Lower price limit for hotels

Price floor

If you want your hotel to be successful in the long term, you have to know exactly the needs of your target group and react flexibly to changes. However, expertise in the area of Revenue Management on. This includes the usual KPIs such as RevPAR, ADR or Occupancy, including the calculation of the lower price limit for hotel rooms, PUG for short.

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The formula for the lower limit calculates the minimum price per room category in order to cover costs. It consists of the share of fixed and variable costs and is offset against the average workload. Calculating the lower price limit helps to cover costs and calculate profits. Do you know the price floor? Do you know the respective fixed costs and variable costs that are incurred per room?

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The fixed costs of a hotel room include:

• Energy costs
• Capital costs
• Insurance and fees
• Taxes and duties
• Promotion
• Telephone
• Repair and maintenance costs

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After the fixed costs have been determined, the variable costs per hotel room follow. The variable costs are proportionate to:

• F&B (breakfast)
• Scouring
• Personnel
• Guest Supply
• Consumables
• Energy costs
• Commissions

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The minimum hotel price (PUG) is calculated as follows:

Fixed costs/room + variable costs/room = price floor hotel (PUG)

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Calculate PUG

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Calculate the lower price limit based on a practical example

A hotel has 100 rooms. The hotel's fixed costs amount to €1,200,000.00. The variable costs are €900,000.00. The average occupancy rate is 80%. As a result, 29,200 rooms are sold. The following calculation basis results from the above data.

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Fixed costs per hotel room

€1,200,000.00 / 29,200 occupied rooms = €41.10
With an average occupancy of 80%, the fixed costs per hotel room amount to €41.10.

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Variable costs per hotel room

€900,000.00 / 29,200 occupied rooms = €30.82
With an average occupancy rate of 80%, the variable costs per hotel room amount to €30.82.

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Lower price limit for hotels

€41.10 + €30.82 = €71.92
The lower limit for a hotel room is a net value excluding VAT
Based on the calculation, the hotelier in the example hotel should not sell his rooms for less than €71.92 per night. This is the only way the hotelier can work economically in the long term. The calculation is usually followed by further considerations of making a profit.

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Conclusion hotel price floor

The lower limit for hotels plays an important role in revenue management, because the formula determines, simply and clearly, how much revenue must be generated per room in order to cover costs. This is therefore the absolute minimum value and should price optimization may only be used as a daily rate in exceptional cases. The lower price limit (PUG) only relates to the value of the rooms actually sold.

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The formula therefore includes room occupancy. The formula thus guarantees a price that can actually be earned. The share of fixed costs per room remains unaffected by single or double occupancy. The fixed costs remain constant regardless of how many people stay in a hotel room. They are more likely to increase as a result of higher personnel expenditure or an increase in fees. Fixed costs should therefore be reviewed by the hotelier at regular intervals by comparing offers. If insurance prices or advertising agency prices rise, alternatives should be considered.

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This allows the high share of fixed costs to be regulated and adjusted regularly. As soon as the fixed costs are covered by the logistics turnover for one month, the hotelier has more scope for special prices. These are particularly interesting for group inquiries. The same applies to the development of special offers, such as for Christmas or New Year, the busy season. The lower limit is therefore part of Yield Management and lower limit of dynamic prices.

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