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
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