Rooms Division Department:
Operational Issues
I- Establishing Room Rates
There are various approaches to pricing rooms. We will examine three popular approaches:
1. The Market Condition Approach
This approach is the commonsense approach. Management looks at comparable hotels in the
geographical market and sees what they are charging for the same product.
How do our rates compare to those of our competition?
Are our rates much lower or higher than those of the competition?
How are our rates affecting our revenue and our share of the business?
What is our occupancy percentage? What is the occ % of the competitive set? Will our total revenue
improve if we increase (decrease) our rates?
Have any trends emerged during the past six months?
2. The Rule-of-thumb Approach
The Rule-of-Thumb approach sets the rate of a room at $1 for each $1,000 of construction and
furnishings cost per room, assuming a 70 % occupancy.
Eg. Assume that average construction cost of a room is $80,000.00. Using this approach comes up to the
average selling price of $80.00 per room. Set up different rates for different room types, but ARR would be
$80.00
3. The Hubbart Formula
Hubbart Formula approach considers operating costs, desired profits and expected number of rooms
sold. In other words, this approach starts with desired profit, adds income taxes, then adds fixed charges and
management fee, followed by operating overhead expenses and direct operating expenses. It is considered a
Bottom-up approach.
Hubbart formula (basic) 200 ROOMS HOTEL
Desired net income yearly: $ 1,525,000.00
Plus depreciation, taxes + 600,000.00
Plus operating expenses + 1,240,000.00
Total required operated income = 3,365,000.00
Less other department incomes: - 200,000.00
Total Rooms Division income: = 3,165,000.00
Rooms direct expenses + 547,500.00 (base on estimated
Total = 3,712,500.00 75% occ of 200 rms
Number of rooms sold in a year 54,750 1 year: 54,750)
Required average room rate: $ 67.81
II- Operational Ratios:
1. Occupancy Ratios:
Occupancy ratios measure the success of the front office in selling the hotel’s primary product (i.e.
guestrooms). Below are some common ratios used in the front office department:
Occupancy Ratios shall be computed on a daily basis by the Night Auditor, and communicated to related
department managers the next day!
For any ratio to be significant, it should be compared to a certain benchmark, which might include:
1. Last Period’s Ratio
2. Budgeted or Planned Ratio
3. Competitors’ or Industry Average Ratio
Occupancy Percentage = (Number of Rooms Occupied) / (Total Number of Rooms Available For Sale) *
100
Multiple Occupancy Percentage = (Number of Rooms Occupied by More Than One Guest) / (Total
Number of Rooms Occupied) * 100
Single Occupancy Percentage = (Number of Single Rooms Occupied) / (Total Number of Single Rooms
Available For Sale) * 100
Double Occupancy Percentage = (Number of Double Rooms Occupied) / (Total Number of Double
Rooms Available for Sale) * 100
Triple Occupancy Percentage = (Number of Triple Rooms Occupied) / (Total Number of Triple Rooms
Available For Sale) * 100
Let’s consider the following problem:
Yasin Hotel has 204 rooms: 45 are triple, 60 are double and the remaining is single. On the night of May 9th,
03 the night auditor counted 195 rooms occupied, 43 are triple, 58 are double, and the remaining are single.
Moreover, the housekeeping department communicated only 4 rooms (all single) out of order for the night
of May 09th, 03
a) What is Yasin Hotel's Occupancy Rate for the night of May 09th, 03?
Hotel’s Occupancy Rate = 195 / (204 - 4) * 100 = 97.50 %
b) What is Yasin Hotel's Single, Double, and Triple Occupancy rates for the night of May 09th, 03?
Single Occupancy Rate = 94 / (99-4) * 100 = 98.95 %
Double Occupancy Rate = 58 / 60 *100 = 96.67 %
Triple Occupancy Rate = 43 / 45 *100 = 95.56 %
2. Other Operational Statistics:
Average Guests Per Rooms Sold = (Total Number of Guests) / (Total Number of Rooms Sold)
Average Daily Rate = (Actual Room Revenue) / (Total Number of Rooms Sold)
Average Rate per Guest = Revenue Per Available Customer (RevPAC) = (Actual Room Revenue) /
(Number of Guests)
Revenue Per Available Room (RevPAR) = (Actual Room Revenue) / (Number of Available Rooms)
Let’s consider the following example:
Cordoba Hotel has 120 rooms: 53 of them are single and 67 are double. On the night of 09/12/03, Cordoba
Hotel’s Night Auditor counted a total of 85 rooms occupied, 42 of which were occupied by more than one
guest. Moreover, on the same night 127 guests were registered. In addition, 2 rooms were on a
complimentary basis. From the Housekeeping Room Status Report (for the night of 28/11/07), there were a
total of 4 rooms Out of Order, 3 of which were Single. Lastly, the Actual Room Revenue for the same night
was at the order of $ 6,960.
