Pearson New International Edition International pcl tp indd 1

REVENUE MANAGEMENT
Calculate the 
hotel’s required 
ADR.
Forecast the number of rooms to 
be sold based on estimated 
occupancy.
Determine the total room revenue 
required to meet the hotel’s goals 
and obligations.
Calculate non-room income.
Calculate all operating costs.
Calculate all fixed expenses.
Calculate the hotel’s target profits.
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Step 7
FIGURE 4
Computation of the Hubbart room rate formula.
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the merits of this approach, which was introduced in the 1940s; however, even with
its limitations, it has remained helpful. Essentially, the rule states that for every
$1,000 invested in a hotel, the property should support $1 in ADR. Some propo-
nents feel the investment amount should include FF&E; most do not. Because the
rate is so closely tied to occupancy level, most proponents also believe a 70 percent
occupancy assumption (and appropriate management) is required for the formula to
be useful. Also, the computed rate must be increased proportionately if occupancy is
below 70 percent and decreased proportionately if it exceeds that level.
Few would argue that the costs of items such as the land and labor required to
build a hotel are the same in Manhattan and rural Georgia. However, advocates
defend this rule of thumb because areas in which building or purchase costs are
higher tend to be the areas where ADRs can also be higher.
To illustrate the rule’s use, assume that an investor is considering the purchase of
a 117-room, limited-service hotel for $6 million. The $1 per $1,000 rule would be
computed as follows:
$6,000,000
117
$1,000 
$51.28
Purchase price
Number
$1,000
Rate to be
of rooms
achieved
Assume also that this buyer projects a 60 percent (not 70 percent) occupancy
rate. Thus, the occupancy rate projected is 14.3 percent lower than the rule’s standard
([70 percent 
60 percent] 
70 
14.3 percent), so the rate to be achieved would
be increased by that amount as follows:
$51.28
.143
$51.28
$58.61
Rate to be 
Adjustment
Rate to be 
Adjusted rate
achieved achieved to be achieved
The rate computed using the $1 per $1,000 rule does not become the hotel’s
rack rate; rather, it is the hotel’s ADR. In this example, the hotel’s owner may estab-
lish a rack rate of, for example, $89 per night. However, the owner would seek an
ADR of $58.61 after all rate discounts. Few sophisticated investors would use the
$1 per $1,000 rule exclusively to evaluate the feasibility of a hotel purchase. The rule
does, however, promote the tendency for hotel buyers to discuss selling prices in
terms of a hotel’s cost per key, which is a mathematical variation of the $1 per
$1,000 rule.