In the luxury hotel business, there is no room for error. That’s why with a 30 percent gross operating profit (GOP), which is slightly higher than the typical profit margin, you stand a lot to gain–and to lose. I’ve been working in the luxury hotel industry for more than 20 years.
Let me share with you a few bits of insight into how luxury hotel brands make money. Find out for yourself if there is more money to be earned in this area of hotels–or if they are simply falling short of a loss of profit.
About Luxury Hotel Profit Margin
The luxury hotel profit margin works from the standard gross operating profit. Here is where that figure of 30 percent comes in handy. How does a luxury profit margin compare to a budget hotel profit margin? For a budget hotel, the profit margin is 11.6 percent as of 2020.
The 20 percent jump from the budget hotel to the luxury hotel profit margin is where you want to pay attention. That 20 percent is how much more a hotel stands to earn–or to lose–based on their rate of occupancy.
How Luxury Hotels Gain More Profits
How is this possible? The biggest expenditure in a luxury hotel that drives up the amount of money spent by hotel patrons is the amenities. When you enter into a hotel that is considered five star or luxury class, you expect and are handsomely rewarded with opulence. This comes in the form of gold gilded chandeliers, expensive rugs, and artwork from famous artists.
In a budget hotel, not a single one of these amenities would be available to hotel guests. It takes staying in what is considered a luxury hotel to be able to enjoy these amenities and this type of environment. That is also what you are paying for as a hotel guest. After all, these amenities are not free and do not come cheap when it is time to maintain and upgrade decor.
That is only one reason a luxury hotel gains more in profit. Along with using high end decor and furnishings to attract hotel guests, luxury hotels offer Michelin-star restaurant experiences and in-room dining.
The price of these dishes alone is more than most budget hotels cost for more than a single night stay. As a result, there is a great investment that must be made to open up a luxury line of hotels.
This is only possible if a hotel has a lot of capital to begin with, which is often the bottom line for any business in the hospitality industry. Yet by offering access to these indulging amenities, guests are willing to pay an upcharge on what is basically a bed to sleep in, and a bathroom to use for the time you are in the hotel.
Calculating Expenses for Luxury Hotels
When it comes time to determine if a luxury hotel is going to be in the red, or in the profitable black, management will calculate all of the expenses. These are the expenditures, and are the negatives that must be faced when staffing and running a hotel.
Every expense cuts into the profitability of a hotel. With luxury hotels that are expecting 30 gross operating profits, managerial staff handle each expense with a swift hand.
Here are the categories of expenditures for a luxury hotel:
- Administrative costs
- Labor and staffing, including outsourcing
- Capital investment (land/building)
- Utilities, i.e., electricity, water, sewer, and security
- Marketing and advertising
As a hotel manager, these expenses are part and parcel of the running and successful operation of a luxury hotel. Without the land and buildings, for example, there would be no hotel. Then, the hotel must consider the overall costs for upkeep, including utilities and labor, as well as marketing and advertising.
For a luxury hotel, there are also certain levels of care that are associated with these properties. Decorating for the Christmas season, for example, is something that has to be marketed and arranged a year in advance for a hotel like this.
Every expense is accounted for and then compared to the income that comes from various sources. Let’s take a look at that part of the profit margin for a luxury hotel. After all, when it comes to income and profit, the hotel should be seeing gains rather than losses.
If not, you want to go back to Square One to see when the hotel started losing money. This might have occurred after an unexpected slow season or due to a high maintenance bill resulting from a blown up boiler, for instance.
Cost of Running a Luxury Hotel
The total cost of operating a luxury hotel is what will really set up the total profit margin in the best light. Start by calculating the average cost of each room in the hotel. Take into account the low and high seasons and the prices for bookings throughout the year.
After you have done that, average out the 12 months to see what the total average cost for a month would be for a standard hotel room in your hotel. As you will have hotel rooms that are more expensive, such as the penthouse suite, you will see that the overall average will be more than just that of the standard hotel room price.
From here, see how much it costs to operate the hotel throughout the year. This is where you will revert back to the expenditures that are costing the hotel money. Take this information and average out the cost per month, followed by the cost per day.
This, again, is the average cost, and you can expect it to fluctuate throughout the year. However, you are going to take the average and use that cost along with the average cost of a hotel room to calculate the profit margin.