It will be a good practices to know . Staying on top of hotel price optimisation 3.2. Optimize labor scheduling and staff training Labor cost is a significant proportion of a hotel's operating expenses: roughly 50 percent, on average. This is because their RevPAR ($71) was lower than their CostPAR ($89), which means that even though they had a better bottom rate, they still lost money due to low occupancy rates. FIXED COST A property like Hotel C practices proper revenue management, which includes an enhanced online reputation. That way, if an employee is on leave, other staff can take on their duties without having to incur extra costs to hire an extra employee. b.) laundry, dry cleaning), especially those that dont impact the hotels operations directly (e.g. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); HOTELIER LIFE. If you would like a copy of any of the following send an email todavid@hotelfinancialcoach.com, Copyright Exceed Global Learning Pty Ltd 1999 2023. You can also use the software to collect data on guests and provide a personalized experience. This is a very different question than What are costs per room occupied? Lets look at this question first because I think it will help clear up some confusion. If you look at Hotel B, you can see that their GopPAR (Gross operating profit per available room) was still negative despite having a higher bottom rate than Hotel A. Got a story to share? Below is an example of how hotels can quickly and easily assess their BEP in terms of sales and occupancy and discover what occupancy they should strive for. Have you been wondering how to increase spa revenue in your hotel when there are high operational costs, regular maintenance and extra personnel to 6 reasons your hotel revenue is going down. To find all your costs, run through your credit card statements and other places where your spend is documented. Learn more in our Cookie Policy. Marketing expenses can burden a business, especially if the cost of commissions is high. This is a rate that is below the forecasted CostPAR of $75 yet it's above the variable costs of $12. Since the rack rate is the highest rate the room sells for during peak times and the bottom rate is the lowest, revenue management means your hotels rack rate can be extremely high. However, dont take this as a suggestion that you should sell rooms only $1 above the variable costs so you fill the room. David is a Certified Hotel Accounting Executive through HFTP and a Certified Professional Coach with CTI. Quite simply put, one revenue manager told me his cost to take a room in his hotel in NYC was $290. Variable Costs On the other hand, variable costs will change to reflect occupancy and business volume. The software will help you to improve efficiency and utilize real-time reporting to schedule staff. It is still unclear whether room expenses are expected to increase or decrease as a result of COVID-19. https://lnkd.in/e45nRnFK. The costs of running and maintaining hotels can either be fixed or variable. At Hotel Financial Coach I help hotel leaders with financial leadership coaching and workshops. Yet, you know thats not how hotels work. If youre used to pricing rooms based primarily on demand, its an entirely different and more profitable approach. Therefore, you should improve the onboarding experience and benefits to reduce turnover. Number of classified star hotels India 2022, by category. This will give you the average variable cost per occupied room. I significantly improve individual and team results with a proven return on investment. Variable costs are expenses that vary directly with the number of occupied rooms in a hotel. The demand for today has been strong but in the last week we have been up and down around the +10 mark. Here you can manage your preferences regarding cookies: Essential cookies enable core functionalities of the website such as marking your data inputs, network management and accessibility. As the hotel industry climbs out of the deepest and most prolonged recession experienced in recent history, these findings can act as a guideline of when to introduce additional expenses for management. Here are the facts of this rooms only operation in New York City. Lets look at the major components of the cost to take those last few rooms. Through calculating a hotels BEP, hotel asset managers are able to determine when is the optimal time for a hotel to reopen or if it may be better to remain closed until higher occupancy levels are attainable. The average daily rate for a hotel in the market is forecasted to be about 350 in the summer 2020. For the sake of simplicity, we assume the sample hotels have rooms as only revenue and cost center. If you keep a solid base and play with scheduling in advance, many events can be covered by the existing hotel staff. Advertising and marketing costs: Your marketing expenses will increase when bookings are high due to commissions. With these variables in hand, tally them for the year and divide by number of rooms. In Revenue Team by Franco Grassos