The External Pricing Decision: Hubbart Formula

The uses of Hubbart formula can have certain advantages and disadvantages. The Hubbart formula can establish the price over a period of time or a wide range of establishments. However, it requisite rate of return on owner’s capital employed, and works back to the total revenue that needs to be generated from accommodation. In addition to the required data, it also calls for the “full cost,” that is all the variable costs plus some share of fixed cost, and hence it is in fact a cost based pricing through the external pricing decision.

Definitely, the company would like to attain what they are yearning for, nonetheless, this kind of approaches may appear to be too subjective and arbitrary, and it is acting as a method of allocating the fixed costs as well. Apparently, tourism is a seasonal industry and always influences by the global changes; therefore the occupancy of the hotel may vary according to different seasons and different incidents.

Such as, a few months ago, there was a terrorism in Bali, after the Bali Blast, the travelers are not willing to travel to Bali since Bali seems to be a considerable dangerous place for them to travel. As a result, the occupancy of the hotels in Bali decreases significantly. Furthermore, we have to concern about the location of the hotel too, if it situates in Britain – Brighton (the southern part of England where it is along the coastal area where it is a seaside resort), then the summer time will be the peak period of tourism, as a result, the seasonal prices should incline as well.

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As long as the hotel does not concern about this factor, then they will suffer from a great loss since there will be less visitors during the winter, and hence the occupancy within that period will be relatively lower. It appears that the occupancy that we use in the Hubbart formula is the average rate, yet it will amend noticeably in different months, so it is necessary to anticipate the monthly occupancy. It is certain that the demand for the tourism industry (e. g. hotel’s bedrooms) is always elastic, so it is unlikely that the tourism operating sectors (e.g. accommodation sector – hotel) to set the prices according to the cost of the goods and services produced.

As a result, it is essentially important for the company to realize the significance of charging the price that “the market will bear,” instead of charging the price according to their wishes. Thus, the full cost techniques can then applied to see if this obtainable price covers the full cost of the product or services, and how much profit can be made at this price. Last but not least, it is often said that pricing decisions are extremely complex.

In addition to the incorporation of the basic cost and financial data, the Star Hotel should also add in other internal and external considerations, including macro-economic, environmental, political and social factors and also it should take the other factors – non-financial and non-quantifiable nature (such as behavioral factors) into their concerns and considerations. To put it briefly, if the above disadvantages can be avoided, it may escape from the inefficiencies that automatically built into the costing system and the uncompetiveness and ongoing to the track of success.

Pricing is closely related to the decision that managers in both profit-making and non profit-making sectors. Providing that the total revenues are not in excess of total expenses the firm must subsequently go into liquidation. Overwhelmingly, there are defined rules of pricing. In my point of view, the Star Hotel can either use the Hubbart Formula or Market-based Pricing, which is one way of the external pricing methods as well. It implicates that the price will be charged for goods and services offered to the travelers outside an organization on market prices.

It is because the goods and services produced by the Star Hotel are in reality sold in a highly competitive market since there are other suppliers offering identical or near-identical products. Consequently, the suppliers will be competing fiercely in respect of price, quality, reliability, and services. Undoubtedly, the Star hotel is one of the participants in the tourism industry, and we can identify it as a tourism-operating sector. Moreover, the demand for the tourism products is actually elastic, meaning that the lower price is offered, the more units will be sold.

By using this method, Star Hotel should firstly categorize its target market and evaluate its position in the market. Afterwards, the price can be set. Overwhelmingly, different markets will have its own price since dissimilar demands occur and also hotels have different abilities, such as some are better in services and some are famous for its quality products. Then an interpretation of the sales according to the source of reservations and category of client is necessary for a further review since it will disclose the standard achievable room rate.

As a result, it is indispensable for the Star hotel to base its price per room on what is being charged in the market. Or else, if it charges more than the market price, their sales will be reduced. On condition that it charges less than the market, its sales will increase in short term but the market will quickly adjust to a lower level of selling prices. Furthermore, the market conditions largely determine a supplier’s selling prices; it is particularly significant to ensure that tight control is exercised over costs.

Otherwise, the gap between total sales and total costs (i. e. the profit) will be insufficient to guarantee an adequate return on capital employed. In case, external price determination is concerned, including both market oriented and cost oriented methods, we can generalize by arguing that prices tend to be governed by the market. And so it is important to ensure that unyielding management is exercised over costs, as there will normally be little opportunity to raise the selling price.