The Hubbart Formula is a formula that can be used in hotel management. It is used to determine the proper average rate to set for rooms in a given hotel. The Hubbart Formula is used to help with setting prices.
It can be expressed as a formula:
[(Operating expenses + Desired return on investment) – other income]/projected room nights = room rate.
As hotels see a constant increase in competition, they are forced to try and compete with other big name companies by providing better quality rooms or lower prices. In order to offer these lower prices, the Hubbart Formula is often used to deduce these prices.
Advantages of Hubbart Formula
- Systematic method of determining optimal average room rate.
- Forecast the desired return for any period of time.
- It takes into account the revenue accrued from non-room departments.
- Allows the manager to price in things like non-operating expenses.
CALCULATING ROOM RATES USING THE HUBBART FORMULA
- Calculate desired profit: Desired Profit = Owner’s Investment X ROI
- Calculate pre-tax profits: Pretax Profit= Net Income / 1 – Tax Rate
- Calculate fixed charges and management fees: Depreciation+ Interest Expense+Property Taxes+Insurance+ Building Mortgage+ Land+ Rent+ Management Fees
- Calculate undistributed operating expenses: Administrative+Information technology+Human resources+Transportation+Marketing+Property +Operation+maintenance+ energy costs
- Estimate non-room operated department profit / loss : Food & Beverage Costs and Income+ Telephone Income
- Calculate required rooms department income: The sum of pretax profits (Step 2), fixed charges and management fees (Step 3), undistributed operating expenses (Step 4), and other operated department income (Step 5) equals the required rooms department income.
- Determine rooms department revenue: Required rooms department income + rooms department direct expenses of payroll and related expenses+other direct operating expenses
- Calculate average daily rate (ADR): Divide Rooms Department Revenue by the Expected Rooms Sold to calculate ADR.