experience, statistically speaking, in a 3- or 4-star hotel, the ideal variable cost should range between $10 and $20. David Lund is The Hotel Financial Coach, an international hospitality financial leadership pioneer. The reduction in rooms occupied during the year was dramatic, but managers were unable to cut expenses at a commensurate amount. Some of the recommendations to reduce utility expenses include: On-site software can increase overhead costs due to software licences and recurring maintenance fees. Fortunately, cloud-based solutions like Mews PMS software can trim your costs significantly by centralizing all the services. Using energy-efficient bulbs and installing occupancy sensors to ensure they turn off when guests leave the room, Staying on top of maintenance for example, faulty HVAC increases energy consumption by 15%, On-site software can increase overhead costs due to software licences and recurring maintenance fees. Housekeeping costs if you use an outsourced service. Ultimately, tracking variable costs is an important aspect of managing a hotels finances and ensuring profitability. Front desk, guest services, reservations payroll. 10 Tips to Improve Your Housekeeping Operation, 19 Feb 2021 First, youll want to consider your hotels fixed costs. Fixed cost is often called overhead. local OTAs). Since Hotel A has lower costs, they can charge less and that can make it challenging to remain competitive during the low season. Its not just about looking at the numbers: its about understanding why those numbers exist in the first place. This makes it the first target when you are trimming hotel costs. Like fresh fruit, rooms that go empty tonight spoil, and you cant recover that revenue. interim staff providers). In the example above, its $41. As the first news aggregate for the hotel industry, Hotel-Online is the industrys must-read daily news source for everything hotel curated for busy professionals. In this article, we will discuss what variable costs are, how they are calculated, and how they can be managed to increase profitability. You can calculate the CostPAR on a historical basis annually and use that data to forecast next years budget. How do you limit operating costs and ensure long-term benefits to the hotel? You never want to create fixed schedules for hourly employees. Hostel revenue management is all about selling as many rooms and spaces as possible at the highest possible price. Explore your hospitality hub. Accounting & Bookkeeping | Expenses By LLoyd Lofton Welcome, this is LLoyd Lofton. All that is needed is a basic profit and loss statement that excludes the hotels occupancy levels as this data is the most difficult to estimate during uncertain times. Your future guests will accept a higher rate when your hotel scores high. The important thing to know is, this balance between variable costs and bottom rates is not only working at specific times of the year with careful analysis. He authored an award-winning workshop on Hospitality Financial Leadership and has delivered it to hundreds of hotel managers and leaders. Automation is the future (and the present) of the hotel industry. This has a lot of variables and doesn't work for everyone. Key insights. It is the right time to clean up this part of the hotel business. When the variable costs are higher, there can be problems of cost rationalization. All the costs for the following under this scenario are fixed. In the hospitality industry, choosing the right metrics and carefully tracking them can help you as the hotelier or hotel manager to understand how your hotel is performing, compare it with your competitors, and possibly find the weak points and opportunities for improvement. Managing variable costs is crucial to increase profitability and remain competitive in the hotel industry. Know there is a balance between building the base, yielding the inventory in the largest demand period, and selling those last rooms more often. For example, if a hotel notices that it is spending more than expected on energy, it can investigate ways to reduce energy consumption and lower those costs. This dynamic gives way to a variable expense category that is not just tied to number of people employed within the department, but to man-hours utilized. Exhibit 2 Fixed and/or Variable Breakpoint Occupancy for Select Labor Expenses. 