a) Calculate the Average Guest Per Room Sold
b) Calculate the Average Daily Rate
c) Calculate the Average Rate Per Guest (RevPAC)
d) Calculate the RevPAR
Answer:
Average Guest Per Room Sold = 127 / (85 – 2) = 1.53 Guest Per Room Sold
Average Daily Rate = $ 6,960 / (85-2) = $ 83.86
Average Rate Per Guest (RevPAC) = $ 6,960 / 127 = $ 54.80 Per Guest
RevPAR = $ 6,960 / (120 – 4) = $ 60.00
3. Yield Statistic:
Yield Statistics is an operational ratio that needs to be calculated on a daily basis by the Night Auditor and
communicated to the Rooms Division Manager to show how successful the Rooms Division Department is
selling its rooms at a rate very near the rack rate!
Yield Statistic is one approach to come up to a solution to Yield Management, which is:
“Maximize Room Revenue Subject to Space”
Yield Static can be computed in the following way:
Yield statistic = (Actual Room Revenue) / (Potential Room Revenue)
Let’s consider the following example:
The following data is pertinent to the room price and room type rack rates of Sinan’s Hotel for the Night of
December 10th, 03:
Number of Rooms Room Type Room Rate Rack Rate
54 Single $ 40 $ 55
40 Single $ 45 $ 55
19 Double $ 52 $ 70
39 Double $ 55 $ 70
14 Triple $ 60 $ 80
16 Triple $ 63 $ 80
13 Triple $ 70 $ 80
Could you calculate Sinan Hotel's Yield Statistic?
Answer:
Number of Rooms Room Type Room Rate Rack Rate Actual Room Revenue Potential Room Revenue
54 Single $40 $55 $2,160 $2,970
40 Single $45 $55 $1,800 $2,200
19 Double $52 $70 $988 $1,330
39 Double $55 $70 $2,145 $2,730
14 Triple $60 $80 $840 $1,120
16 Triple $63 $80 $1,008 $1,280
13 Triple $70 $80 $910 $1,040
Total $9,851 $12,670
Sinan Hotel’s Yield Statistic = $ 9,851 / $ 12,670 *100 = 77.75 %
III- Forecasting Room Availability:
Forecasting room availability is forecasting the number of rooms available for sale on any future date. This
type of forecasting helps manage the reservation process, guides the front office staff for an effective rooms
management, and can be used as an occupancy forecast, which is, further, useful in attempting to schedule
the necessary number of employees for an expected volume of business.
In order to forecast room availability, the following data are needed:
a) Number of expected room arrivals
b) Number of expected room walk-ins
c) Number of expected room stayovers
d) Number of expected room no-shows
e) Number of expected room cancellation
f) Number of expected room understays
g) Number of expected room check-outs
h) Number of expected room overstays
These above-mentioned data help the front office in conduct various daily operational ratios such as:
a) No-shows % = (number of no-show rooms) / (number of rooms reserved) * 100
b) Cancellation % = (number of cancellation rooms) / (number of rooms reserved) * 100
c) Walk-ins % = (number of walk-in rooms) / (total number of rooms arrivals) * 100
d) Overstays % = (number of overstay rooms) / (number of expected check-outs) * 100
e) Understays % = (number of understay rooms) / (number of expected check-outs) * 100
The forecasted number of rooms available for sale for any future date can be tracked using the following
formula:
Forecasted Number of Rooms Available for Sale = Total Number of Guest Rooms – Number of Out of
Order Rooms - Number of Stayovers Rooms – Number of Reserved Rooms + Number of No-show Rooms +
Number of Cancellation Rooms + Number of Check-Out Rooms + Number of Understay Rooms – Number
of Overstay Rooms
Under non-automated and semi-automated systems, the number of rooms available for sale forecasts can
be calculated only upon demand and need and might vary from three-day to ten-day forecasts. However,
under fully automated systems, forecasts can be done at any moment for any future period of time. For,
computers run forecasts on a room count considerations, hence eliminating tedious labor work and human
error margins.
