can be done in cases of: LARGE CONVENTION GROUPS, REGULAR
GUESTS, CORPORATE and GOVERNMENT TRAVELLERS.
• Normal cost of business to maintain occupancy levels.
• The reductions in rooms revenue is most of the time balanced by the extra
sales that will be achieved from guests’ making use of the hotel other
paying facilities.
27.
28.
29. ○ PRICING ○
FOOD AND
BEVERAGE
PRODUCTS
• Food service operations must establish
appropriate selling prices for their menu
items. In establishing the prices of F&B
products, two groups of pricing methods
are used:
1. SUBJECTIVE PRICING METHODS
mostly based on assumptions and guesses.
2. OBJECTIVE PRICING METHODS
ensure that the property’s profit
requirements, as well as the value guests
attach to the entire dining experience are
incorporated into the selling price.
30. SUBJECTIVE
PRICING
METHOD
Reasonable Price Method
• This method uses a price that the food
service manager thinks will represent a
value to the guest. The manager
presumes to know from the guest’s
perspective what charge is fair and
equitable.
Highest Price Method
• The manager sets the higher price that
he or she thinks guests are willing to
pay.
31. • In this method, an unusually low price is set for an item/s.
The manager assumes that guests will be attracted to the
property to purchase the low-priced item/s and that they
will then select other items while they are there.
Loss Leader Method
• Set by intuition alone, the manager makes little more than
a wild guess about selling price. Closely related to this
approach is a trial and error pricing plan.
Intuitive Price Method
32. OBJECTIVE PRICING METHOD
Based upon data in the
approved operating
budget help the
manager transfer
budget plans into
selling prices.
Before any objective pricing method
can be used, three basic cost
procedures must be in place and
consistently used:
• STANDARD RECIPE MUST BE
AVAILABLE
• PRE-COSTING WITH CURRENT
COSTS
• STANDARD RECIPES MUST BE
CONSISTENTLY USED
33. USING A
MARK-UP
MULTIPLIER
In using the mark-up multiplier to determine F&B prices, the
mark up is the difference between the costs of the products and
the selling price.
1. Simple Mark-Up Multiplier
Generally includes the related costs such as labor,
utilities, supplies and the expected profit.This approach is
equally called cost-plus pricing. It involves identifying costs
that can be traced to the F&B food item that is to be priced.
2. Ingredients Mark-Up Pricing Method
Attempts to consider all product costs. The FOOD
COST and BEVERAGE COST.
37. 3. Prime Ingredient Mark-Up
Method
Differs from the ingredients
mark-up method in that only the
cost of the prime ingredient is
marked-up. In addition, the
multiplier must be greater than the
multiplier used when considering
the total cost of all ingredients.
38. 4. Mark-Up with Accompaniment Costs
Using the mark-up with accompaniment costs pricing method, managers
determine ingredient costs based only upon entrée items and then add a standard
accompaniment or “plate” cost to this amount before multiplying by a multiplier.
39. 5. Determining the Mark-Up
Multiplier
The mark up pricing
methods just discussed are
simple to use and for that
reason, are commonly used
in the food service industry.
