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How Hotel Operating Costs Affect the Bottom Line

By Alex Gaggioli, October 9, 2018

Through the recent economic recovery, the hospitality industry has fared well. Hotels emerged from the recession in a position to excel, and looking at the numbers, it appears they have done just that. For a hotelier to succeed in the rising economy, they must carefully manage their operating costs. High expenses and wasteful practices deplete profit margins and affect any property’s livelihood.

Forbes reported awhile back that net profit margins approached 5% in 2012, a huge improvement from the negative 1% 5-year margin in years previous.

Hotels have many unavoidable costs such as labor, utilities, property operation costs, customer acquisition costs, etc. The first step in reducing operating costs and increasing profit margins is tracking and managing your costs. Large hotels and chains already meticulously track their costs, but it is equally as important for independent hotels and hostels to do the same.

That said, tracking operating expenses can be time-consuming and difficult if done manually. We suggest using a property management system with reporting functionality to do the manual work for you, such as myfrontdesk (shameless plug). According to a recent tnooz article, one out of four US hoteliers still use a pen and paper to manage their properties. With a property management system, a hotelier is better able to predict future needs based on future bookings and trends over time.

HotelExecutive.com stresses the importance of having an automated revenue management system. These systems save time and create accurate reports. Hotel managers with automated systems can focus on the hotel’s performance instead of working with big data to pull insights. Understanding hotel performance is imperative to identifying and controlling the largest cost contributors.

The Largest Cost Contributors

Labor

In almost any business, labor accounts for a large portion of any hotel’s costs. Some sources say that hotels should tightly maintain labor costs between 30-35%, and others say they are at 47%. The actual percentage most likely varies by property type, but most agree that the percentages are high.

One of the best ways to decrease labor expenses is to cross-train employees. Cross-training employees allows for people to do many different jobs as needed in the same shift. During each shift, a single employee could help at the front desk during busy check-in times and then join in other work during downtimes (such as stocking the breakfast room, working on the hotel’s social media, inspecting the lobby bathroom, etc.). Business Process Excellence also believes that cross-training decreases turnover. Employees with more skills are able to work more shifts and have more work opportunities.

Skift recently listed five startups that can help hotels run their properties more smoothly. One of the companies included was SubItUp. They provide hotel managers with an automated way to schedule full and part-time employees. With SubItUp or another similar scheduling software, hotel managers can save a significant amount of time. Instead of wasting hours scheduling, managers can focus on the employees themselves and their guests.

Business Process Excellence also reported on how to decrease housekeeping costs. Housekeeping staff make up a large percentage of hotel staff and their processes, by nature, are often wasteful. Hotels can implement simple mechanisms into everyday tasks to maximize efficiency and cut waste. First, create a Standard Operating Procedure for different room cleaning processes. List everything that must be done in every room type. Guest rooms and meeting rooms require different procedures and there should be a process for each. The list should include everything from towel procedures to checking if the remote works. Think to yourself, “If I was a guest in a room, what are the things I would notice?” Include all those things in the housekeeping procedure.

Energy

Utilities, on average, are responsible for around 6% of operating costs (source). As energy costs rise and the world becomes more environmentally conscious, hoteliers must adjust their practices. There are many certifications and government subsidies to make your hotel more environmentally conscious. While most of these services cost money, their long-term effect is positive. However, there are free options as well. Energy Star is a free benchmarking tool to help US businesses gauge their energy efficiency.

Cloudbeds recently published a post outlining some of the most popular green certifications. Read the list and identify a green certification that will work for your property based on size, money available and time. Business Process Excellence shared two seemingly small changes that had a huge impact for other hotels. Old thermostats are incredibly wasteful and replacing them can reduce electricity expenses by up to 40%. The Hyatt Century Plaza is a good example of a property updating its facilities to reduce the cost of energy. They will save $670,000 after installing window films, and produce a positive ROI in just 6 months.

