There are many challenges facing modern hoteliers, and one of the most significant is how to look after ‘the bottom line’, that is, the profitability of their hotel operation. Many factors impact the profit margin, and in this article we’ll look at how it is calculated, and what can be done to boost income, and reduce outgoings. Although the concept of Profit and Loss is fundamental to all businesses, there are some strategies that specifically address the issues facing hoteliers.
What is hotel profit margin?
The profit margin of hotels can vary widely depending on various factors such as location and hotel type (boutique, luxury, budget, and so on), market conditions, and how efficiently the hotel is run. There are two measurements of profit: gross profit - the money you have left after paying for the goods and services sold to guests - but you don’t get to keep gross profit, because all other operating expenses and taxes must be paid from this. On the other hand, net profit is the money you keep after all expenses and taxes are paid. It is net profit that is often referred to as the bottom line.
We’ll regard ‘profit margin’ as referring to net profit, which is expressed as a percentage, using the formula: Profit Margin = (Net Profit ÷ Total Revenue) × 100
The profit margin can therefore be influenced by operating expenses such as staff salaries, maintenance, marketing, utilities charges, and admin costs. In addition, external factors such as economic conditions and competitors can impact the profit margin.
What is the average profit margin of running a hotel?
Hotel profit margins are not as high as in other industries, ranging from as low as 5%, up to around 15%. Global research by Statista for 2022 reveals an average hotel profit margin of just under 15%, a drop from the previous year’s average of 24%. Some hotels will be beating that (luxury hotels tend to have higher profit margins than budget hotels), but many will be below. So what can be done to improve profit margins? Adopting initiatives in strategic management, cost control, marketing, customer satisfaction, and improved use of technology can reap rewards:
Strategic management for an enhanced profit margin
Having a long-term plan and executing it is the basis of all successful businesses. It’s not always possible, because few companies anticipate freak events such as a pandemic. But in general, it’s safe to say that a business which has a clear strategy is better able to weather difficulties and more likely to be profitable.
- Knowing your customer is essential in the hospitality business. It’s not possible to be ‘all things to all people’ (for example, the clientele for a luxury hotel are clearly not the same as for a backpacking hostel), so hotel management should identify their ideal target market, and then plan the offering around that. If guests are showing an interest in spa and wellness, then uprate your facilities. If you want to establish a reputation for fine dining, then plan and execute for that. Viewing your market as ‘niche’ focuses your strategy.
- Pricing strategies are a constant headache for some managers, as they constantly juggle room availability against demand. By implementing dynamic pricing strategies it’s possible to both predict and respond to market conditions with seasonal demand, special events in the area, and other factors taken into account. All the biggest chains operate dynamic pricing, along with the Online Travel Agencies, and smaller hotels can implement the same flexible approach to pricing, using modern revenue management systems to adjust room rates in real-time.
- Direct booking is more profitable than if guests make their reservation through an OTA or other third party, but they have to be attracted and retained by your own hotel website. To achieve that means keeping the website constantly refreshed, with great images and text, and new or special offers. A hotel’s own website is a powerful tool in fulfilling a long-term strategy for increased profit margins - but it has to be smart, smooth, and tell a great story.
Cost control for leaner business
When profit margins are threatened, one of the first questions is, ‘Where can we cut costs?’ That’s a reasonable question, but cost reduction has to be of long-term benefit. For example, laying off staff might relieve costs in the short term, but could very soon impact the hotel’s quality.
- Utilities are a very large cost area that has increased in recent times, including electricity, gas, water, and refuse collection. New and smarter solutions can address all of these areas. Electricity usage can be dramatically reduced by installing eco-lamps, and providing smart plugs in rooms. Better insulation all around the hotel will save huge HVAC costs, and water use can also be decreased. All of these cost reductions can be engaged with guests, as people are increasingly happy to be engaged in environmentally sound practices.
- Reviewing suppliers is a valuable exercise in cost control. Are there better or cheaper ways of doing things? Are you buying foodstuff from a distant chain supplier, rather than from local producers? Do you accept three deliveries a week from a supplier, because that’s the way they’ve always done it, rather than aggregating into one less costly delivery? Getting better rates out of suppliers should be an ongoing part of a hotel management strategy - you need the suppliers, but for sure the suppliers need you too. The secret to successful supplier management is collaboration.
- Getting operations streamlined is a sure way to reduce costs, and lift profit margins. Look critically at every aspect of front-of-house and back office work, and how this can be made more effective. For example, contemporary Cloud-based Property Management Systems can make guest reservations automatically, send out confirmation emails, and respond to many frequently asked questions. Think of the average time a receptionist is tied up in dealing with these matters, and the savings that can be made as personnel are diverted to more meaningful and cost-effective work.
Balancing cost reduction with maintaining service quality is a delicate task for hotel managers. While cutting costs can help improve profit margins in the short term, it's essential to consider the potential long-term implications on guest satisfaction and the overall guest experience. For example, reducing staff levels may lead to decreased service quality, longer wait times, and ultimately, dissatisfied guests. Similarly, implementing new technologies or energy-saving measures should be carefully evaluated to ensure they enhance operational efficiency without compromising guest comfort or convenience. Hoteliers must strike a balance between cost-saving initiatives and maintaining the high standards expected by guests to sustain profitability in the long run.
