Hotel ownership is something most people know nothing about. And even those who understand the business model typically aren’t aware of how complex it is to manage operating costs. But at the heart of every successful hotel is a firm commitment to monitoring operating costs in an effort to keep the bottom line intact.
Common Hotel Operating Costs
Every hotel is different. From where the hotel is located to how it’s managed, there are so many variables in play. But if you want to understand operating costs from an aerial viewpoint, here are some of the major categories:
- Labor. The most expensive operating cost is, without a doubt, labor. Labor costs generally account for somewhere between 30-35 percent of all operating costs. But if you aren’t careful, they can scale as high as 50 percent.
- Utilities. Though utilities typically only account for roughly 6 percent of hotel operating costs, rising energy prices are worrying hoteliers and making them more conscious of this expenditure. If it inches too much above 6 percent, profits can be affected.
- Maintenance. The upkeep of the building, furniture, and key systems – including technology and software – falls under the heading of maintenance costs. Depending on the location of the hotel and the clientele it serves,
maintenance can account for a significant percentage of the operating budget.
- Marketing and advertising. Finally, there’s marketing and advertising. To keep rooms booked, you have to reach out and find guests. Also falling into this category would be the commissions that hotels pay online search aggregators to feed them bookings.
There are obviously other operating costs involved in hotel management, but these broad categories account for a huge chunk of the expenses. Being able to manage them well and reduce superfluous costs is an important aspect of remaining profitable.
The Practical Ways Hotel Managers Handle Operating Costs
How a hotel manager handles operating costs will, to a large extent, determine the profitability of the business. This is especially true for hotels that are booked solid. Other than raising rates – which can be challenging on multiple levels – reducing costs is the only practical way to bolster profits. With that being said, here are some of the strategies hoteliers use:
1. Use the Right Financing
When debt and financing are used strategically, hotel ownership has so much more flexibility. Take, for example, hotel furniture, fixtures, and equipment – otherwise known as FF&E. As this helpful guide on FF&E shows, it’s all about how a hotel manages the costs associated with financing and depreciation. Handled incorrectly, it can put a huge dent in an otherwise solid budget. Handled well, it can result in significant tax benefits that preserve profitability.
2. Invest in Preventative Maintenance
In terms of maintenance costs, a hotel can significantly reduce long-term expenditures by investing in preventative maintenance. When preventative maintenance is handled well, it prevents costly issues from sneaking up on ownership in the future. It also reduces friction between guests and hotel staff – leading to a more positive guest experience.
For hotels, any sound preventative maintenance strategy should focus on electrical issues, lighting, plumbing, HVAC, floor, furniture, and the hotel’s exterior (curb appeal). When these issues are proactively addressed, everyone – guests, staff, and managers – benefits.
3. Promote From Within
You can only drive labor costs so low without succumbing to illegal behaviors and/or denigrating your employees. But there are plenty of ways to lower labor costs without actually paying your staff less.
One option is to hire and promote from within. Doing so saves money in multiple ways. First off, it eliminates the costs associated with finding and recruiting candidates. Secondly, it generally lowers the chances of a new hire being fired (or leaving) within the first few months. (When both parties are already familiar with one another, there are fewer surprises.) Third, when a hotel manager shows a willingness to hire from within, it sends a signal to other employees that there’s room for upward mobility in the organization. This indirectly reduces turnover, which is costly in multiple ways.
4. Invest in Energy Efficiency
Nearly half of all U.S. hotels have now implemented some sort of in-room energy management system. Many use sensors that require movement in order for lights to turn on/stay on. Others require a key card to be inserted into a specific slot to turn the HVAC on.
In addition to implementing systems like these, hotel ownership should consider replacing old washing and drying machines with more energy efficient laundry appliances. This alone can save a hotel hundreds of dollars per month.
Staying in the Black
Hotels can be enormously profitable businesses, but they can also lose money. While marketing and advertising play an important role in getting rooms booked, it ultimately comes down to managing operating costs and preserving profitability. If you can do this, you’ll find success.