What is Hubbart Formula, market condition approach & Thumb Rule

What is Hubbart Formula ?

Hubbart Formula is also known as bottom-up approach to pricing rooms introduced by Roy Hubbart in 1940. This approach considers operating costs, desired profits, and expected number of rooms sold to determine the average rate per room. Hubbart formula Allows the manager to price in things like non-operating expenses.

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 a hotel :

1. Market condition approach
2. Rule-of-thumb approach
3. 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.

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.

HUBBART FORMULA APPROACH

Hubbart formula approach considers operating costs, desired profits, and expected number of rooms sold (i.e. demand). The procedure of calculating a room rate is as follows:

1. Calculate the hotel’s desired profit by multiplying the desired rate of return (ROI) by the owner’s investment.
2. Calculate pre-tax profits by dividing the desired profit by 1 minus hotel’s tax rate.
3. Calculate fixed charges and management fees. This calculation includes estimating depreciation, interest expense, preperty taxes, insurance, amortization, building mortgage, land, rent, and management fees.
4. Calculate undistributed operating expenses. This includes estimating administrative and general expenses, data processing expenses, human resourecs expenses, transportation expenses, marketing expenses, property operation and maintenance expenses, and energy costs.
5. Estimate non-room operating department income or loss, that is, F&B department income or loss, telephone department income or loss …
6. Calculate the required room department income which is the sum of pre-tax profits, fıxed charges and management fees, undistributed operating expenses, and other operating department losses less other department incomes.
7. Determine the rooms department revenue which is the required room department income, plus other room department direct expenses of payroll and related expenses, plus other direct operating expenses.
8. Calculate the average room rate by dividing rooms department revenue by the expected number of rooms to be sold.

Hubbart Room Rate or Average room rate formula is :-

Doubles sold daily = double occupancy rate * total number of rooms * occupancy %

Singles sold daily = rooms sold daily – number of double rooms sold daily

Singles sold daily * x + doubles sold daily * (x + y) = (average room rate) * (total number of rooms sold daily)

Where: x = price of singles; y = price differential between singles and doubles; x + y = price of doubles.

What are the Advantages of Hubbart Formula ?

1. Systematic method of determining optimal average room rate.
2. Forecast the desired return for any period of time.
3. It takes into account the revenue accrued from non-room departments.
4. Allows the manager to price in things like non-operating expenses.

What are the Disadvantages of Hubbart Formula ?

However, hubbart formula in front office only makes assumptions and it does not look into external factors such as what are other competitors are doing.

You can also watch the video below for hubbart formula so that you understand average room rate formula or the Hubbart Formula better:-

Also Check :- Types of Budget and Budget Cycle

Making A Front Office Budget