If a hotelier takes action on sustainable business practices, it can dramatically affect energy consumption. The Energy Star benchmark and other green certifications are often vigorous exercises. But, the certifications influence a property’s profit, and become a marketing tool.

Energy.gov/savings lists tax credits, rebates, and savings for every state. The site lists all available incentives based on a business’ location. For example, San Diego offers savings in categories like solar, geothermal electric, wind, and fuel cells to name a few. The site also lists regulations set forth by states, counties, cities, etc.

The green certifications also address maintenance issues that lead to unsustainable energy use. Routinely checking air filters and cleaning air vents can save hoteliers a lot of money.

Marketing

Marketing a hotel property is oftentimes expensive. While marketing costs are very different for all types of properties, there are a few things every hotelier can do to offset costs. Most marketing costs boil down to customer acquisition costs (CAC). Hoteliers strive to get bookings at the lowest possible CAC, which is often tricky.

Every hotel should diversify their marketing strategy with several distribution channels. A healthy mix of direct bookings, OTA listings, social promotions, email campaigns, etc. make for a good marketing strategy. First, you need to understand your CAC for each channel. Leveraging OTAs produces higher CAC than improving direct bookings, but that doesn’t mean you shouldn’t use OTAs. Cloudbeds recently wrote about profitable distribution strategies and how a hotelier can maximize their marketing efforts. Increasing direct bookings will give you the highest revenue because it has the lowest CAC. See our recent guide on how increase your property’s direct reservations.

Follow a plan to diversify your marketing efforts and analyze the varying costs. If you notice that one channel costs more than others with little return, focus on the channels that bring in the most guests for the lowest costs. This is easier said than done, but start by taking careful note of different acquisition costs and go from there.

Software

Software infrastructure can end up costing a hotel a lot of money. Traditionally, software makers would visit your property, install their software and required hardware, and then present you with a big bill. Today, the preferred method is to use software as a service (SaaS), which has cheaper up-front costs, is easier to setup and install, and is future-proof, making your operations more secure.

There are many different types of software, such as:

  • Front office & property management
  • Housekeeping
  • Guest relationship management
  • Business relationship management
  • Business intelligence
  • Catering & Event Management
  • Retail Point of Sale
  • Spa Management
  • Central Reservations
  • Online Booking Engines
  • Core Accounting
  • Club Management
  • Maintenance Management
  • Restaurant Point of Sale (POS)

Costs quickly pile on the more software a hotel uses. For small and independent hotels, it can seem impossibly expensive to acquire all the software needed to run their businesses. However, there are plenty of low-cost solutions out there to power independent hotels and hostels. The key is to find all the software your property needs bundled together in a low monthly fee. If you use 10 pieces of software from 10 different companies, that’s 10 monthly bills. However, if you consolidate software into a bundle, you can often get much more bang for your buck. Our company, Cloudbeds, has created a suite of software to achieve this aim. We bundle together a property management system, mobile optimized booking engine, channel manager, and more.

Conversely, onsite software solutions are expensive and outdated. They come with exorbitant set-up and installation fees. Once installed, that’s it–no future improvements or upgrades are included with such purchases. Associated hardware often takes up a lot of space and causes unnecessary trouble for the hotel’s IT infrastructure, which has to work to keep systems operating and integrated with modern technology as it evolves (source). Onsite software solutions, as opposed to SaaS, also have greater security risks because they grow vulnerable over time to hacks and exploits as technology evolves around them. Sometimes software companies will alert hoteliers when a security patch is available, but often hoteliers are left with outdated, vulnerable software that leaves their guest’s information at risk. Therefore, the risk and the added costs of a physical software solution are both reasons to use newer SaaS-based products.

Conclusion

Labor, energy, software, and marketing are among the top operating cost categories for hoteliers. In order to maintain a healthy profit margin, hotels should watch these expenses carefully, and cut or consolidate expenses whenever practical.

 

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