How Hotel Operating Costs Affect the Bottom Line

By Alex Gaggioli, October 9, 2018

Keeping hotel operating expenses under control is key to running a successful property. High expenses and wasteful practices deplete profit margins and threaten a property’s financial health and long-term viability. On the other hand, proper cost management primes your property for profitability and longevity. 

In an ideal operation, expenses are perfectly aligned with demand so there’s never any waste. Your property would seamlessly balance efficiency with guest experience, always providing the level of service expected by guests without leaving any idle hands or holding excess inventory.

Of course, maintaining that sort of precise balance is easier said than done and not always so predictable. Still, with a little practice and focus, you can strive for better balance. 

Two Types of Hotel Operating Expenses

Hotel operating expenses include any costs and expenses associated with maintaining and running your hotel. These expenses can be broken down into two types: fixed costs (costs that remain the same regardless of changes in the volume of goods or services) and variable costs (costs that fluctuate in relation to the volume of goods or services provided). Here’s a breakdown of the top hotel operating costs:

FIXED COSTS – These expenses may change periodically but aren’t influenced day-to-day:

  • Rent/mortgage. This is usually a property’s largest single fixed cost. 
  • Property expenses, such as insurance and taxes. 
  • Fixed monthly bills, like cable and internet.
  • Staff salaries and other payroll costs.  
  • Health insurance premiums.  

VARIABLE COSTS – These costs vary according to demand and operational efficiency and are thus influenced by day-to-day decisions.

  • Hourly labor. While salaries can be planned and remain mostly fixed, hourly labor can cut into your bottom line when you aren’t matching labor to demand and using staff efficiently.
  • Utilities. The more guests, the higher the usage, with the average hotel spending around 3% or more of revenue on utilities. 
  • Marketing and distribution costs. You’ll spend more money on commissions when bookings are high on your 3rd-party channels, and you’ll likely spend more on marketing and advertising to boost demand in slower periods.
  • Linen and other toiletries. Poorly managed supplies can mean that you’re spending more than you should to serve existing demand.
  • Food and Beverage inventory. Overordering can cause waste, while underordering can reduce your revenue opportunities and contribute to a poor guest experience. 

 

How to Reduce Your Hotel Operating Costs

The first step in reducing operating costs and increasing profit margins is tracking and managing your costs. Tracking operating expenses takes time and dedication, but each incremental improvement builds on another, and over time you’ll see a real boost in your bottom line. You can also use the reports and analytics from your PMS to help you make smart, data-based decisions. 

Start reducing your hotel’s expenses by tackling the highest-impact areas first. These are the areas where even a small change results in a major improvement. Generally, this means looking at your biggest controllable expenses, including labor, energy and marketing, and then looking for ways to operate at peak efficiency across your entire operation.  

 

1. Control your labor costs

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 20-25% (not including management salaries), and others say they are at 50%. The actual percentage most likely varies by property type, but most agree that the percentages are high. 

Effective scheduling is the easiest way to manage labor costs. If you’re overstaffed, then your schedule is actually costing you money! You should carefully schedule staff according to expected demand. The key here is to remember that each position has a different demand driver. 

For example, expected occupancy levels and average minutes it takes to clean a room must be matched with the number of housekeepers scheduled, as well as check-ins and check-outs with the front desk, and so on. Many hotels even schedule an “on-call” shift for employees each week, so that you’ll never be caught short-staffed. 

Another way to decrease labor expenses is to train staff in multiple roles, especially roles that relate to each other. Cross-trained employees can do different jobs, switching as needed throughout a shift. For example, a housekeeper can help work on laundry and a bellman can deliver room service. Cross-training works extremely well in smaller properties where the staff tends to function as one big team. 

Cross-training can decrease turnover since employees use more skills, stay engaged, and can work more shifts. It also strengthens bonds and deepens understanding between employees across roles, says consultant Mark Heymann: “Cross-utilized employees better understand the impact their jobs have on other aspects of the operations. Employees gain a better understanding of how the operation works through cross-training, and the impact they have on one another.”

Cross-training optimizes your staffing resources so you can both manage labor costs in busy times and stay lean during downturns, such as low season or an economic recession or health crisis. It also benefits employees because it can help them develop new skills and open the opportunity to grow into new roles. 

2. Reduce energy usage 

 

 

Reducing energy usage has a direct impact on your bottom line. Hotels spend about 6% of operating expenses on utilities, of which 35% goes to lighting. Start with more affordable sustainability initiatives, such as switching to energy-efficient light bulbs and training staff around smart energy usage. Even a “reuse your towels” campaign can have a dramatic impact on your electricity and water usage. 

Then look into upgrades that may reduce your overall energy usage, such as: 

  • Smart thermostats that can be automated (check out Lynx home automation solution for property owners and managers)
  • Water heaters that recycle heat from HVAC systems 
  • Solar heaters for pools 
  • Coated windows that reduce energy leakage
  • Occupancy sensors that dim or turn off lights (reduces usage by 30%!)
  • LED bulbs that use less electricity and emit less heat  
  • “Living roofs” that use plants to absorb heat 

You may also want to work towards an eco-friendly hotel certification that reduces expenses and creates marketing opportunities.

