Premier InnÂ is the UK's largest hotel brand, with over 40,500 rooms and more than 650 hotels. Originally opening under the "Travel Inn" brand name in 1987, it has been owned byÂ WhitbreadÂ during its entire operation and was set up to compete with theÂ TravelodgeÂ brand which was at the time owned byÂ Forte. The company provides 70% of the total earnings of Whitbread.Â Premier Inn operates hotels at a variety of locations including city centers, suburbs and airports. The Premier Inn chain can be found from Elgin in the north of Scotland to Helston, Cornwall in the south. Hotels are found either in city centers or on the outskirts near to major A roads and Motorways. In 2006, Premier Inn announced that it has entered into a joint venture agreement with Emirates Group to launch the UK's leading budget hotel brand in the Gulf region. This is the first move to expand the brand beyond the UK. The joint venture has initially identified three sites in Dubai to build Premier Inn hotels, creating more than 800 new rooms for business and leisure travelers seeking high quality budget hotel accommodation. In 2007, Premier Inn announced that it has entered into a 50:50 joint venture agreement with Emaar-MGF - one of India's leading real estate developers, to develop the UK's largest budget hotel brand, Premier Inn, in India
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Before we talk about pricing we need to know about the elements that affects on the price and we need to know what cost is. Every company needs to know that is their product acutely cost before they take any decision about pricing and price.
Definition of cost: Cost is the resource forgone or sacrificed in order to accomplish a objective, Generally, cost is measured in item of money. (CostÂ Accounting: Principles And Practice)
Importance of cost and volume in Business: Cost and volume is very important for travel and tourism business to ensure sufficient supply of funds for the company at the right time from the right source at the right cost to the firm to meet up its funding requirements.
Determinant of Business Success
Focal point of Decision making
Measurement of performance
Optimal Utilization of Resources
We need to know about price before we are discuss about pricing.
Price: Price is the sum or amount of money at which a thing is valued, or the value which a seller sets on his goods in market; that for which something is bought or sold, or offered for sale; equivalent in money or other means of exchange. (http://www.brainyquote.com/words/pr/price206593.html#ppiZPg30gmRY1ZZ4.99)Â
Pricing: PricingÂ is the procedure of determination what a company will charge to the customers' in trade for its products. Pricing is the automatic or manual process of applying prices to purchase and sales orders, based on factors.
1 Establishing Room Rates:
ï‚· The front office manager shall assign to each room category a rack rate. In accordance, front office employees are expected to sell rooms at rack unless a guest qualifies for an alternative room rate (ex: corporate or commercial rate, group rate, promotional rate, incentive rate, family rate, day rate, package plan rate, complementary rateâ€¦).
ï‚· While pricing rooms, the hotel shall keep in mind that rate should be between a minimum (determined by cost structure) and a maximum (determined by competition structure) boundary as depicted below:
Minimum (Hurdle Rate) < Room Rate < Maximum (Rack Rate)
Cost Structure < Room Rate < Competition Structure
ï‚· While establishing room rates, management shall be careful about its operating costs, inflationary factors, and competition. Generally, there are three popular approaches to pricing rooms:
Market Condition Approach
Hubbart formula Approach
A. Cost Approach:
This Approach's starting Point is on finding the Per Room occupied daily Direct and Indirect Expenses.
Consider the Following Example:
Premier Inn has estimated the Following Indirect Expenses (i.e. Undistributed Expenses and Fixed Charges) for the upcoming Year:
Allocation to Rooms Division
Rooms Division Expense
Always on Time
Marked to Standard
Administrative & General Expenses
Furthermore, suppose that Premier Inn has 150 Rooms (90 of them are single and the remaining are double) and that the Forecasted Single Room Occupancy Rate is 80 % and the Double Room Occupancy Rate is 85 %.
Total Number of projected Single Rooms Sold per Year = 90 * 0.80 * 365 = 26,280 Rooms.
Total Number of projected Double Rooms Sold per Year = 60 * 0.85 * 365 = 18,615 Rooms
Daily per Room Indirect Expenses = £ 1,042,000 / (26,280 + 18,615) = £ 23.21.
Moreover, suppose that Premier Inn estimated the following daily per room Operating Expenses (i.e. Direct Expenses):
Frills Expenses (Single): £ 7.5
Frills Expenses (Double): £ 8.25
Staff Expenses (Single): £ 8
Staff Expenses (Double): £ 9
Laundry Expenses (Single): £ 6.5
Laundry Expenses (Double): £ 7.25
Total Single Daily per room Direct Expense = £ 7.5 + £ 8 + £ 6.5 = £ 22
Total Double Daily per Room Direct Expense = £ 8.25 + £ 9 + £ 7.25 = £ 24.5
Total Daily Single Room Expense = £ 23.21 + £ 22 = £ 45.21 (Hurdle Rate)
Total Daily Double Room Expense = £ 23.21 + £ 24.5 = £ 47.71 (Hurdle Rate)
Determining Rack Rate:
The answer found above is the minimum price of Single and Double rooms as to have no loss or profit from our operations! This condition is refereed to as the Break-Even price!
