The document discusses various methods for determining hotel room tariffs, including cost-based and market-based approaches. The cost-based approach includes the rule-of-thumb method, which sets the price per room at ₹1-2 per day based on costs, and Hubbart's formula, which uses an inverted profit and loss statement to calculate the required average room rate. The market-based approach considers competitor pricing, market tolerance rates, bundled/package pricing, and customizing rates based on guest needs. Hubbart's formula provides a scientific way to determine room rates based on costs, revenues, occupancy rates, and desired profit levels.

1. Methods of Tariff Fixation
Cost-based Approach
Market-based Approach

2. Definition: Price
• Price is the value in ₹ 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 profit margins and costs of production,
plus others.

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

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

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

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

7. 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
(vii) Marketing Method Used:

8. 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.
• Economy Pricing ...low cost of production so low
prices
• Price Skimming. ...very high initially, then lower
• Psychology Pricing. ...99.99 instead of 100
• Bundle Pricing… package pricing

9. Room Tariff Fixation
• Selling a room is like selling space and time.
• Space is permanent and can be used again
and again.
• But time keeps moving.
• 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.

10. 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
loss.
• Market- based
Setting price of the room
by first looking at the price
being charged by
competing hotels.
Then, the hotel also tries
to make the price look
attractive to a buyer.

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

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

13. 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.

14. 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 any more.

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

16. Hubbart’s Formula & 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 all expenses related to
the revenue. (Revenue-Cost= Profit )
• It shows a company's financial progress during
the time period being examined, generally 1
year.

17. Understanding P&L Statement
Sales 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

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

19. 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 profit earned
from other departments must be subtracted
from room revenue so that room rates can be
lower and attractive to customers.
In case a department is making loss, then that
loss has to be made good from room revenue.

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

21. 1 Owner’s Investment
+ Loan from bank &
others
= Total Investment

22. 2 Return on Investment
(ROI) per year
= Total Investment
X Fair rate of return
(15% to 20%)

23. 3 Return on Investment
+ Tax
= Profit before Tax

24. 4 Profit before Tax
+ Direct & Indirect
Expenses
= Gross Operating
Income

25. 5 Gross Operating Income
+/- Other Departments
Loss(+) or Profit (-)
= Total required Revenue
from Room Sales per year

26. 6 Total Number of
Rooms in hotel
X Expected Occupancy
% (70-75%)
= Rooms sold per day

27. 7 Rooms sold in 1 day
X 365
= Total rooms sold in
1 year

28. 8 Total Revenue
needed in 1 year
(Divided by) Total
Rooms sold in 1 year
= Average Rate per
room per day

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

30. Competition based Pricing
All the competing hotels make a “Competitive
Set”.
Each hotel in the Competitive Set has to
consider the actions of others to remain
attractive to guests.

31. 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.

32. 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.“

33. Rate Cutting
• The discounted pricing, especially during off-
season, or to compete for greater market
share is known as Rate Cutting.

34. Bundled Pricing
• Hotels may package prices as inclusive or non-
inclusive of some other product or service.
• For example, Meal Plans & Meeting packages.

35. 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.