So right away, let me start by saying the average gross operating profit margin for hotels in the US is 11.6 percent as of 2020. That means you are making 11.6 percent off of every hotel stay based on expenditures, on average and across a month. This is based on an occupancy rate of 39.8 percent as projected for that year.
As someone working in the hospitality and hotel industry, I am all for profits instead of losses. Getting above and beyond the red numbers of loss, though, is tricky. Here is where understanding a profit margin and how to calculate this figure for a hotel room is important.
Learn more about how I calculate the profit margin for the budget boutique hotel here in Mexico where I am the manager. Then, try the method for yourself to see where your hotel profit margin falls, and ways to gain in profits and reduce those pesky losses.
Start With Expenses and Expenditures
Just as soon as a hotel chain opens its doors for the first time, there are already countless expenses draining away its potential profits.
This is why I recommend beginning with the expenses when calculating the profit margin on a budget hotel room per night. Here is a hotel operating expenses checklist that covers the most critical expenditures:
- Administrative costs
- Capital investment (land/building)
- Utilities include electricity and water
The building of the hotel is the biggest expenditure, especially if there is a mortgage or lease involved with the property. Expenses related to the capital investment of land and building of a hotel include the maintenance and repairs.
This is only the physical equipment and materials, not to count all of the labor hours and costs for hiring employees that goes into hotel property maintenance.
Next, there are the hotel operations expenses related to keeping a hotel up and running. Hotels depend on human traffic. Without humans checking into hotels and paying to stay in rooms, and for the amenities and extravagant extras like room service, there would be no hotels. This area of expenses covers two directions:
- Labor to staff the hotel
- Costs for handling reservations and customers
The costs associated with labor include:
- In-house housekeeping
- Third party labor from landscapers
- Pool service providers
- Food vendors
If you are staffing a hotel with in-house labor, you are required to provide:
- Human resources services
- Filing necessary paperwork
- Vetting new hires
All of these are expenses that must be managed and possibly taxed by the local, state, and federal governments.
Hotel reservations involve high tech software and computer systems, as well as apps for third party reservation sites like Hotels.com and TripAdvisor. In order to stay up along with competition, budget hotels must be active in all aspects of social media with marketing. Online marketing allows hotels of a smaller size to be competitive with national chains, which is a benefit of using social media.
However, with increased demand are…increased demands, and that can lead to failure for smaller budget hotels that are not able to handle that capacity. Here is where hiring a hotel marketing firm is typically the next step for any hotel manager.
All of these expenses for hotel reservations are coupled by the costs associated with each check-in. A hotel must be serviced, cleaned up to standards set by COVID-19, and fully equipped with the amenities they advertise.
Each time someone books a hotel room, that room must be deep cleaned when they leave. This takes cleaning materials and labor hours, as well as supplies that must be restocked and replenished. Add this to the ever growing list of hotel expenses.
Other expenses a hotel has to pay for may likely include food:
- Grab and go breakfast
- Vending machines
- Continental breakfast
If a hotel offers parking for guests, there is the major expense of maintaining a paved and possibly covered parking area. Hotels may also provide:
- Indoor or outdoor swimming pools
- Hot tubs
- Massage services
Maintenance, repair, and upkeep has to be calculated to determine if these are profitable areas of the hotel. Since those expenses are calculated as “other,” these are often the first to be cut if a budget hotel is struggling to achieve a positive profit margin.
Take Account of Room Costs
The next major area of calculating a profit margin for a budget hotel involves the hotel rooms. Here, you need to take into account the total cost of operating a hotel per room. Start by counting up the average of how many rooms are booked in a single month.
I suggest taking the average over the last 12 months to see what a single month really looks like at your hotel. As you know, there are typically more hotel visitors on the weekends and during the high season.
Find out how much a room costs per month. From here, use that information and the average number of rooms booked in a month. Use this to figure out the total gross profit you will earn from the rooms in your budget hotel.
Now you will have two pieces of information: the average price of a room and the average number of total rooms booked in a month. This is the estimated income you expect to receive for the total hotel bookings in any given month.
Calculate Profit Margin for a Budget Hotel
Taking the information you just garnered, you are able to calculate the profit margin for a budget hotel. Simply subtract the total expenses with the expected income you anticipate for a month.
This will tell you what the profit margin is for the hotel. As noted, the average profit margin is 11.6 percent. This is a positive number, which means you are earning 11.6 percent on every hotel guest that comes in.
This accounts for all of the expenses that go into taking care of that guest and their time at the hotel. If you have a negative number as a profit margin, this is a sign that your income is not as well off as your expenses. It is time to curb spending and find ways to reduce expenditures if you want to see a return on your investment–and be in the black instead of the red at the end of the year.