Unpacking the revenue calculation of hotels
To identify key success factors i the hotel industry, it is useful to unpack the key formula of profitability for hotels:
Nightly Revenue = Occupancy rate X Nightly rate charged per room X Number of rooms
Total costs = Lease (or mortgage costs) + overheads of running the hotel
Profit = 365 X Nightly Revenue – Total Costs
Identifying key success factors
Dimensions that can't be easily changed
Examining the above formulas of hotel profitability, there are several dimensions outside of the control of management:
- The number of rooms (likely fixed for a hotel).
- The lease or mortgage cost associated with the hotel (fixed costs that can’t be changed).
Both of these dimensions will have a significant impact on the profitability of the hotel – but are fundamentally outside of the control of management. While important things to consider before setting up the hotel, for existing hotels, there is little that can be done to adjust these dimensions.
Dimensions with greater opportunity to be optimized
The formulas above do however do highlight some critical components of profitability that are directly within the control of management:
- The average occupancy rate of the hotel
- The average nightly rate that the hotel
- Overheads associated with running the hotel
Each of these dimensions is important for management to monitor and look to control – those hotels that are able to drive up the occupancy rate, average nightly rate, or bring down the cost of serving the rooms will be able to achieve the greatest profitability.
KSF 1 - Occupancy rate: Increasing the percentage of rooms that are filled
The first key dimension of success for hotels is the occupancy rate – the percentage of rooms that on average are filled. Hotels that on average achieve a better occupancy rate (all else equal) will experience better financial performance.
While certain dimensions of occupancy of the hotel are outside of management’s direct control – events in the city and seasonal fluctuations, will both influence the occupancy rate of the hotel (and may mean some hotels are naturally able to achieve better occupancy year-round based on local market demand), there are factors more directly in control of management. These include:
- Returning guests: The likelihood that guests will come back to the hotel (if visiting the city again). Having a loyal customer base makes it easier to achieve a higher occupancy rate.
- Satisfaction: Not only will customer satisfaction increase the likelihood of repeat business, but positive reviews will likely also drive further bookings.
- Awareness of the hotel: How visible is the hotel across booking platforms, how complete is the room listing, and how appealing are the rooms.
While the above factors may directly lead to improved occupancy rates, some measure that are “close to the ground” that may ultimately drive greater satisfaction and returning customers include:
- Room cleanliness: How clean and appealing are the rooms.
- Check-in queue length: How easy is it for customers to check-in.
- Refreshments and services available: Is there free coffee at the entrance, or other perks that improve the quality of the stay.
One way of improving customer satisfaction, and ultimately occupancy rates, is to systematically analyze customer reviews – considering if there are ways of learning from prior mistakes and improving the quality of the stay.
KSF 2 - Nightly rate: Increasing the rate that the room is leased for
Beyond the occupancy rate, the nightly room rate is another component that is an important dimension that influences hotel profitability. Achieving a high occupancy rate due to being priced below comparable hotels is unlikely to be the best approach to optimizing the revenue. It is important to recognize the balance and optimize across both components.
While certain factors that influence nightly revenue will be fixed – the amenities (or start rating) of the hotel is a large component impacting price, similar characteristics that drive occupancy rate will also impact the rates that can be charged. The greater customer satisfaction (and in turn greater return guests and better customer reviews), the easier it will be to achieve a higher average nightly rate.
KSF 3 - Hotel overheads: Decreasing the costs of servicing the hotel
The final key success factor in the hotel industry is the overhead associated with servicing the hotel. The more efficient the operation of the hotel at serving the rooms, the higher margins the hotel is likely to achieve.
Some possible measures that can help drive performance in the hotel setting include:
- Time take to service a room: The quicker rooms can be serviced, the lower the cost associated with servicing.
- Time taken to check-in guests: The smoother the check-in process, the lower the cost of check-ins.