What is Hubbart Formula ?
Hubbart Formula is a bottom-up approach to pricing rooms introduced by Roy Hubbart in 1940. In the current hospitality competitiveness setting the right room rate is more than just picking a number—it’s about balancing profitability, market competitiveness, and customer perception.This approach considers operating costs, desired profits, and expected number of rooms sold to determine the average rate per room. … Allows the manager to price in things like non-operating expenses.
- The Hubbart Formula Approach
- The Market Condition Approach
- The Rule of Thumb Approach
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…).
- While establishing room rates, management shall be careful about its operating costs, inflationary factors, and competition. Generally, there are three popular approaches to pricing rooms:
- In this post, we’ll explore the three most widely used room pricing approaches:
- Market condition approach
- Rule-of-thumb approach
- Hubbart formula approach
MARKET CONDITION APPROACH
Under this very approach, management shall look at comparable hotels in the geographical market, see what they are charging for the same product, and “charge only what the market will accept”. Some drawbacks of this approach are that it does not take into consideration the value of the property, and what a strong sales effort may accomplish.
This approach answers a crucial business question:
“How much should I charge per room to hit my financial goals?”
RULE OF THUMB APPROACH
In this very approach, the rate of a room shall be $ 1 for each $ 1,000 of construction and furnishing cost per room, assuming a 70% occupancy rate. This approach, however, fails to take into consideration the inflation term, the contribution of other facilities and services towards the hotel’s desired profitablity, and assumes a ceratin level of occupancy rate.
How to Calculate Using Hubbart Formula:
Here’s a step-by-step breakdown:Here’s a step-by-step breakdown:
- Desired Profit = ROI × Owner’s Investment
- Pre-Tax Profit = Desired Profit / (1 – Tax Rate)
- Add Fixed Charges: Mortgage, depreciation, insurance, management fees.
- Add Undistributed Expenses: HR, Admin, Marketing, Energy, Repairs.
- Add/Subtract Non-Room Revenues: F&B profit or losses, phone revenue.
- Total Required Room Department Income =
Pre-tax profit + Fixed charges + Undistributed expenses + Department losses - Room Revenue =
Required Room Department Income + Direct operating payroll & costs - Average Room Rate = Room Revenue ÷ Expected Rooms Sold
Real-World Example:
At a 100-room midscale hotel with:
- Owner investment: ₹10 crore
- ROI expected: 12%
- Tax Rate: 30%
- Fixed charges + Expenses = ₹3 crore annually
- Expected rooms sold annually = 25,000
You’d reverse-engineer your rate based on these factors. After full calculations, you might find your minimum average daily rate (ADR) needs to be ₹4,000 just to break even.
Why Use It?
- Accurate and profit-focused
- Works well for feasibility studies and new projects
- Helps in setting realistic break-even goals
Limitations of using Hubbart Formula:
- Complex and time-consuming
- Requires accurate financial data
- Not ideal for fast-paced pricing changes
2. Market Condition Approach – Pricing Based on Competition
What is the Market Condition Approach?
Also known as competitive pricing, this method depends on analyzing what other hotels in the same area are charging and aligning your rate accordingly.
Essentially:
“What is the market willing to pay for a room like mine?”
💡 How to Apply It:
- Identify your competitive set: Hotels with similar location, size, star-rating, and amenities.
- Track their rack rates, OTA prices, and package rates.
- Adjust your pricing to match, undercut, or go premium—depending on your brand position.
Personal Anecdote:
While working in Dubai, we used this method at a wellness resort. I discovered that corporate hotels nearby offered ₹500–₹800 lower weekday rates. So, we adjusted the rates of our hotel by offering package inclusions like spa credits instead of reducing the base rate—retaining our ADR while staying competitive.
Advantages:
- Simple to implement
- Adjusts quickly to market demand
- Great for short-term rate planning
Drawbacks:
- Ignores your actual costs
- Can lead to price wars
- Doesn’t account for brand value or uniqueness
3. Rule of Thumb Approach – A Quick Estimate Tool
What is the Rule of Thumb?
This old-school pricing method suggests:
Room Rate = $1 for every $1,000 spent on construction and furnishing per room, assuming 70% occupancy.
So, if you spent ₹30 lakh per room, the rate should be ₹3,000 per night.
Why It’s Used:
- Quick & simple to communicate to investors or developers
- Offers a ballpark idea of profitability
Major Flaws:
- Ignores inflation
- Doesn’t consider other income streams like events or F&B
- Assumes fixed occupancy, which is unrealistic in seasonal markets
Summary Table: Comparing Room Pricing Approaches
| Criteria | Hubbart Formula | Market Condition | Rule of Thumb |
|---|---|---|---|
| Complexity | High | Low | Very Low |
| Data Required | Detailed financials | Competitor pricing | Construction cost only |
| Strategic Use | Long-term planning | Dynamic short-term rates | Early-stage feasibility |
| Best For | Budgeting, ROI planning | Day-to-day operations | Rough estimations |
FAQs: Room Pricing Strategies in Hotels
1. Which room pricing strategy is best for new hotels?
The Hubbart Formula is ideal for new hotels—it ensures costs are covered and desired ROI is achieved.
2. How often should hotels update their room rates?
Use dynamic pricing tools and review rates weekly—or even daily—for better revenue optimization.
3. Is it okay to price below competitors?
Yes, but only if you have a clear strategy—such as building brand awareness or boosting occupancy during low seasons.
4. Can I use multiple pricing methods at once?
Absolutely! Many hotels use a hybrid strategy—starting with Hubbart for baseline pricing, then adjusting using market data.
Final Thoughts
Mastering room pricing is an art backed by science. Whether you’re running a homestay or a luxury hotel, knowing how to apply the right pricing method at the right time can maximize your revenue without compromising guest satisfaction.
What pricing strategy do you use at your hotel? Have you ever tried the Hubbart Formula? Let me know in the comments below!
You can also check the below article which will help you understand more deeply about Hubbart formula.
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