ECONOMICS: Economic Model

Revenue Drivers

·         Do I have a wide variety of revenue drivers or only a few?

The venture will have one major revenue driver, the sale of guestrooms. 

·         Are my prices negotiable?

As is normal practice, prices are negotiable based on volume of purchase

·         How often do I change my prices? Is it frequently (hourly, daily, weekly, or biweekly)? Moderately frequently (monthly, bimonthly)? Or rarely (semiannually, annually or longer)?

Pricing of guestrooms is dynamic and are modified based on demand.  Thus, prices will change daily

·         Do I use bundling, market segmentation pricing, loyalty schemes, etc?

There will be bundling, and as such, guestrooms will be sold as packages when conditions warrant such bundling. 

Margins

·         Are my margins relatively low (e.g., a grocery store) or high (e.g., a jewelry store)?

Margins in the lodging industry range from low to moderate, especially if intermediary costs are high. 

·         Do I offer highly customized services which allow me to charge significantly higher prices?

The venture will offer customization of services for which higher prices will be charged. 

Volumes

·         Do I have significant capacity constraints?

There is capacity constraint.  The hotel will have 100 guestrooms and as such, will utilize revenue management techniques, a common practice for ventures that have capacity constraints. 

·         Am I a relatively high, medium or low volume business?

The venture will be a medium volume business. 

·         What is the quantity of items sold relative to the competition over a specific time period?

The quantity of rooms sold will be similar to the venture’s primary competition. 

·         What is the average value of a transaction in my business and how does that fare against competition?

The value of each transaction will vary based on existing market demand.  However, since there will be a high level of customization, the venture should surpass its competition. 

·         Do I offer highly customized services which decreases the volumes I can process, or are my goods and services very standardized allowing me to increase my business’s volumes?

Customization of services offered will increase volume. 

  

Cost Structure

·         Proportion of fixed and variable costs

Expenses	Percentage of expenses fixed
Rooms	60.0%
Administrative & General	70.0%
Information Systems	90.0%
Security	80.0%
Marketing	70.0%
Property Operations & Maintenance	70.0%
Energy Costs	90.0%
Property Tax	100.0%
Insurance	100.0%

Do I outsource so as to convert certain fixed costs into variable costs?

The convert some fixed costs into variable costs, I intend to outsource cleaning services. 

Revenue Drivers and Profit Margins

The primary source of revenue for the proposed hotel is the sale of its guestrooms.  Revenue management strategies will be used to establish standard daily rates.  Another stream of income will be derived from customers personalizing service.  Revenue will also be derived from leasing of food and beverage, meeting and spa space.  Rental income will be generated on a monthly basis.  For the purpose of financial analysis and projection, standard projected room rates will be used for analysis.    Appendix A provides a summary of financial projections.

Revenue Projections-Assumptions

1. Based on the current market data, the hotel projects: occupancy percentage of 68% in the first year of operations and will grow by 2% in the first two years and stabilize at 75%.
2. The calculations assumes an inflation rate of 2.2%.  Hence, the initial ADR of $140 is adjusted based on this rate.   This rate is also the conservative rack rate.  Table 4 below provides a summary of projected performance. 
3. Based on industry standards, rental income is projected at 3.5% or rooms revenue.
4. Calculations are based on an opening or base year of 2017

 Five year rooms revenue projections ($ amount in 000)

	2017	2018	2019	2020	2021
Occupancy	68%	70%	72%	75%	75%
ADR	$140	$143	$146	$149	$152
Revenue (000)	$3,597	$3,782	$3,974	$4,228	$4,321
Net Income	$1,557	$1,680	$1,805	$1,983	$2,026
Profit Margin	$43.3%	44.4%	45.4%	46.9%	46.9%
Revenue per Occupied room	$144.92	$148.02	$151.22	$154.45	$157.84
Cost per occupied room (VC)	$33.20	$33.35	$33.49	$33.42	$34.16
Contribution Margin (CM) per room	$111.92	$114.67	$117.73	$121.03	$123.68
CM Ratio	80%	80%	81%	81%	81%