1. Additionally, if a hotel is overspending on food and beverage, it can investigate ways to lower food costs or reduce waste. That means they dont change significantly whether your hotel is flourishing or struggling to stay afloat. Yield management systems use sophisticated algorithms to analyse data such as occupancy levels, booking patterns, and competitors rates to determine the optimal room rates. This is a very different question than: What are costs per room occupied? Lets look at this question first because I think it will help clean up some confusion. the cost associated with selling a room is low. Many potential guests filter their search results by score. David coachs hospitality executives and delivers his Financial Leadership Workshops throughout the world, helping hotels, owners and brands increase profits and build financially engaged leadership teams. One way to manage variable costs is through cost control measures. Hotel Demand Curves. A Barcelona-native with a true passion for hospitality, Albert has experience across hotel management, sales and marketing, revenue, customer service and more. Its a science focused on profit maximization. Non-operating expenses relate to financing costs, such as interest on loans, investment expenses and taxes. Choose a solution to find out more, Hospitality events, insights and inspiration, Everything from industry trends and hotelier interviews to product releases and events. How To Do A Hotel Break-Even Analysis - Catala Consulting You have to match the costs to demand to avoid overstaffing or understaffing. This means that guests enjoyed their stay here more than any other hotel (based on reviews), and hoteliers could generate more revenue from each guest than any other hotel (based on other metrics). For instance, they can determine costs associated with hiring and whether it is proportional to the income generated. However, it does not tell us the real variable cost to take those last few rooms. Unfortunately, fixed costs cannot reflect your hotels productivity because you must continue to pay them regardless of the performance. These cookies allow a website to remember choices you have made in the past, like what language and currency you prefer, remember your name and email and automatically fill forms. Here are four important strategies we've been able to implement at White Lodging using cutting-edge solutions provided by UniFocus. Revenue management is the science of increasing your profitability every year and requires data from all departments. How it leaves the kitchen is where the cost sits on the profit and loss a. To determine this we must first understand the nature of the fixed expenses. However, monitoring the variable expenses can maximize productivity and improve financial health. The money you need to keep the lights on and run day-to-day operations is the business operating cost. Sometimes, hoteliers think about unsold rooms when rooms are empty. 2023 EHL Hospitality Business School, What's Included in Hotel Operating Cost? In the above-simplified budget for this 295-room hotel, we can see all the expenses on an annualized basis is just north of $24 million. Compare RevPAR (revenue per available room) to CostPAR (cost per available room.) When generating gross revenue numbers, you should deduct operating costs from the income. The word "fixed cost" and "variable costs" in the hotel industry operation are been used to distinguish between the costs that have a direct link to the hotel occupancy and those have no direct link or connection to the occupancy or business. Let's say your variable costs are $750 (which is $150 per room . These can be contrasted with fixed costs that aren't easy to scale back in response to business conditions. Fixed costs are often confused with static or unchanging expenses. Some of the fixed costs in hotels include: You can spread out fixed costs to allow for economies of scale. Is the RevPAR higher on a per unit basis? Mews has a comprehensive platform designed for your specific business needs. By monitoring your occupancy levels, you can ensure that your hotel is fully booked during peak seasons, which will reduce your variable costs per occupied room. If your property is losing large amounts of money through avoidable expenses, you need to take proactive steps to control costs. Make sure your schedules reflect the day-to-day variations in business volume. While they had the lowest CostPAR, they also had a lower annual ADR and RevPAR vs. Hotel C which means they lost money compared to other hotels in this area. Moving beyond the 60% occupancy level necessitates additional personnel to perform the administrative functions of the hotel. The x-axis plots the occupancy level, and the y-axis plots the corresponding expense level. Undistributed departmental other costs include office supplies, credit card fees, guest loyalty programs, supplies to maintain the property, etc. Rather, revenue managements goal is to sell the rooms at the best possible price daily. 