Role of Room Rates

Role of Room Rates
 What are Room Rates?

Determining a standard room rates is one of the challenging and tough jobs for hotel as designated
room rate must be capable of generating revenue and compensate other cost of the hotel, such as
administrative cost, overhead, and utility costs.
Room rate could be typically designed as the price of the cost that is charged by the hotel or lodging
industry for overnight lodging. Usually, the front office department and the sales and marketing
department are responsible for ensuring effective room rate according to several market-sensitive
aspects. The market-sensitive factors basically include:
 Expected sales room.

 Expenses to beat market competition.
 Hotel operations.
 Price sensitivity.
 Marketing and sales endeavor.
 How do you calculate room rates?

ADR (Average Daily Rate) or ARR (Average Room Rate) is a measure of the average rate paid for the
rooms sold, calculated by dividing total room revenue by rooms sold. Some hotels calculate ARR or ADR
by also including the complimentary rooms this is called as Hotel Average Rate.
The formula for ARR or ADR calculation with examples:

Average Room Rate (ARR or ADR) = Total Room Revenue / Total Rooms Sold
Or Average Room Rate (ARR or ADR) = Total Room Revenue / Total Occupied Rooms
Average Room Rate (ARR or ADR) Calculator:
Total Room Revenue:
Total Rooms Occupied:
Total Comp & House:
CALCULATE
ARR or ADR (Occupied Rooms) =
ARR or ADR (Sold Rooms) =
Example 1:
Total Room Revenue for 01st Jan 2017 = 25000.00
Total Room Sold for 01st Jan 2017 = 250
ARR or ADR for 01st Jan 2017 = 25000.00 / 250
= 100
Example 2:
Total Room Revenue for 31st Dec 2016 = 95985.58
Total Room Sold for 31st Dec 2016 = 277

ARR or ADR for 31st Dec 2016 = 95985.58 / 277
= 346.52
Example 3 (Monthly ARR/ADR):
Total Room Revenue for the Month of October = 2,250,485.58
Total Room Sold for the Month of October = 5822
ARR or ADR for October = 2,250,485.58 / 5822
= 386.55
 What factors affect the prices of hotel rooms?
 6 things that affect hotel room prices

1. Occupancy and demand
Room availability and customer demand are probably the greatest contributing factors to hotel prices. If
it's busy season, or there is a conference or event happening in the city, hotels are going to jack their
prices up because they know the demand will be high. In these peak times, hotels also often implement
certain restrictions like minimum stays.
On the flip side, during the off-season when there are fewer tourists and less demand for rooms, hotels
will often drop their prices or offer special deals or packages.
2. Location of the hotel
If the hotel is centrally located, within walking distance of shops, restaurants and tourist attractions,
chances are it’s going to be priced higher than more remote hotels that offer guests less convenience.
3. Type of room
Hotels typically offer at least three different categories of room: standard, family room and suite. The
more deluxe the amenities, the more the room will cost.
4. Competition
Hotels look to see what the competition is doing. They want to try to lure customers with better deals
and stay competitively priced, yet still need to make a profit.
5. Season You’re going to pay top dollar during peak season, simply due to the increase in demand. On
the other hand, you’ll likely be able to find good deals on hotels in the off-season, so if you're flexible
with the time of year you can travel, it can be a good way to save some money.
6. Day of the week
Hotels often charge more for weekend stays than they do for weekday stays, again, simply because the
demand is usually higher.
 How are prices determined in a hotel?

