What is Hubbart formula in Hotel ?
The Hubbart Formula is a widely used pricing formula in the hospitality industry to determine the optimal room rate for a hotel. It is named after its creator, Roy Hubbart.
The purpose of the formula is to calculate the minimum room rate that will cover the hotel’s costs while also generating the desired profit margin. This can help hotel managers determine the optimal price for each room that will allow them to remain competitive in the market while also achieving their financial goals.
Hubbart Formula Stated as
[(Operating expenses + Desired return on investment) – other income]/projected room nights = Room Rate.
It’s important to note that the Hubbard formula in front office is a just one method, several methods that hotels can use to determine room rates. Hotel managers must consider many other factors, such as market demand, competitor pricing, seasonality, and other factors when setting their prices.
The Hubbart formula considers such factors as operating expenses, desired return on investment, and income from various departments in the hotel to establish room rates.
This method relies on the front office to produce income that will cover operating expenses, overhead, and return on investment for the hotel operation. The following example applies these factors.
Brief History of Hubbart Formula
In the 1940s the American Hotel Association (the precursor to today’s American Hotel and Lodging Association) asked a gentleman by the name of Roy Hubbart to develop a way to compute room rates.1 Mr. Hubbart came up with a method to calculate a hotel room rate based on the costs incurred in operating the hotel and a reasonable return on investment for the investors.
Going beyond simple room cost, the Hubbart formula allowed the hotel to scientifically illustrate to a banker what the return on investment would be. This quantifiable approach was well received. Financing for any business enterprise has always been contingent on return on investment and forecasts.
Though this rate formula has its detractors today, it was a valuable milestone In the evolution of the industry.
Hubbart Formula Example
A hotel with $4,017,236 of operating expenses (various departmental operating expenses and overhead), a desired return on investment of $1,500,000 and additional
income of $150,000 from other sources (food and beverage, rentals, telephone) with projected room sales of 47,680 room nights would set its room rate at $113.
So the Hubbart formula stated as
Hubbart’s Formula Variations
- Net Income = Owners contribution* ROI
- Income before Tax = Net Income / (1 – tax % )
- Estimate non-room operated dept. Income/loss e.g. Telephones.
- Rooms department income = Income before tax + Fixed charges & mgmt. fees + undistributed operating expenses + other operated department losses – other operated department income.
- Required Rooms Dept. revenue = Rooms Dept. income+ dept. direct payroll & related Expenses + direct operating expenses.
- Average room rate = Rooms Department revenue / No. of rooms sold.
- Room nights = 365* occupancy %* no. of rooms in the Hotel.
- Direct operating expenses = Operating expenses * Room nights.
Uses of Hubbart Formula
It is a revenue management technique that can be used in the front office of a hotel or other hospitality business to optimize pricing and maximize revenue. The Hubbart formula can be used for following reason.
Improved Revenue – The Hubbart Formula is designed to help businesses maximize their revenue by adjusting prices based on demand. By using the formula, front office managers can optimize prices to ensure that they are charging the maximum amount customers are willing to pay for a given product or service.
Better Forecasting – The Hubbart Formula takes into account historical data on demand and occupancy, as well as upcoming events and other factors that can impact demand. By analyzing this data and using the formula to forecast demand, front office managers can make more informed decisions about pricing and availability.
Increased Occupancy – By setting prices based on demand, can help front office managers fill more rooms and increase occupancy. This can be especially useful during slower seasons or when occupancy rates are lower than desired.
Greater Efficiency – It can be used to automate pricing decisions and adjust prices in real-time based on changes in demand. This can help front office managers operate more efficiently and respond more quickly to changing market conditions.
Competitive Advantage – By using the Hubbart Formula to optimize pricing and maximize revenue, front office managers can gain a competitive advantage over other businesses that do not use revenue management techniques. This can be especially important in highly competitive markets where every dollar counts.
Overall, the Hubbart Formula can be a powerful tool for front office managers looking to maximize revenue, increase occupancy, and gain a competitive advantage in the hospitality industry
Frequently asked Questions
Who developed Hubbart formula?
1) Mr. Roy Hubbart in 1940.
2) Hubbart formula also known as
The bottom-up approach to pricing.