4.1. What is Revenue Management? When expanded it provides a list of search options that will switch the search inputs to match the current selection. Hotel industry in India - statistics & facts | Statista Because hotel management wants to be certain that occupancy declines are permanent and not waste training resources, some portion of these so called variable expenses actually are fixed to a point along the occupancy continuum, and likewise some of expense categories traditionally thought of as fixed are indeed variable at certain occupancy levels. They also had lower reputation than Hotel A, which means that guests werent enjoying their stay as much as those who stayed at Hotel A. Leasing Sales Funds Professionals STR Fixed and Variable Hotel Expenses As the hotel industry climbs out of the deepest and most prolonged recession experienced in recent history, these. The real impact is an additional profit of the $210K, which adds an additional $2.6 million in asset value using a very modest capitalization rate of 8: (8/100 = 12.5), therefore 12.5 x 210,600 = $2,632,500. The fundamental problem with this line of thinking is the assumption your hotel will reach 100% occupancy daily at that price or above. David speaks at hospitality company meetings, associations and he has had several financial leadership articles published in hotel trade magazines and he is the author of two books on Hospitality Financial Leadership. This example shows that when a Bottom rate exceeds the CostPAR, it does not mean the hotel is profitable and doesnt reflect a better ADR and RevPAR than other hotels. Temporarily close down low-traffic areas of the hotel. As guest counts decline, the shifts of the existing employees are reduced, or in the case of a prolonged occupancy deficiency, eliminated altogether. Hoteliers rely on high-quality customer services to succeed. For example, in the case of a cancellation, the hotel could offer the guest the option to rebook at the same hotel within one year. First, you need to track energy consumption to discover creative ways to slash costs. In this course, we will: Understand the impact of variable costs on business operations Learn effective strategies to optimize variable costs Explore real-world case studies and best practices By . Getting started: hotel cost control and analysis. This exposed the fact that many of the rooms department costs are more fixed than variable. In addition to setting the overall strategy, management should also be involved in implementing cost-saving measures. Hotel Revenue Management: Boost Your Hotel's Topline Revenue with In this article, we will discuss what variable costs are, how they are calculated, and how they can be managed to increase profitability. He has held positions as a Regional Financial Controller, Corporate Director and Hotel Manager with Fairmont Hotels for over 30 years. Then guests leave poor reviews, and your hotel loses reservations and, thus, revenues. Once variable costs have been tracked, hotels can use the data to make informed decisions about how to reduce expenses. Below are the key areas to focus on when establishing your BEP. Its a completely free guide which is packed with top tips. This could be entire floors and public spaces that are not utilized due to social-distancing measures, or specific F&B outlets. When determining your services' pricing strategy, you need to understand the operating costs implication to ensure your revenue can cover all the expenses. This makes for a minimum $94 rate for Hotel B. Thats roughly $5 over the CostPAR. Contrary to historical beliefs, we found undistributed departmental expenses to be highly correlated with the number of guests staying in the property and, therefore, largely variable. By conducting a thorough analysis of utility costs, the hotel can find areas where costs can be reduced by employing more energy-efficient automation technologies, such as light timers and LED light bulbs. Its easy to calculate CostPAR, and when you compare it to RevPAR, you can immediately see the hotels economic health. Your hotel's financial health relies on cash inflow and outflow. I tend to concentrate on direct margins and then look at everything else as fixed costs. Business owners can make smarter decisions if they have a clear picture of the amount spent on running the hotel. Consider your hotel; you have a fixed number of rooms, and you cant magically expand or contract your inventory based on demand. Fixed/variable costs and room revenue management - Insights Revenue management is big-picture thinking partnered with strategic tactics. Revenue managements goal is to find the right balance for year-end profitability. business. Call him Mr Hospitality. F&B costs. Variable costs fluctuate depending on productivity levels, as they are directly related to business volume and hotel occupancy. Contribution margin = 84 - 30 = 54. In closing For many managers, these numbers may seem familiar, as they no doubt have experienced the phenomena in their own property. However, if you do not balance demand with labor requirements, you will have unhappy guests and frustrated employees. By understanding variable costs and implementing cost control measures, optimizing operations, and monitoring occupancy. For an annual picture let's look at the impact on profits if the hotel was able to sell these 10 rooms half the days of the year: Limit monthly contracts that are not 100% useful (e.g. Exhibit 1 illustrates this concept. You can calculate your fixed costs, divide them by the number of rooms, and by the number of working days (e.g., $ 1.000.000 / 100 rooms / 365 days = $27). These expenses include food, beverages, and housekeeping supplies, guest room amenities, laundry operations, and guest relations services.