pricing and financing chapter 7. unit essential question what pricing, purchasing, and financing...

Pricing and FinancingPricing and Financing

Chapter 7Chapter 7

Unit Essential Unit Essential QuestionQuestion

What pricing, purchasing, What pricing, purchasing, and financing strategies are and financing strategies are used by hotels, restaurants, used by hotels, restaurants, and airlines?and airlines?

Essential Question 1Essential Question 1

What are the different processes What are the different processes used to determine hotel room used to determine hotel room rates and prices?rates and prices?

Hotel Pricing StrategiesHotel Pricing Strategies

Types of RoomsTypes of Rooms– Supply and Demand affect room rates.

Peak Seasons: Time of the year when demand is high and so are rates.

Shoulder Seasons: Time of the year when demand is low and rates go down.

– Room PricesRoom PricesRack RatesRack Rates: : The published rates considered to be The published rates considered to be standard. They are based on the type of room, size of standard. They are based on the type of room, size of beds in a room, and location of the room.beds in a room, and location of the room.


Corporate or commercial ratesCorporate or commercial rates: : Usually 10-15% Usually 10-15% below the rack rate. These are rates that are given to below the rack rate. These are rates that are given to companies and business that are frequent customers of companies and business that are frequent customers of the hotel.the hotel.

Group RatesGroup Rates:: Available to large groups that reserve Available to large groups that reserve ten or more rooms for a conference or special event. ten or more rooms for a conference or special event. Groups do not normally require advance deposits Groups do not normally require advance deposits because they are considered reliable and often bring in because they are considered reliable and often bring in repeat business.repeat business.

Government RatesGovernment Rates: : Available to school, state, or Available to school, state, or federal employees. Rates are normally within the federal employees. Rates are normally within the per per diem diem rate to acquire and maintain regular customers.rate to acquire and maintain regular customers.


Senior ratesSenior rates: : Available to guests age 55 and older. Available to guests age 55 and older. The discount is usually 10-15%. Since this is the The discount is usually 10-15%. Since this is the fastest growing market, especially with baby boomers fastest growing market, especially with baby boomers entering retirement, there is a great opportunity for entering retirement, there is a great opportunity for creative promotional and rate discount programs.creative promotional and rate discount programs.

– Specialty RatesSpecialty RatesAirline RatesAirline Rates: : Available on properties close to Available on properties close to airports for airline crews. The discount rate is 30-50% airports for airline crews. The discount rate is 30-50% and free transportation to and from the airport. Air and free transportation to and from the airport. Air crews typically check out early allowing housekeeping crews typically check out early allowing housekeeping to clean the room early so the hotel can resell the to clean the room early so the hotel can resell the room.room.


Club or frequent guest discountsClub or frequent guest discounts: : Club discounts Club discounts usually begin during the slow season and continue usually begin during the slow season and continue through peak times as a reward. Loyal customers who through peak times as a reward. Loyal customers who return to the hotel on a regular basis receive frequent return to the hotel on a regular basis receive frequent guest discounts.guest discounts.

Employee RatesEmployee Rates: : Usually 50% of rack rate and Usually 50% of rack rate and offered as a reward and benefit for the employee.offered as a reward and benefit for the employee.

Travel Agent RatesTravel Agent Rates: : Offered to build a strong Offered to build a strong relationship with those who sell large amounts of room relationship with those who sell large amounts of room space. A travel agent is more likely to recommend space. A travel agent is more likely to recommend property they are familiar with.property they are familiar with.


Determining Room RatesDetermining Room Rates– Setting marketable room rates is vital to the success of

a hotel.– Hotels make from 80-90% of revenues from room

sales.– The average cost of a room should be $1 for every

$1,000 of construction costs and per-room investments.If a hotel cost $200,000 per room, the average room rate should be $200.


– Hubbart FormulaHubbart FormulaThis formula is used to determine the room rate This formula is used to determine the room rate necessary for a predetermined return on investment.necessary for a predetermined return on investment.