Hotel pricing is determined by any combination of the following factors:
 Location
 Seasonality
 Demand
 Star rating
 Amenities
 Value of services and other hotel competition.
Even things like increases in flight searches to a particular destination or good and bad weather can have
an impact on hotel prices.
 Methods in establishing room rates
There are three methods of establishing room rates:
1. Market Condition Approach
In this method, the management looks at similar hotels in the area and sees what they are charging for
the same product. These properties are often called the competitive set, which is made up of a number
of properties in a market that are a property’s most important competition. The competition can be
based on location, type, brand or other factors. According to this approach, the hotels will charge only
what the market will accept. This information is available through various public domain sources and
periodic blind calls to competing hotels. A blind call does not identify the hotel making the call and
simply asks for availability and rates on specific dates
2. The Rule-of-Thumb Approach
This method sets the rate of a room at Rs.1/- for each Rs.1000/- of construction and furnishings cost per
room assuming a 70 percent occupancy. For example, if the average construction cost of a hotel room is
Rs.80000/-, the average room rate will be Rs.80/- according to this method. The emphasis on the hotel’s
construction cost fails to consider the effects of inflation. It also fails to consider the contribution of
other facilities and services towards the hotel’s desired profits.
The rule-of-thumb approach should also consider the hotel’s actual occupancy level instead of a fixed 70
percent occupancy.
3. Hubbart Formula Approach
It is a bottom-up approach to pricing rooms. This approach considers operating costs, desired
profits, and expected number of rooms sold to determine the average rate per room. It is
considered a bottom-up approach because its initial item – net income (profit) – appears at the
bottom of the income statement. The second item – income taxes – is the second item from the
bottom of the income statement, and so on.
 Types of room rates

 There are some other common room rates categories which are as follows:
1. Commercial room rates: Commercial room rates are given to the business representative of a
particular company. These business people are not the frequent guest and occasionally stay in
the hotel.
2. Government rate: A discount or special rate which is negotiated with government organization
for their foreign visitors and traveling official staffs.
3. Corporate rates: Corporate rates are offered to existing business guests of the hotel. Generally,
two types of business guests stay in the hotel, such as, frequent guest who often visit or stay in
the hotel and corporate guests who have given a constant rate.
4. Frequent traveler rate: Hotel developed frequent traveler program to offer frequent traveler
rate to those who frequently visit the hotel due to repetitive business trip.
5. Military and educational rate: As the name suggest military and educational room rates are
specially developed for military personnel and educators. These groups are considered as
valuable source of revenue maximization and potential room sales due to their frequent
traveling.
6. Family rates: Special room rates are offered at particular season with a view to attract the
family with their children. The room rates of children are deducted whe family rates are
approached.
7. Membership rates: Hotel offer membership rate (fifty percent of the rack rate) in order to
attract the potential members of large organizations.
8. Groups rates: Group rates are developed for a large number of groups. In this case, the travel
agent works as a negotiator between the front office and the group.
9. Industry rates: A negotiated special for the officials or staffs of the travel industry, for example:
travel agents, hoteliers of the hotels etc. are often extended the professional courtesy of
discounted rates.
10. Half-day rate: Half-day rate room is calculated based on duration of guest stay. It is basically
developed for those travelers who book room for short period of time for business purpose.
11. Complimentary rate: Complimentary rates are preserved for the special guest (ex-personnel or
member) as fringe benefit.
12. Airline contract rate: Hotel offer discount rate to the airlines crew to generate high volume of
business.
13. Travel writer rate: It is the special rate for the traveler writer to appreciate them to write quality
and resourceful article about the hotel features.
14. Advance purchase travel: Advance purchase rate is the discount rate which is offered according
to the number of days of advance booking to encourage the traveler for advance booking.
15. Package rates: Package room rates include goods and services with reasonable room rate during
low sales periods. Such packages are often advertised and promoted in order to attract guest.

Role of Room Rates

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Role of Room Rates

 What are Room Rates?

 Expected sales room.

 How do you calculate room rates?

The formula for ARR or ADR calculation with examples:

Average Room Rate (ARR or ADR) Calculator:

Total Room Revenue:

Total Rooms Occupied:

Total Comp & House:

ARR or ADR (Sold Rooms) =

Total Room Revenue for 01st Jan 2017 = 25000.00

Total Room Sold for 01st Jan 2017 = 250

ARR or ADR for 01st Jan 2017 = 25000.00 / 250

Total Room Revenue for 31st Dec 2016 = 95985.58

Total Room Sold for 31st Dec 2016 = 277

Total Room Revenue for the Month of October = 2,250,485.58

Total Room Sold for the Month of October = 5822

ARR or ADR for October = 2,250,485.58 / 5822

 6 things that affect hotel room prices

 How are prices determined in a hotel?

1. Market Condition Approach

2. The Rule-of-Thumb Approach

3. Hubbart Formula Approach

 Types of room rates

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