sg‚ wllee@smu.edu.sg} I n this article‚ we describe a business modeling exercise that helps students understand the complex relationship between demand and price. The exercise seeks to determine the optimum pricing‚ in view of anticipated occupancy response that maximises profit for a hotel. Through the exercise‚ students are introduced to advanced Excel operations such as Goal Seek and Solver. This exercise goes through a systematic series of basic modeling steps‚ starting from identifying
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that a hotel actually receives: in hotels not using RM software‚ this factor is generally approximated by dividing the actual average room rate by the potential average rate 2. ADR – An occupancy ratio derived by dividing net room’s revenue by the number of rooms sold 3. Average rate per guest – An occupancy ratio derived by dividing net rooms revenue by the number of guests 4. Competitive Set - The competitive group of hotels in a market that provides the most important competition for a hotel
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Answer Key for Test Your Skills 1. Tutti’s Sandwich Shop has the following information regarding costs at various levels of monthly sales. Help Tutti separate her costs into fixed costs and variable costs so that she can predict and evaluate costs at varying levels of guests served. January February March Monthly Sales in Guests Served 10‚000 16‚000 20‚000 Cost of Sales (Food Cost ) 10‚500 16‚800 21‚000 Salaries‚ Wages‚ and Benefits 15‚000 15‚600 16‚000 Telephone 12‚750 16‚350 18‚750 Rent on
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Appendix B – Majestic Hotels‚ Inc. Room Rate and Occupancy Records MAJESTIC HOTELS‚ INC. PROPERTY: Asheville MONTHLY OCCUPANCY SUMMARY REPORT YEAR: 2011 Month January February March April May June July August September October November December Average Total Rooms Occupancy Occupied Percent 126 150 154 162 163 159 156 162 154 186 149 118 153 51.6% 61.4% 63.1% 66.2% 66.7% 65.3% 64.0% 66.4% 63.2% 76.4% 61.0% 48.3% 62.8% Total ADR $140.27 $139.29 $141.80 $140.20 $143.72 $141.90 $139.11 $141
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opens a total of 120 hotel operating days but if they remain open the hotel will operate 365 days a year. The manager of the hotel‚ Mr. Kacheck‚ is worried about off-season losses. Mr. Kacheck proposed following ideas in order to increase the occupancy and decrease the losses. * Stay open in the off-season and advertise * Stay open in the off-season‚ advertise‚ and add a heated/covered pool * Stay open in the off-season and add a heated/covered pool (no advertising) * Stay open
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profitability. Information collected in your analysis is then used to predict future occupancy levels and rates. Types of Questions Answered Your market analysis will help you answer questions such as: • • • • • What trends are occurring in the lodging industry? Are local economic and visitation trends favorable? Who are my competitors and how successful are they? What are the potential lodging market segments in the area? What occupancy and average room rate could I achieve? Applications The guidebook is
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Costs: = Total Costs – Variable Costs = $138‚410 - $19‚497 = $118‚913. Break Even: =. Per night: = = 54 rooms. 54 rooms on average (or 67.3% occupancy) must be rented each night in season for the hotel to break even. 2. The hotel is full on weekends in the ski season. If all room rates were raised to $5 on weekend nights‚ but occupancy fell to 72 rooms instead of 80‚ what is the revised profit before taxes for the year‚ per Exhibit 1? Subtracted Contribution Margin: Weekend nights
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develop with practice. The mentality of a good revenue manager or team is focused on producing a good blend of occupancy and average rate. The hotel’s mission should be to construct a base occupancy‚ through a good mix of rates‚ and then take advantage of having a base by then locking out lower rates to build average rates. The mission is not to only get 100% occupancy; it must be to get occupancy as high as possible‚ with an average rate as high
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rents for $15 for single occupancy or $20 for double occupancy. The west wing of the hotel has 30 rooms‚ all of which have spectacular views of the skiing slopes‚ the mountains‚ and the village. Rooms in this wing rent for $20 and $25 for single or double occupancy‚ respectively. The average occupancy rate during the season is about 80% (typically‚ the Hotel is full on weekends and averages 50 to 60 rooms occupied on week nights). The ratio of single versus double occupancy is 2:8; on average.
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Exhibit 4 tells us the break-even analysis. This is an excellent indicator of risk of the project. Alison Green has the least break-even occupancy with 64.84%‚ which is good because it means that the building only needs to be occupied with 64.84% of people for the owner to Break-even. On the other hand‚ The Fowler building has the highest break-even occupancy level with a percentage 85.92%. This means that the Fowler Building is a lot more risky than Alison Green. Exhibit 5 tells us the expected
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