The formula does not include travel agent commissions The formula does not include travel agent commissions or discounts offered. These items would have to be or discounts offered. These items would have to be considered before the final rack rate could be considered before the final rack rate could be determined.determined.

This pricing method takes into consideration pricing This pricing method takes into consideration pricing factors such as costs, customer demand volumes, factors such as costs, customer demand volumes, customer characteristics, corporate objectives, and customer characteristics, corporate objectives, and channels of distribution.channels of distribution.


– Hubbart FormulaHubbart FormulaThe following formula is used to determine average The following formula is used to determine average room rate.room rate.

Operating expenses + Desired ROI – Other incomeOperating expenses + Desired ROI – Other income = Average room rate= Average room rate

Projected room salesProjected room sales

$9,000,000 + $6,000,000 – $900,000$9,000,000 + $6,000,000 – $900,000 = $141 = $141

$100,000$100,000


– Breaking EvenBreaking EvenBreakeven PointBreakeven Point: : The point where revenue equals the The point where revenue equals the cost of running the property.cost of running the property.

When setting room prices it is essential to know how When setting room prices it is essential to know how many rooms must be sold in order to breakeven.many rooms must be sold in order to breakeven.

The following formula is used to determine breakeven.The following formula is used to determine breakeven.

Fixed costs Fixed costs = Breakeven Point= Breakeven Point

Average room rate – Variable costsAverage room rate – Variable costs

$200,000 $200,000 = 2,565 rooms per month= 2,565 rooms per month

$141 – $63$141 – $63

Fixed Expenses

VariableExpenses

Break-even Point

Cost perUnit

Numberof Units

Revenue


Occupancy RateOccupancy Rate: : A percentage of the ratio of total A percentage of the ratio of total rooms sold to total rooms available per month.rooms sold to total rooms available per month.

Many lodging operations require a 60% occupancy rate Many lodging operations require a 60% occupancy rate to meet the breakeven point.to meet the breakeven point.

Rooms to sell to breakeven Rooms to sell to breakeven = Occupancy rate= Occupancy rate

Rooms available per monthRooms available per month

Rooms available per month = 134 per day × 30 days = 4,020Rooms available per month = 134 per day × 30 days = 4,020

2,565 2,565 = 0.638 or 64%= 0.638 or 64%

4,0204,020


– Yield ManagementYield ManagementYield ManagementYield Management: : The practice of evaluating demand The practice of evaluating demand and setting prices that result in maximum revenue.and setting prices that result in maximum revenue.

Yield and revenue management systems have been Yield and revenue management systems have been referred to as:referred to as:

“ “people and software using historical data and current people and software using historical data and current trends to better understand future demand and achieve trends to better understand future demand and achieve the best rate possible.”the best rate possible.”

Yield management is an ongoing process that involves Yield management is an ongoing process that involves comparisons of the forecast of rooms sold to the actual comparisons of the forecast of rooms sold to the actual number of rooms sold; room sales to specific target number of rooms sold; room sales to specific target markets; and rooms reserved by specific market segments markets; and rooms reserved by specific market segments as compared to the real amount of daily rooms sold.as compared to the real amount of daily rooms sold.

Hotel Pricing StrategiesHotel Pricing Strategies– Psychological PricingPsychological Pricing

Pricing based on the belief that customers base Pricing based on the belief that customers base perceptions of a product on price.perceptions of a product on price.

Prestige Pricing:Prestige Pricing: – Uses prices to suggest exclusiveness, status, and prestige.Uses prices to suggest exclusiveness, status, and prestige.– A limited-service or economy hotel offers a price lower than its A limited-service or economy hotel offers a price lower than its

competition to promote an image of efficiency and services at competition to promote an image of efficiency and services at affordable rates.affordable rates.

– A five-star hotel charges higher rates than competitors to suggest A five-star hotel charges higher rates than competitors to suggest that its rooms, services, and amenities are more luxurious.that its rooms, services, and amenities are more luxurious.