In order to find the rack rate (i.e. the maximum price potential guests can be charged), the hotel shall apply some of the above-mentioned methods:
Under this very method, hotels shall try to set a Multiplier, by which the Room Cost shall be multiplied, in order to come up with the hotel Room Rack Rate (for each room type):
Multiplier = 1 / (Desired Room Cost Percentage)
Desired Room Cost Percentage = (Forecasted Total Room Cost) / (Forecasted Total Room Revenue)
Suppose that Premier Inn's Management decided, prior to a certain price demand analysis, to have a Desired Room Single Cost Percentage of 75 % and a Desired Double Cost Percentage of 60 %.
ï‚· Single Multiplier = 1 / 0.75 = 1.33
ï‚· Double Multiplier = 1 / 0.60 = 1.67
ï‚· Single Rack Rate = £ 45.21 * 1.33 = £ 60.28
ï‚· Double Rack Rate = £ 47.71 * 1.67 = £ 79.52
Under this very method, an addition (or add-on) to the Cost of a Product will be applied to come up with the Single and Double Rack Rates.
Suppose Premier Inn decided to have a 25 % Mark-up on Room Costs for both Single and Double Rooms.
ï‚· Single Rack Rate = £ 45.21 * (1 + 0.25) = £ 45.21 * 1.25= £ 56.51
ï‚· Double Rack Rate = £ 47.71 * 1.25 = £ 59.64
Later, the hotel might adjust this figure to a whole number and communicate it as its List Price (for guest and accounting convenience!)
The most important handicap of the Cost Approach pricing is that it does not take into consideration how much Customers are actually willing to pay for the Hotel Services, and how other Hotels are actually charging for their Rooms.
B. Market condition approach:
ï‚· Under this very approach, management shall look at comparable hotels in the geographical market, see what they are charging for the same product, and "charge only what the market will accept".
ï‚· Some drawbacks of this approach are that it does not take into consideration the value of the property, and what a strong sales effort may accomplish. Last but not least, there is always subjectivity in coming up with sets of criteria against which hotel rooms can be compared and measured for similarity.
C. Rule of thumb approach:
ï‚· In this very approach, the rate of a room shall be £ 1 for each £ 1,000 of construction and furnishing cost per room, assuming a 70% occupancy rate.
ï‚· To illustrate suppose a 150-room hotel has costed £ 9,500,000 of Construction and Furnishing Costs. Therfeore, the cost per room is £ 63,333.33 which would mean that the price per room shall be £ 63.33.
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ï‚· This approach, however, fails to take into consideration the inflation term, the contribution of other facilities and services towards the hotel's desired profitablity, and assumes a ceratin level of occupancy rate.
D. Hubbart formula approach:
ï‚· This very approach considers operating costs, desired profits, and expected number of rooms sold (i.e. demand). The procedure of calculating a room rate is as follows:
Calculate the hotel's desired profit by multiplying the desired rate of return (ROI) by the owner's investment.
Calculate pre-tax profits by dividing the desired profit by 1 minus hotel's tax rate.
Calculate fixed charges and management fees. This calculation includes estimating depreciation, interest expense, preperty taxes, insurance, amortization, building mortgage, land, rent, and management fees.
Calculate undistributed operating expenses. This includes estimating administrative and general expenses, data processing expenses, human resourecs expenses, transportation expenses, marketing expenses, property operation and maintenance expenses, and energy costs.
Estimate non-room operating department income or loss, that is, F&B department income or loss, telephone department income or loss â€¦
Calculate the required room department income which is the sum of pre-tax profits, fÄ±xed charges and management fees, undistributed operating expenses, and other operating department losses less other department incomes.
Determine the rooms department revenue which is the required room department income, plus other room department direct expenses of payroll and related expenses, plus other direct operating expenses.
Calculate the average room rate by dividing rooms department revenue by the expected number of rooms to be sold.
ï‚· Doubles sold daily = double occupancy rate * total number of rooms * occupancy %
ï‚· Singles sold daily = rooms sold daily - number of double rooms sold daily
ï‚· Singles sold daily * x + doubles sold daily * (x + y) = (average room rate) * (total number of rooms sold daily)
ï‚· Where: x = price of singles; y = price differential between singles and doubles; x + y = price of doubles.
