Room rate calculation
in the hotel industry
Calculate your room rates and calculate your price floor for maximum success.
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What is behind the calculation?
The aim of the room rate calculation is to determine the necessary average room price.
To determine the price, you need various parameters. The necessary average room rate is therefore the price with which you must cover your own expenses and achieve your desired profit.
To do this, you need your planned room occupancy and the expected costs. As a basis, the BWA serve the past few months. Once the price is fixed, the room rates are divided according to various criteria.
What do you need to calculate the room rate?
In order to carry out a correct room rate calculation in the hotel industry, you need the following data and key figures:
How do you calculate the room rate?
The basis for calculating your best room rate is the necessary average room rate.
The different price differentiations in the hotel industry are then based on the various categories, room size, fluctuations in demand or seasonal demand.
How to calculate the room rate
To calculate your room rate, you simply have to do the following:
1. Calculation of ADR
The Average Daily Rate (ADR) is the average hotel room rate achieved in one day. To do this, you need all the revenue you've earned. You sold a total of 8 rooms for 95€ (760€) over your entire OTAs on 22/11/2019. In addition, you had 15 bookings worth 85€ (1275€) via your website. Your total daily turnover was 760€ + 1275€ = 2035€. The total turnover is now divided by the number of bookings 8 + 15 = 23:2035€/23 bookings = 88.48€. The average ADR rate was therefore €88.48.
2. PUG calculation
When calculating the room price, you must ensure that your room rate is above the lower price limit (PUG). Calculate the lower price limit as follows:
Fixed costs: 1,900,000€
Variable costs: €1,250,000
Number of rooms: 150 rooms
Average occupancy rate: 70%, i.e. 38,325 overnight stays sold per year
Now calculate the fixed and variable costs per room:
1,900,000€/38,325 occupied rooms = 49.57€ fixed costs per room
1,250,000€/38,325 occupied rooms = 32.61€ variable costs per room
PUG = fixed costs per room + variable costs per room
EGG = 49.57€ + 32.61€
WEIGHT = 82,18€
3. Compare ADR to PUG
The ADR in our example from 22.11.2019 was €88.48. The PUG is €82.18. The room rate is therefore 6.29€ above the lower price limit. The price floor is important to know in order to cover costs. But the value alone is not the only decisive factor. The LTV (lifetime value) should be considered. It states how much revenue a customer generates over their entire lifetime. A regular customer comes several times and therefore the first booking may also be below the lower price limit.
How do room prices differ?
The calculation and naming of room rates can be based on various criteria:
✓ Length of stay
Differences in room price calculation
1. Differentiation by categories
Most hotels have different room categories: small, large, standard or comfort rooms, junior or senior suites. Regardless of the room names, they usually differ in size, equipment and capacity. Therefore, there may be different prices for different categories.
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2. Differentiation through demand
Depending on the location and region of a hotel, whether a country hotel or a city hotel, there are different peaks in demand. For example, these are usually seasonal criteria for rural or holiday hotels. Seasonal periods determine increased or lower demand. In the case of city hotels, these include trade fairs and conferences.
3. Differentiation based on time of booking and length of stay
The time of a booking can also be decisive. Early bird or last minute bookings are usually cheaper variations of the normal price in order to give the booker a small incentive to book. It is very important that, with this different price structure, the necessary room price must be achieved at the end so that you can cover your costs and make a profit.
How do hoteliers calculate their room rates?
Unfortunately, very few hoteliers are able to answer this question exactly. Because most of the time, they don't really know that themselves. The decisions for Pricing rules are all too often based on gut feeling and intuition and can be based less on data and facts. But anyone who wants to make a data-based statement about how much an overnight stay in a room is really worth should take a closer look at their figures.
Cost calculation: These figures include all costs, particularly fixed costs. Together with variable costs, these result in the total costs.
Profit calculation: With the sum of all costs, you can see how much turnover you need to generate at least in order to be able to cover all costs. However, the goal should be profit!
That's how fast you lose profits
When a hotelier plans his costs, he must be very diligent, otherwise this will be reflected in his room prices and ultimately in turnover. If he sets his room rates too high at an early stage, this can result in fewer bookings. Room rates are too expensive for guests and they don't book. At the same time, it can happen that a room is offered too cheaply and too many bookings are made too early. As a result, the hotelier can no longer raise his prices and his hotel is booked out at a low price. He should avoid that. The goal should be to find an optimal middle ground for the ideal price. Happyhotel helps you do just that!
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