Odd / Even Pricing:Odd / Even Pricing: – Uses odd prices ($59.99) to suggest bargains.Uses odd prices ($59.99) to suggest bargains.– Uses even prices ($60.00) to suggest higher quality.Uses even prices ($60.00) to suggest higher quality.


What affects restaurant and What affects restaurant and airline pricing?airline pricing?

Restaurant and Tourism Pricing Restaurant and Tourism Pricing StrategiesStrategies

Factors in Restaurant PricingFactors in Restaurant Pricing– Major considerations for determining prices

include:

Cost of SalesCost of Sales: : Beginning Inventory + Purchases – Ending Inventory . Cost of Sales


Direct Operating Expenses: Expenses that can be directly attributed to a department.

– Examples: Dinning uses flatware and glasses while Kitchen uses pots and pans.

Indirect Operating Expenses: Costs associated with expenses difficult to charge to any specific area.

– Examples: Marketing, utilities, administrative costs, etc.


– Menus and MarketingMenus and MarketingThere are two types of menu pricing:

– A La CarteA La Carte: :

A la carte items are listed separately.A la carte items are listed separately.

Customers are allowed to order separate menu items and Customers are allowed to order separate menu items and the final check is usually higher than the table d’hôte the final check is usually higher than the table d’hôte menu.menu.

This pricing option allows greater control over items This pricing option allows greater control over items offered on the menu as well as food costs.offered on the menu as well as food costs.


– Menus and MarketingMenus and Marketing– Table d’hôteTable d’hôte: :

This is a more familiar and traditional pricing system.This is a more familiar and traditional pricing system.

Complete meals with more than one item or course are Complete meals with more than one item or course are offered at one price.offered at one price.

Table d’hôte systems costs the customer less but, they Table d’hôte systems costs the customer less but, they generally have higher food costs for the manager.generally have higher food costs for the manager.

The “best spot” on a menu is in the upper right column.The “best spot” on a menu is in the upper right column.

The favored places to position items listed in a group or The favored places to position items listed in a group or column are first, second, and last.column are first, second, and last.

People tend to forget or not read any items listed beyond People tend to forget or not read any items listed beyond first or second, and often skip down to the last item listed.first or second, and often skip down to the last item listed.


The High Cost of FlyingThe High Cost of Flying– Airline tickets are some of the most negotiable

products in the travel business.– Using revenue management models, airlines

extensively research and plan discounts, promotions, and pricing programs to meet the needs of certain target markets as well as to reach company objectives.


– Any Given Flight on Any Given DayAny Given Flight on Any Given DayAirlines must sell a specific number of spaces in order to cover the operating expenses of the flight.

Assume that the tickets on a 150-passenger flight all sold for the same price. To make the flight economically successful, 100 of the seats must be filled.


What are the procedures of What are the procedures of purchasing; including purchasing; including receiving, storing, issuing, receiving, storing, issuing, aand reordering supplies?aand reordering supplies?

Purchasing StrategiesPurchasing Strategies

More Than Just ShoppingMore Than Just Shopping– PurchasingPurchasing:: Selecting and obtaining goods and

services. It involves:Maintaining a professional relationship with vendors.

Gathering bids or quotes to determine the best prices available.

Evaluating products and services for value.

Developing and following adequate ordering procedures.

Receiving, storing, issuing, and reordering merchandise and supplies.

Keeping accurate records of all transactions.

Purchasing StrategiesPurchasing Strategies– Purchasing agents and buyers must consider the

following:What is being ordered?

How much needs to be ordered?

Where is the best value?

When will these products arrive?

– May I Quote You?May I Quote You?Most companies require more than one price estimate or quote.

Most companies deal with more than one vendor when purchasing.

Purchasing StrategiesPurchasing Strategies– E-PurchasingE-Purchasing

Online purchasing has improved the efficiency of hotel and restaurant management.

Online procurement companies offer automated approvals and ordering, price quotes, specification comparisons, and reordering capabilities.

New tracking technology allows companies to track their orders. This is especially useful if the purchase order is not shipped at one time.

