REVENUE MANAGEMENT FOR HOTELS

Revenue management (also called yield management) -set of techniques and procedures that use hotel-specific data to manipulate occupancy, ADR, or both for the purpose of maximizing the revenue yield achieved by a hotel.

Yield is a term used to describe the percentage of total potential revenue that is actually realized.

Revenue managers are individuals responsible for making decisions regarding the pricing and selling of guest rooms in order to maximize yield.

ESTABLISHING ROOM RATES

KEY TERMS
Room rate economics Rack rate Room mix Seasonal rate Special event rate Corporate rates Government rates Group rates Package rate Property management system Fade rates

The Hubbart Room Rate Formula

COMPUTATION OF THE HUBBART ROOM RATE FORMULA

STEP 1 Calculate the hotel's target before-tax net income STEP 2 Calculate estimated non-operating expenses STEP 3 Calculate estimated undistributed operating expenses STEP 4 Calculate estimated operated department income excluding rooms STEP 5 Calculate the operated department income for rooms STEP 6 Calculate the estimated rooms department revenues b ased on estimated occupancy STEP 7 Calculate the hotel's required ADR

COMPARISON OF NORMAL AND BOTTOM-UP FORMATS Normal Format of Income Bottom-up Format for Statement the Hubbart Formula Operated Department Net Income Income (Rooms) Operated Departments + Taxes Income (Excluding Rooms) Undistributed Operating Expenses + Nonoperating Expenses Nonoperating Expenses + Undistributed Operating Expenses Taxes - Operated Departments Income (Excluding Rooms) Net Income = Operated Department Income (Rooms)

+ =

1 Calculate the hotel's target before-tax net income Assumptions: Investment P16,217,417 ROI 12% Tax rate 40% Target Net Income: P16,217,417 x 0.12 = P1,946,090 ROI (hotel's target net income) Before-Tax Net Income (ROI) After-Tax Net Income (ROI) = Before-Tax Net Income 1 - Tax Rate or 1,946,090 = P3,243,483.30 3,243,480 1.00 - 0.40

2 Calculate estimated nonoperating expenses. Rent, Property Taxes, and Insurance 1,760,400 Depreciation and Amortization 1,260,000 Interest Expense 1,272,000 Total 4,292,400

3 Calculate estimated undistributed operating expenses. Administrative and General Information Systems Human Resources Security Franchise Fees Transportation Marketing Property Operations and Maintenance Utility Costs Total

1,357,200 388,800 583,200 277,200 0 334,800 1,552,320 1,197,000 1,071,000 6,761,520

4 Calculate estimated operated departments income excluding rooms. Food 2,340,000 Beverage 2,076,000 Telecommunications (180,000) Other Operated Departments 216,000 Rentals and Other Income 34,200 Total 4,486,200

5 Calculate the operated department income for rooms. Before-Tax Net Income Total Nonoperating Expenses + Total Undistributed Operating Expenses + Total Operated Departments Income Excluding Rooms Total

3,243,480 4,292,400 6,761,520 4,486,200 9,811,200

5 Calculate the estimated rooms department revenues based on estimated occupancy. From historical data, the rooms manager has calculated that payroll and related expenses and other expenses for rooms is P60 per room. Also the manager has determined that the hotel has an average occupancy % of 80%, and the hotel has 240 rooms.Thus, estimated number of rooms to be sold in the year: 240 rooms x 365 days in a year x 0.80 occupancy = 70,080 rooms The extimated rooms department revenues: Operated Department Income for Rooms 9,811,200 Estimated Rooms Expenses Total Operated Departments Income Excluding Rooms + 4,204,800 Estimated Rooms Department Revenues 14,016,000

7 Calculate the hotel's required ADR. Estimated Rooms Department Revenues / Estimated Number or Rooms to be Sold = Hotel's Required ADR, or P14,016,000 = P200 70,080

SUMMARY OF THE HUBBART FORMULA CALCULATIONS STEPS 1-5 Bottom-up Format for the Calculations Hubbart Formula Before-Tax Net Income P 3,243,480 + Nonoperating Expenses 4,292,400 + Undistributed Operating Expenses 6,761,520 - Operated Department Income (Excluding Rooms) 4,486,200 - Operated Department Income (Rooms) P 9,811,200 STEP 6 240 rooms x 365 days in a year x 0.80 occupancy = 70,080 rooms 70,080 rooms x 60 expense per room = 4,204,800 estimated rooms expenses Operated Department Income for Rooms P 9,811,200 Estimated Rooms Expenses 4,204,800 Estimated Rooms Department Revenues P 14,016,000 STEP 7 14,016,000 = P200 70,080

The P1.00 per P1,000 Rule

WEB- INFLUENCED ROOM RATE METHODOLOGIES Competitive Pricing Follow the Leader Pricing Prestige Pricing Discount Pricing