Hotel Rack Rate Calculator (Hubbart Formula)
Total costs (wages, utilities, maintenance, supplies, etc.)
The net income you want to generate after expenses
Income from F&B, parking, events, etc.
Total inventory of rooms available in the hotel
Estimated percentage of rooms sold over the year
Total Revenue Required:
Room Revenue Needed:
Est. Rooms Sold (Annually):
Required Rack Rate (Per Night):
How to Calculate Rack Rate: The Ultimate Guide for Hoteliers
Setting the correct pricing strategy is one of the most critical decisions in hospitality management. The Rack Rate represents the standard price of a hotel room before any discounts, corporate rates, or promotional offers are applied. It serves as the baseline from which all other pricing strategies are derived.
While many hotels adjust prices dynamically based on demand, calculating a solid foundational Rack Rate is essential to ensure operational costs are covered and profit targets are met. The most industry-standard method for this calculation is the Hubbart Formula.
What is the Hubbart Formula?
The Hubbart Formula is a "bottom-up" approach to pricing. Instead of looking at what competitors are charging (market-based pricing), it calculates what you need to charge to cover expenses and achieve a desired Return on Investment (ROI).
The formula works backward from your financial goals to determine the Average Daily Rate (ADR) required to meet them.
Step-by-Step Calculation Logic
To calculate your ideal Rack Rate manually, follow these steps:
- Determine Annual Operating Expenses: Sum up all costs required to run the hotel for a year (salaries, utilities, maintenance, administration, laundry, etc.).
- Determine Desired Profit (ROI): Calculate the return you expect on the owner's investment. This is added to the expenses because it is treated as a required outcome.
- Calculate Non-Room Revenue: Estimate income from other streams such as the restaurant, bar, spa, conference rooms, or parking.
- Calculate Room Revenue Required:
(Operating Expenses + Desired Profit) – Non-Room Revenue - Estimate Projected Occupancy: Determine the total number of rooms available per year (Total Rooms × 365) and multiply by your expected occupancy percentage.
- Calculate Rack Rate: Divide the Room Revenue Required by the Projected Number of Rooms Sold.
Example Scenario
Let's apply this to a realistic scenario for a boutique hotel to see how the numbers work.
- Total Rooms: 50
- Annual Operating Expenses: $1,200,000
- Desired Profit: $300,000
- Non-Room Revenue (F&B): $150,000
- Projected Occupancy: 75%
The Math:
- Total Required Revenue: $1,200,000 + $300,000 = $1,500,000
- Room Revenue Needed: $1,500,000 – $150,000 = $1,350,000
- Total Room Nights Available: 50 rooms × 365 days = 18,250 nights
- Expected Rooms Sold: 18,250 × 0.75 = 13,688 nights
- Rack Rate: $1,350,000 / 13,688 ≈ $98.63
In this example, the hotel must set a base Rack Rate of roughly $99 to meet its financial goals, assuming a 75% occupancy rate.
Why Calculating Rack Rate Matters
Even in an era of dynamic pricing algorithms and Online Travel Agencies (OTAs), knowing your calculated Rack Rate is vital for several reasons:
- Profitability Baseline: It establishes the "floor" for your pricing strategy. If you consistently sell below this rate without higher volume, you may miss profit targets.
- Discount Strategy: When negotiating corporate rates or offering seasonal discounts, you calculate these as a percentage off the Rack Rate.
- Financial Forecasting: It helps investors and managers understand the feasibility of the business model before the fiscal year begins.
Factors That Influence Your Final Price
While the calculator above gives you the financial requirement, the actual market price may vary based on:
- Competitor Rates: If your calculated rate is $150 but neighbors charge $100 for similar quality, you may need to reduce expenses or accept lower ROI.
- Seasonality: Your Rack Rate is often the "High Season" price, while off-peak prices are lower.
- Room Types: The calculated rate is an average. Suites will be priced higher, and standard rooms lower, to average out to the calculated figure.