In all Computations done so far, the Room Price that we have found is what is called the Room Rack Rate (i.e. The Maximum Rate a Hotel can charge a Guest). Yet, most often, only Walk-ins (i.e. Guests without a Reservation) are charged a Rack Rate, which would mean that a big proportion of guests actually pay a Discount on the Rack Rate.
Discounting is a method used by Management to make their Products and Services attractive to Customers. This very method may differ according to seasonality, type of Customer, Market Segment, and Type of Productâ€¦
There is an important relation between Occupancy and Discount Percentage:
ï‚· Equivalent Occupancy = (Current Occupancy) * ((Rack Rate - Marginal Cost) / (Rack Rate* (1-Discount Percentage) - Marginal Cost))
To illustrate, suppose that an Occupied Single Room has a daily variable cost of £ 10 and that management are right now selling at Single Rack Rate £ 50 and managing to have Single Occupancy of 70 %. Suppose, furthermore that management decided to discuss the effect of a 10 % discount on Single Rack Rate on the eventual demand! And hence, whether to discount or not!
ï‚· In order not to be economically affected by the discount, the minimum Occupancy at that discounted price (i.e. at £ 45), shall be:
ï‚· Equivalent Occupancy = 70 % * ((£ 50 - £ 10) / (£ 50 * (1 - 10 %) - £ 10)) = 70 % * (40 / 35) = 80 %
ï‚· Management, shall at this very stage, conduct a feasibility study on the effect of that pre-determined Discount on Demand and if the effect proves to yield an occupancy which is more than 80 %, discounting can be applied. If, not than the discounting idea shall be discarded!
III- Other Pricing Techniques:
1. Market-skimming Pricing.
2. Market-penetration Pricing.
3. Optional Product Pricing.
4. Captive Product Pricing.
5. Product Bundle Pricing
Relation Between Cost Volume and Profit:
Cost volume profit is a form ofÂ cost accounting. Cost volume profit analysis is a technique that examines changes in profits in response to changes inÂ sales volumes, costs, and prices.Â The CVP analysis is performed to plan future levels of operating activity. The CVP analysis focuses onÂ prices of products, volume or level of activity, per unit variable cost, total fixed costÂ and mix of product sold. The cost-volume-profit (CVP) analysis helps an organization to understand the interrelationships among cost, volume, and profit. For example, it provides information on what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire.
The CVP analysis CVP analysis begins with the basicÂ profit equation.
Profit = Total revenue -Total costs
Costs are separated into variable and fixed categories and profit is expressed as:
Profit = Total revenue =Total variable costs -Total fixed costs
Contribution margin is defined the amount remaining from sales revenue after variable expenses have been deducted. It is the amount that covers fixed expenses and then to provide profits for the period. The relationships among revenue, cost, profit and volume is expressed graphically by preparing aÂ cost-volume-profit (CVP) graph or break even chart.Â AÂ cost-volume-profit graphÂ (or CVP graph) is a graph shows the relationship between total revenues and total costs.
ï‚·ï€ Where sales revenue is greater than total cost it means that profits are being granted.
ï‚·ï€ Where sales revenue is less than total cost it means that losses are being incurred.
ï‚·ï€ Fixed costs do not vary with output and are constant for a range of output produced.
They are incurred even when there is no output at the beginning of production. This is because they are costs that must be incurred to support manufacture such as machinery or a warehouse.
ï‚·ï€ The total costs line is a representation of the combined variable and fixed costs. This
is why at nil output it has a cost which represents fixed costs, and then as output
increases the total cost line varies with it and in parallel with the variable cost line.
ï‚·ï€ The margin of safety is the extra amount of sales that is expected to be generated
when the budget or actual sales is compared to the break even level of sales.
The profit volume chart is a summarisation of the break even chart, whereby the line represents total profit (sales less all costs). When the line rises above the horizontal axis it means that production is beginning to yield a profit, before this point it means that production is yielding a loss. The break even point where no profit or loss is being made is where this profit line intersected the horizontal axis.
1. Single product or single mix of products
2. Fixed cost, variable cost and selling price are constant
3. The level of production will equal the level of sales
The facts that could affect profitability: Cost Reduction can affect profitability of the hotel company.
The importance of cost reduction plans is related to the most common reasons why expenses must be cut in a business.
Need for increased profits
Improved competitive standing
Preserve company resources
Cost reductions can be achieved utilizing different approaches. A company can:
Reduce existing expenses
Eliminate unnecessary expenses
Modify business strategies which affect the types of business expenses
Replace higher expenses with lower expenses for same items