Services quickly drive up costs. Added to this is the enormous competition on the market. But guests are also becoming more and more demanding when it comes to choosing hotels. They compare amenities and prices before booking. That is why it is important to know exactly the price floor for each individual room category. The price floor formula makes the calculation easy.
- Calculate price floor
- Price floor formula
- Calculating the price floor using a practical example
- Fixed costs per hotel room
- Variable costs per hotel room
- Price floor hotel
Calculate price floor
If you want to be successful with your hotel in the long run, you have to know the needs of your target group exactly and react flexibly to changes. However, it also depends on the expertise in the area of revenue management. In addition to the usual KPIs such as RevPar, ADR or Occupancy, this also includes the calculation of the price floor for hotel rooms.
The formula for the lower limit calculates the minimum price per room category in order to cover costs. It is made up of the share of fixed and variable costs and is offset against the average occupancy rate. Calculating the price floor helps to cover costs and determine profits. Do you know the price floor? Do you know the respective fixed and variable costs per room?
The fixed costs of a hotel room include:
- Energy costs
- Capital costs
- Insurance and fees
- Taxes and duties
- Repair and maintenance costs
After the determination of the fixed costs, the variable costs per hotel room follow. The variable costs consist proportionally of:
- F&B (breakfast)
- Guest Supply
- Energy costs
After identifying the costs, you can calculate the price floor:
The price floor hotel is calculated as follows:
Fixed costs/room + variable costs/room = price floor hotel
Calculating the price floor using a practical example
A hotel has 100 rooms. The fixed costs of the hotel are 1,200,000.00 EUR. The variable costs are 900,000.00 EUR. The average occupancy rate is 80%. Thus 29,200 rooms are sold. The following calculation basis results from the above data.
Fixed costs per hotel room
1,200,000.00 EUR / 29,200 occupied rooms = 41.10 EUR
The fixed costs per hotel room are 41.10 EUR at an average occupancy rate of 80%.
Variable costs per hotel room
900,000.00 EUR / 29,200 occupied rooms = 30.82 EUR
The variable costs per hotel room are 30.82 EUR at an average occupancy rate of 80%.
Price floor hotel
41.10 EUR + 30.82 EUR = 71.92 EUR
The lower limit for a hotel room is understood as net value without VAT.
The hotelier of the example hotel should not sell his rooms below 71.92 EUR per night based on the calculation. This is the only way for the hotelier to work economically in the long run. The calculation is usually followed by further considerations of how to make a profit.
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The lower limit hotel plays an important role in revenue management, because the formula determines, simply and clearly, how much turnover per room must be generated as a minimum in order to cover costs. Thus, this is the absolute minimum value and should only be taken as the daily rate in exceptional cases with regard to price optimisation. The price floor refers only to the value of the rooms actually sold.
The formula thus includes the occupancy of the rooms. Thus, the formula ensures a price that can actually be earned. The share of fixed costs per room remains unaffected by single or double occupancy. The fixed costs remain constant no matter how many people stay in a hotel room. They tend to increase due to higher personnel expenses or an increase in fees. Fixed costs should therefore be reviewed by the hotelier at regular intervals by comparing offers. If the prices for insurances or the prices of the advertising agency increase, the hotelier should consider alternatives.
In this way, the high proportion of fixed costs can be regulated and regularly adjusted. As soon as the fixed costs are covered by the accommodation turnover for one month, the hotelier has more leeway for special prices. These are particularly interesting for group enquiries. The same applies to the development of special offers, for example at Christmas or New Year’s Eve, the time of year with the highest bookings. The lower limit is thus a component in yield management and the lower limit of dynamic prices.