Marketing and customer satisfaction
Guest satisfaction is paramount for every hotel, but perhaps it’s not usually considered as a part of the hotel’s profit margins. But the more that guests are delighted by their hotel stay, the more likely they will help boost profitability. This includes upgrade and upsell opportunities, extra services and events, and re-bookings in the future. A satisfied guest will spread the word - mainly through social media - and word of mouth is the best possible free marketing any hotel can have.
- Positive online reviews really count in influencing new guests to enquire and then book. This means having the strategy in place to regularly monitor social media and OTA sites to see what people are saying about your hotel (and responding to both criticisms and congratulations), as well as what competitor hotels are saying. Being aware of social media and trends can reap rewards which will enhance the bottom line.
- Marketing initiatives should have strategic goals. There’s no ‘one size fits all’ guest, so marketing initiatives should be planned and executed carefully. Think about the demographic you wish to attract, and then create an offer that is appealing, be it seasonal dining, or a surfing school! Whatever local attractions or facilities you can leverage can be brought into play to help boost your marketing. Initiatives can also include loyalty programmes or discounts for repeat guests, or other special offers.
- Enhancing the guest experience should be the goal of any hotel, and one of the keys to this is having well-trained, responsive and friendly staff - hospitality is a people business after all! Staff who are unburdened from routine tasks such as check-in and check-out processes, are more able to address guests with a smile and offer real human help. As part of the marketing strategy, that’s a story which needs to be told - especially through short videos on the hotel’s own website. Over time an enhanced guest experience will lead to raised profit margins.
- Factors like location and hotel type can significantly influence the average profit margin of running a hotel. For instance, hotels situated in prime tourist destinations or bustling urban areas may command higher room rates and occupancy levels, potentially leading to higher profit margins.
- Similarly, luxury hotels often offer premium amenities and services, allowing them to charge higher prices and achieve greater profitability compared to budget or economy accommodations. Conversely, hotels located in less popular areas or those catering to budget-conscious travelers may experience lower profit margins due to lower room rates and occupancy levels. Regional economic conditions, local competition, and seasonal fluctuations can also impact profit margins, with some regions or types of hotels experiencing more stable or higher margins than others.
Technology for now to enhance profit margins
For centuries hotels have offered essentially the same services to guests, but recently that has radically changed. Post-pandemic, guests are more confident in doing their own searching and booking online, and expect smooth processes at all points in the guest journey. They can shop and be entertained online very easily, so their hotel experience has to be just as seamless. Technologies that are available now, and those for the immediate future include:
- Property Management Systems have made huge strides in the last decade. These were originally cumbersome systems that often sat in the back office, and required frequent attention from specialist engineers. A PMS did a few jobs quicker than human staff, so they were worth having, but many hotels still managed without them. This has all changed with modern cloud-based PM systems where the ‘clever stuff’ takes place offsite and can be regularly upgraded. A PMS will now handle bookings, confirmations, billing, and a range of in-stay and post-stay functions. In other words, things that would tie up human staff, but which now leave them free to engage meaningfully with guests.
- Artificial Intelligence will increasingly make its way into the hospitality industry, and is indeed already at work in areas such as dynamic pricing, and chatbots. Just a few years ago chatbots were merely sometimes annoying popups, but now provide quite free-flowing conversational interfaces to answer many Frequently Asked Questions. Furthermore, chatbots are also increasingly able to write and even talk in the guest’s chosen language.
- Other robotic functions are also making their way into hotels. For example, large chains are now using robot vacuum cleaners which are efficient, and can operate at times best suited to the hotel’s, and guest’s schedules. This trend is percolating down to smaller establishments because it is more efficient, and in a cost-saving strategy, more effective. Increasingly, touchless solutions are also being adopted by hotels, with self check in and keyless room access becoming popular.
- Data Analytics provide the power for hotel managers to get a ‘deep dive’ understanding of where they are earning, and where they are spending. Property Management Systems, and add-on apps give unrivalled granular detail of everything that goes into the formula:
Profit Margin = (Net Profit ÷ Total Revenue ) × 100
Boosting your hotel’s profit margins
Implementing strategies to improve profit margins in hotels, such as strategic management, cost control, marketing, and technology adoption, can present various challenges for smaller or independent establishments. Limited financial resources, lack of expertise, and resistance to change are common obstacles that hoteliers may face when attempting to implement these strategies. Additionally, smaller hotels may struggle to compete with larger chains that have greater resources and economies of scale. Overcoming these challenges may require creative solutions, collaboration with industry partners, and a willingness to adapt to evolving market trends. Furthermore, navigating the complexities of technology adoption and digital marketing requires ongoing training and support to maximize effectiveness and achieve sustainable improvements in profit margins.
We fully appreciate that many hotel managers are searching for ways to improve their profit margins. We know this because for over a decade we have been working exclusively in the hospitality industry, supplying our modern cloud-based PMS solutions, worldwide. It’s true that some of our suggestions require outlay before seeing a Return On Investment. For example, the ROI of modernising electrical or water systems requires outgoings, a clear strategy, and time. The same goes with Property Management Systems, but you may be surprised at the speed with which ROI comes, and we are confident you’ll be delighted at the comprehensive uplift you’ll experience at very many points of your hotel’s operation. At SabeeApp we believe that a good PMS can truly be a game changer for hotels. We’d really like to give you a free, no-obligation demo of our PMS and associated apps, and show you how we can help you boost your profit margins.