Purchasing StrategiesPurchasing Strategies

Receiving Goods and SuppliesReceiving Goods and Supplies– Correct receiving procedures are essential to

inventory control.– When a shipment is received it must be counted

and the invoice checked against the purchase order.Verify product quantity.

Verify product description – is it the correct, a replacement product, or the wrong product.

Verify product price.

Purchasing StrategiesPurchasing Strategies– Storing, Issuing and Reordering SuppliesStoring, Issuing and Reordering Supplies

Inventory logs must be maintained in all major storage areas.

The most commonly storage and inventory control method is FIFO (First in, first out). This insures product rotation (usually from left to right), the oldest products are used before the newer products, and similar products are stored together.

Reordering needs to occur in time to ensure the stock does not run out.


What are the basic types of What are the basic types of restaurant and hotel restaurant and hotel ownership and the available ownership and the available sources of financing for each?sources of financing for each?

Financing Various Forms of Financing Various Forms of OwnershipOwnership

Hotel and Restaurant OwnershipHotel and Restaurant Ownership– FranchiseFranchise:: A legal agreement to begin a new A legal agreement to begin a new

business in the name of a recognized company.business in the name of a recognized company.FranchiseeFranchisee – The buyer of a franchise.– The buyer of a franchise.

FranchisorFranchisor – The seller of a franchise.– The seller of a franchise.


– Sole ProprietorshipSole Proprietorship:: The owner is the The owner is the only one responsible for the business’s only one responsible for the business’s activities.activities.

Easiest and most popular form of business to Easiest and most popular form of business to create.create.

Accounts for 76% of all businesses. Accounts for 76% of all businesses.

The owner has The owner has unlimited liabilityunlimited liability: Debts : Debts incurred by the business have to be paid from incurred by the business have to be paid from the owner’s personal assets (car, house, bank the owner’s personal assets (car, house, bank accounts, etc.).accounts, etc.).


– PartnershipsPartnerships: : More than one person shares More than one person shares the business decisions and outcomes.the business decisions and outcomes.

General PartnersGeneral Partners: All partners have unlimited : All partners have unlimited personal liability and take full responsibility for personal liability and take full responsibility for the management of the business. the management of the business.

Limited PartnersLimited Partners: Partners whose liability is : Partners whose liability is limited to their investment. They cannot be limited to their investment. They cannot be actively involved in managing the business.actively involved in managing the business.

Law requires that at least one partner is a Law requires that at least one partner is a general partner.general partner.


– CorporationCorporation:: A business that is chartered or A business that is chartered or registered by the state.registered by the state.

Legally operates apart from its owner(s).Legally operates apart from its owner(s).

Required to issue stock. This shows the amount of Required to issue stock. This shows the amount of equity or ownership.equity or ownership.

Required to have a board of directors.Required to have a board of directors.


– What’s In A NameWhat’s In A Name– Brand:Brand: Name, design or symbol that identifies the Name, design or symbol that identifies the

products of a company.products of a company.Brand NameBrand Name

– Word or group of words that can be spoken.Word or group of words that can be spoken.

– Ex: Omni, Hilton, Sheraton, Marriott, etc.Ex: Omni, Hilton, Sheraton, Marriott, etc.


Financing sourcesFinancing sources– CapitalCapital:: Money, equipment, real estate, and tools Money, equipment, real estate, and tools

or goods used to produce goods or services.or goods used to produce goods or services.Debt CapitalDebt Capital – Sources that require the borrower to – Sources that require the borrower to repay plus interest.repay plus interest.

– Examples: Banks, Credit Unions, other loan institutions.Examples: Banks, Credit Unions, other loan institutions.

Equity CapitalEquity Capital – Sources that loan money in return for – Sources that loan money in return for part ownership, or equity, in the business.part ownership, or equity, in the business.

– Examples: Venture Capitalists, private investors, partners, etc.Examples: Venture Capitalists, private investors, partners, etc.

pricing and financing chapter 7. unit essential question what pricing, purchasing, and financing...

Documents

hotel room rates

room pricesrack rates

average room rate

demand affect room rates

room investments

room sales

type of room

room rate necessary