What is a hotel business?
A hotel is the broad term referring to an accommodation that includes a bed, bathroom, and various guest services, creating a comfortable, home-away-from-home experience for travelers. Typically, hotels are in buildings (though bed & breakfasts are often in large homes) and are primarily used for short-term stays. However, under certain circumstances, they can also cater to long-term guests.
What transforms a hotel into a hotel business is the ability to consistently fill rooms while providing these services at a price that ensures profitability and keeps guests coming back. Running a hotel business isn't easy, but with the right strategy and execution, it can be highly successful.
Startup costs for a hotel business?
Startup costs for a hotel business can be quite varied depending on where you want to open your hotel, the size of the property, the taxes for that particular area, price of supplies and materials in the particular country where your hotel is located, and the number of stars or the amount of luxury and amenities you want to provide. Here are some of the most common startup costs:
Initial investment costs
- Buying the land and the building (some may choose to rent instead)
- Design and furniture
- Technology (like your Hotel Management Software)
- License and permits
- Marketing and advertising
- Inventory
- Security
Fixed costs (may be monthly, quarterly or annually)
- Staff wages
- Utilities
- Marketing and promotion
- Maintenance
- Inventory
- Insurance
With all these factors combined, it’s estimated that you may need as much as $17 million on average to start a hotel. However, this figure can vary significantly based on the size of your property and other specific details.
Revenue streams: How hotels make money
Now that you understand the investment needed to start a hotel, you might be asking, "So how do I make money?" The largest revenue stream for hotels is, unsurprisingly, room bookings. This is followed by revenue from meetings and events, food and beverage services, and other ancillary offerings.
Rooms are the primary revenue source because nearly all hotel visitors are paying guests who book a room, whereas not every guest will attend meetings, dine on-site, or purchase additional services. Plus, rooms typically offer the highest return on investment (ROI).
Key factors for a successful hotel
There are many factors to consider when it comes to creating a successful hotel business.
Targeted marketing campaigns and reputation management
First, it’s crucial to develop target marketing campaigns that highlight your hotel’s differentiation. Conducting a SWOT analysis—examining your Strengths, Weaknesses, Opportunities, and Threats—both internally and externally, will give you a solid foundation to craft your messaging.
Next, you’ll need a strategy for gathering reviews and staying on top of your online reputation. For example, you might offer a complimentary drink or coffee to guests who leave a review during their stay. Additionally, implementing a robust social media strategy is essential. Consider collaborating with influencers who resonate with your target audience to promote your hotel effectively.
Choose wisely your distribution strategy
Distribution is a significant part of your investment, with some channels taking up to 20% in fees. That’s why it’s essential to have a balanced mix of reliable OTAs (Online Travel Agencies) while also focusing on building your direct channels to attract as much direct business as possible. Initially, it might be challenging since people won’t know your hotel yet, but leveraging the marketing power of large OTAs can help you gain visibility and success.
Consider having a soft opening
A soft opening is a great way to introduce your hotel to the market while giving yourself time to iron out any issues. As the property owner, it’s a smart move to spend a night in each room category. This firsthand experience is invaluable for identifying any missing elements or issues that need fixing.
Getting business
While OTAs, a solid marketing strategy, social media investment, Google ads, and reputation management are crucial, getting your pricing strategy right is equally important. Ensure your hotel’s pricing aligns with your target audience. The stronger your online presence, particularly your own website (which can be boosted with SEO efforts), the easier it will be to attract guests.
Segmentation is key
Your strategic plan should include a marketing approach that clearly defines your target market. This allows you to craft unique experiences tailored to your audience and develop pricing strategies that meet their needs. Understanding your audience’s preferences and challenges will help you make more strategic decisions. From there, you can also create a distinct value proposition that differentiates you from the competition.
6 essential steps to launch your hotel business
Starting a hotel business might feel overwhelming, but breaking it down into manageable steps can make the process more approachable. Follow these essential steps to get started:
Create a strategic business and financial plan
First things first, create a business plan that outlines your goals for the first year, three years, five years, and even ten years. This plan will keep you focused and help you prioritize what matters most. Alongside this, put together a financial plan to manage your budget and investments wisely, ensuring you’re spending where it counts.
Study the market and competitors
Understanding your competition is key to positioning your hotel effectively. Define your competitive set and analyze their strategies, pricing, and market presence. This knowledge will help you differentiate your hotel and identify opportunities to stand out. This research is a vital part of your SWOT analysis.
Create a unique brand identity
Once you’ve pinpointed your unique selling proposition (USP), develop a brand identity that reflects it. Your brand should clearly communicate what sets you apart and resonate with your target audience.
Take care of bureaucracy
It’s important to have all your ducks in a row when it comes time to open, because it won’t take long for a neighbor to report you if they find out you don’t have the right licenses and permits. Hire a professional who is very up to date with the local bureaucracy so they can help you get all your paperwork in order.
Hire staff
Start by hiring key management positions, as these roles are critical to your hotel’s success and may require more time to fill. Your first and foremost hire should be a General Manager, who will then assist in building out the rest of your team.
Leverage the right technology
No hotel is complete without the right Hotel PMS, which will serve as the backbone of your operations. The right technology will help streamline processes, make data-informed decisions, and enhance overall efficiency.
Conclusion
A hotel business is complex with many moving parts, but with strategic planning, thorough business analysis, and accurate forecasting, you can find a great deal of satisfaction in running a hotel while also achieving a solid return on investment.
The time it takes to fully recover your initial investment will depend on whether you bought, rented, or built your property from scratch. Generally, you can expect to start generating profit after several years. Success also hinges on having a strong initial business plan and the ability to adapt to changing circumstances as they arise.
Download our guide "How to diversify hotel revenue"
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