HOTEL ECONOMICS PRIMER
I stay in a lot of hotels each year. Some of these stays are planned; some occur by chance.
Regardless of the country, one common factor that never ceases to amaze me just how much money hotels invest in their facilities every year, and then fail to invest the same amounts in a human-centric technology and commercial policy. In other words, in their staff.
Today’s checkout from a 3* hotel in Lisbon brought home to me just how divorced most hotel chains are from their staff, and certainly from their customers.
Let’s start by taking some basic hotel economics into account:
If a day goes by and the hotel room is empty, that represents a lost revenue opportunity that cannot be made back in the financial year. If a year goes by and about 40% of room nights are empty, that’s usually financial break-even or below.
If a year goes by and about 15% of rooms are empty, that’s usually an acceptable long-term rate of return. In other words, 85-90% occupancy year-round is excellent performance, on average, in hotel terms.
So, what every hotel owner and manager needs to do is fill every room to at least 80% occupancy, ideally at room rates above the break even rate. What is the break even rate of a hotel room?
Typically it is the hotel’s [cash cost of operations] / available room nights.
Let’s say a 4* 50-room city hotel pays an average of € 270,000 in tour operator / OTA commissions and has a further € 850,000 in operating costs (including breakfast), that would be:
€ 1,120,000 / (50x365)
€ 1,120,000 / 18,250
€ 61.37 / night
So every night, the hotel needs to make € 61.37 to break even. (Notice that this calculation is without mandatory property maintenance, property taxes and debt service, which is why break-even is so low).
If the hotel is, on average, only 80% full per year, then the break-even rate is in fact € 61.37 / 80% = € 76.70
Coming back to my trip today: Web Summit finished on Thursday night and I had originally thought to use Friday for catch-up meetings and fly back on Saturday.
In all the rush, I accidentally booked my return flight on Sunday, and a hotel for Friday-Saturday night. So I missed one night: Saturday – Sunday.
The 3* hotel I booked was in the historic centre and cost € 148.55 with breakfast. I checked into this hotel as a Booking.com Genius Level 3 customer: that's the highest level of frequent traveller on Booking.com. The hotel staff sees that I’m a Level 3 customers from their central reservation system.
This morning, I went down to reception to try to extend my stay. The hotel had rooms available but the online rate had increased to € 200 for Saturday night.
I asked for a second room night at the same rate: € 150. (Remember, there were rooms available and I was asking at 08:30 on the day of the stay).
The receptionist said she couldn’t go below € 180.
So of course I checked out.
Why? Literally one block away there was a 4* hotel at € 120 per night. Much higher standard of facilities. No friction to booking or moving. Better room.
Please note this example carefully: the hotel’s break-even has not changed. We budget this on an annual basis. There is no change in break-even costs or operating costs between a Friday night and a Saturday night.
It’s not that hotel break-even costs have increased from € 76.70 to € 106.70. The costs were exactly the same.
What has changed is the hotel’s perception of the price it can charge per room based on booked occupancy and room availability for Saturday night.
For any hoteliers out there: your pricing policy, your management policy and your employment policy are of course your own to make.
But in a highly competitive economy when you have available capacity, you are better off extending a guest reservation for one night (on the same day) when your occupancy is showing availability (on the same day), than waiting for some future potential guests to arrive.
We are, after all, talking about a stay booked on 18 November 2023. Not the summer high season.
1. Because you need to make your break even rates, and in a competitive economy, this is challenging to do. And everything you are getting above break even contributes greatly to final profitability.
2. Because every hotel has competition just a block away, and by giving away a client even for one night, you risk that this client never comes back again because of better service elsewhere.
3. Because for frequent travellers like me, all the receptionist smiles and all the bedside chocolates in the world mean nothing unless I understand I am getting fair value for money.
It’s also funny because the same hotel chain I was in was advertising that it had opened in Greece on its room keys. Guess which hotel I will never visit in Greece?
For the most part, a 3* city hotel is a commodity. There are at least 200 other 3* hotels in most European capitals offering the same experience at the same price. And you can find these all on a single website: Booking.com (or any other number of online travel agencies).
So in decision-making terms, a consumer has perfect information. The hotel, in contrast, has been both disintermediated as well as commodified, with very few exceptions, usually at the top end of the market.
If you feel that your prices cannot come down, fair enough. Can you offer an alternative? A room upgrade? A meal voucher? An airport transfer? Any of these would offset the € 30 per night price difference, and cost you less.
If not, don’t be surprised if your loyalty programmes and everything else you do in-house do not work to retain customers. Customers have a choice. Experienced customers know how to exercise this.