For years, the hospitality industry has focused heavily on top-line metrics such as Average Daily Rate (ADR), Occupancy Percentage, and Revenue Per Available Room (RevPAR) to gauge hotel performance. While these metrics are crucial for understanding revenue generation, they do not paint the complete picture of a hotel’s profitability. True profitability encompasses a broader spectrum of factors, including cost management, operational efficiency, and strategic planning. This article delves into the various aspects contributing to hotel profitability beyond revenue generation.
Top-Line Metrics: ADR, Occupancy Percentage, and RevPAR
ADR, Occupancy Percentage,and RevPARare metrics used for measuring a hotel’s top-line performance. While these metrics are essential for understanding revenue generation, they do not account for the costs associated with generating that revenue or indicate profitability. This is where deeper analysis is required, which couples the revenue generation metrics with expense analysis to get a view of the effectiveness of operations.
Commission Costs and Distribution Strategies
One of the significant expenses that hotels incur is commission costs paid to Online Travel Agencies (OTAs) and travel agents. These commissions can range from 10% to 30% of the booking value, significantly impacting the hotel’s bottom line. Effective distribution strategies can help mitigate these costs. Here are some specific examples of effective strategies implemented:
- A hotel implemented a commission program for front desk staff, upselling room upgrades and additional services to guests. By offering them small commissions for each successful upsell, there was a significant increase in revenue for these services with lower costs.
- A resort introduced a progressive commission structure for reservation agents. Higher commissions were generated for bookings during peak periods and longer stays, which incentivized the agents to focus on high-value bookings, increasing occupancy and overall revenue.
- A hotel chain worked with third-party sales representatives and paid net commissions after accounting for lead generation fees. This helped ensure the representatives were motivated to bring in high-quality leads, generating better conversion rates and increased revenue.
Housekeeping Services and Labor Costs
The frequency of housekeeping services is another critical factor affecting hotel profitability. Traditionally, hotels offered daily housekeeping services, but this practice has been re-evaluated. Offering housekeeping on request or every few days, utilizing flexible housekeeping schedules, allowing guests to choose the frequency of housekeeping services, or offering incentives for foregoing room cleaning services can reduce labor and supply costs without compromising guest satisfaction. Reducing the number of daily cleanings can lower operational costs, allocate resources more efficiently, and increase profitability.
Labor costs are often the most significant expense for hotels. Efficient labor management is crucial for maintaining profitability. This includes optimizing staff schedules, cross-training employees to perform multiple roles, and leveraging technology to automate routine tasks. For instance, self-check-in kiosks and mobile apps can reduce the need for front desk staff, while housekeeping management software can streamline room cleaning schedules.
Here are some specific examples of effective strategies implemented to assist in reducing labor costs:
- A hotel chain implemented innovative scheduling software that aligns staffing with real-time occupancy data. This helps ensure that hotels are not understaffed during high-occupancy periods or overstaffed during low-occupancy periods, reducing payroll expenses.
- A hotel automated introduced automated check-in kiosks and mobile check-in options, as well as automated night audit reporting and data aggregation tasks which significantly reduced labor hours.
- A resort outsourced laundry services to a third-party provider, which reduced the need for in-house laundry staff. The agreement with the provider included performance measurements to make sure that high-quality service was ensured, which saved costs while maintaining guest satisfaction.
Energy Costs
Energy costs are a substantial part of a hotel’s operating expenses. Implementing energy-efficient practices and technologies can lead to significant savings. For example, using LED lighting, installing smart thermostats and motion sensors for lighting, optimizing HVAC systems, and investing in energy-efficient appliances can reduce energy consumption. Some hotels have reported over 20% reduction in energy usage and substantial cost savings by implementing these measures. Additionally, sustainability initiatives such as solar panels or energy management systems can lower energy costs and carbon emissions and enhance the hotel’s environmental credentials and profitability.
Comprehensive Cost Management
Understanding the cost structure associated with hotel operations requires a detailed analysis of various expenses. Here are some key metrics to consider:
- Labor Costs per Occupied Room: This metric helps understand the staffing cost relative to the number of rooms occupied. It includes wages, benefits, and other related expenses. Reductions in housekeeping frequency can significantly affect this metric.
- Cleaning Supplies and Amenities Costs: These costs can vary based on the level of service provided and the type of guests staying at the hotel. Monitoring these expenses helps identify areas for cost savings. Similarly to the labor cost metric above, reducing housekeeping costs can improve this metric.
- Travel Agent and OTA Commissions: As mentioned earlier, these costs can significantly impact profitability. Tracking commissions as a percentage of room revenue provides insights into the effectiveness of the hotel’s distribution strategy. Implementing programs to decrease commissions and increase revenue can quickly change this metric positively.
- Energy Costs per Available Room: This metric helps understand the hotel’s energy efficiency . It includes costs related to heating, cooling, lighting, and other utilities. Implementing energy efficiency measures can have a significant positive impact.
- Gross Operating Profit per Available Room (GOPPAR): This metric provides a comprehensive view of the hotel’s profitability by considering revenue and expenses. It is calculated by subtracting operating expenses from total revenue and dividing by the available rooms. If small changes were made in every expense category above, GOPPAR could increase quickly and significantly.
- Gross Operating Profit Margin: This metric indicates the percentage of revenue that remains after covering operating expenses. It is calculated by dividing gross operating profit by total revenue. All increases in revenue and decreases in expenditures increase profit margin.
- Flow-Through Percentage: This metric measures the efficiency of converting additional revenue into profit. It is calculated by dividing the change in gross operating profit by the change in total revenue. This is a good measure of the success of programs to increase revenue and if that revenue increase is profitable.
An analysis of these types of metrics can quickly provide a picture of cost-saving and revenue-generating measures to determine their profitability.
Cost structures are not static and should evolve to reflect changes in the industry. Guest preferences and behaviors change over time, and hotels must adapt their cost management strategies accordingly. Hotel profitability is about more than just generating revenue. It requires a holistic approach that includes effective cost management, strategic planning, and adaptability to industry changes. By focusing on revenue and expenses, hotels can achieve sustainable profitability and deliver more excellent value to guests and owners. Understanding and optimizing key metrics such as ADR, Occupancy Percentage, RevPAR, and GOPPAR, along with managing commission costs, housekeeping frequency, energy costs, and labor costs, are essential steps in this process. In the ever-evolving hospitality industry, staying flexible and data-driven is crucial for long-term success.
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For more information on this topic, please contact a member of Withum’s Hospitality Services Team.
