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Hubbart Formula

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Hubbart Formula
The Hubbart Formula

Where would a hotel manager start in determining the fair price for a guest

room? What is a fair value? This question has daunted innkeepers from the

beginning. Charge rates too high, and no one will stay with you. Setting rates

too low, and the owner makes less money. For many years in the beginning

of the modern hotel era, hotel managers simply guessed. As unscientific as this

approach sounds, it did work to an extent. After a hotel has been in business

for a while, managers would know by instinct and past experiences what rates

to set. In some ways, this instinctual approach had merit. It allowed for flexibility

and swift market response.

That approach stopped being effective when new lodging management

associations emerged. As owner-operated and owner-managed hotels looked

to expand and evolve into chains and franchise operations, they needed to

borrow capital. It is the banking industry that forced a change in the way

hotels set their rates. The guessing approach didn’t translate well into the language

of income statements. In order for financing to become available, a

standardized rate formula was developed.

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

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