Keeping up with property maintenance goes hand-in-hand with saving on energy costs. Create a monthly maintenance review schedule so that your property is inspected regularly. This inspection should include looking for cracks and holes that can be sealed, as well as any emerging issues that can be fixed before the cost escalates. Deferred maintenance when it comes to things like HVAC may also add it to your operating expenses in the short-term. 

 

3. Lean on revenue management and key metrics

 

 

Revenue management isn’t one of the first things that come to mind when you think “hotel operating cost.” As a tool that tracks local market data (such as how big local events may impact occupancy) and your competitor’s rates, it’s generally seen as an income producer, not an expense management tool. Yet it’s a valuable asset for optimizing your operations as it helps identify and manage the largest cost contributors, such as commissions and other distribution costs.

Your revenue management system also creates insightful forecasts that provide clear guidance for your hotel’s operations, especially around staff scheduling and inventory management. These forecasts highlight periods of higher demand, which means that you may need to schedule more staff and order more items to support this increased demand, depending on your occupancy levels, of course. Conversely, your revenue management forecast can reveal unexpected dips and demand to help you reduce your variable expenses and control labor costs.

Also, don’t overlook the value of picking the right metrics when managing your property’s operating expenses. Here are a few you can consider: 

  • Per Available Room (PAR): Since hotels generally have a fixed room count, this metric allows you to compare directly to other hotels regardless of size. For instance, you could benchmark your payroll per available room to other hotels in your competitive set. Generally, this helps you track how well you are managing fixed expenses. To calculate how many rooms are available, out of service/out of order rooms should be taken out of the count so you only include the total number of rooms that are open for sale. You can also take a look at RevPAR to help distinguish how much revenue you are making per available room and how you can tie this into calculating the expenses per room to check how profitable the operation is.
  • Per Occupied Room (POR): Since occupied rooms are variable, the metric is good for comparing your property’s variable costs to others. For example, you can compare how well you are managing hourly payroll compared to other costs. If your hotel is at 50% occupancy, this metric would allow you to calculate revenue and profitability based on occupancy levels instead of availability.
  • Profitability by channel: When you’re building out your hotel distribution strategy, focus not just on revenue but also on overall profitability per channel. Since channel commissions and costs are variable, capturing more business from lower-cost channels reduces operating boats and boosts profit. Alternatively, direct bookings made on your website using a booking engine carry no commission charges, so you can look for ways to boost direct bookings to keep more of your profits. 
  • Room cost: This is how much it costs you to put a guest in a room, including both fixed and variable costs. Monitoring this figure gives you a baseline and early indicator of decreasing profitability per room. 

By using good revenue management practices and analyzing your reports and data to assess the right metrics, you can keep your costs trim while operating most effectively.   

4. Reassess your software stack

Costs quickly pile on with 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. There’s software for property management, housekeeping, guest relationships, revenue management, online bookings, point-of-sale…the list goes on. If you use ten pieces of software from ten different providers, that’s ten monthly bills, ten account managers, ten knowledge bases, and ten times the headache to keep track of it all. 

To ensure that you’re using all of your software to its fullest potential, do a technology audit to identify software that has either being underused or is no longer needed. You may be able to save money by reducing the total number of vendors and choosing a hospitality management software that bundles key functionality into a single suite.

Cloud-based software can also provide a lower-cost alternative to on-premise hosting. The cost savings can be quite significant: Triple C Hotels & Resorts, a boutique hotel group with two properties, trimmed 60% off its hotel software budget when it switched to a cloud-based property management system. Added bonus: the switch increased direct bookings by 12% thanks to an integrated system that kept rates in sync across systems and optimized to real-time demand.

You’ll also see other benefits to cloud-based hotel software: zero upfront installation cost, no ongoing maintenance costs, seamless syncing across systems, and no on-premise IT headaches or future upgrades. Not to mention, you’ll be able to access your property management system from anywhere in the world with internet so you’re always connected to your business.

 

5. Optimize your marketing

Marketing is one of the largest variable 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. First, you need to understand your CAC for each channel. Leveraging OTA channels usually produces higher CAC than direct bookings. However, direct bookings, though commission-free, are usually acquired with advertising costs using Google ads, Facebook ads, or metasearch

Every hotel should diversify their marketing strategy, using both inbound and outbound tactics, and also strategically distribute their inventory on several OTAs and online marketplaces. A healthy mix of OTA listings, metasearch advertising, social media promotions, email campaigns, partnerships with local businesses, etc. makes for a good marketing strategy.  

To fully optimize your marketing spend, be sure to install Facebook Pixel and the proper analytics code (such as Google Analytics) so that you can track performance from clicks to conversions. When properly integrated into your hotel management system, you’ll have a full view of your hotel’s marketing efforts — and be able to leverage powerful tactics like remarketing and retargeting campaigns

If you’re using a digital marketing agency for your hotel, be sure to regularly review their engagement reports. It’s easy to forget to check performance metrics when someone else is doing it. 

Conclusion

As you work through this list and develop strategies to reduce your hotel’s expenses, don’t forget to consider the impact on customer service. It can be tempting to cut down all of the low-hanging fruit, without fully envisioning the impact of negative guest reviews. 

With sufficient planning and consistent execution, you can reduce your hotel’s operating expenses without sacrificing service. It’s a win-win where profitability meets a more streamlined operation!

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