What are hotel operating costs?
Your hotel's financial health depends on managing cash inflows and outflows effectively. Operating costs are the expenses required to maintain daily operations and are essential for calculating profits. They constitute a significant part of the income statement, providing key indicators of financial health.
Operating costs encompass essential expenses for running your hotel, such as lease or rent payments, wages, and utilities. They also include the costs of supplies and hospitality services, known as the cost of goods sold (COGS). Understanding operating costs is crucial for pricing strategies to ensure that revenue covers all expenses.
When calculating gross revenue, operating costs are deducted from income. Besides COGS, operating costs comprise sales, marketing, and administrative expenses directly linked to income-generating activities. It's important to distinguish operating costs from non-operating expenses, which include financing costs like loan interest, investment expenses, and taxes.
Having a clear understanding of operating costs allows business owners to make informed decisions. For example, they can assess hiring costs relative to income generated. To make strategic decisions for your hotel, it's essential to understand each operating cost and its impact on your property.
What kinds of operating costs exist in the hotel sector?
The costs of running and maintaining hotels can either be fixed or variable. Let’s look at the implications of these costs for your business.
Fixed costs
In hotel operations, fixed costs remain unchanged regardless of fluctuations in sales volume or occupancy levels. This means they do not vary significantly whether your hotel is thriving or facing challenges. Fixed costs are often mistaken for static or unchanging expenses, but they may change over time, albeit with minimal impact on day-to-day operations.
Unfortunately, fixed costs do not reflect your hotel's productivity because they must be paid irrespective of performance. Examples of fixed costs in hotels include:
- Mortgage, rent, or lease expenses
- Property taxes and insurance costs
- Staff salaries
- Fixed utility bills
- Employee health premiums
- Maintenance charges for equipment and software
While businesses can benefit from economies of scale by spreading out fixed costs, hoteliers have limited flexibility because most operating costs are variable. This means they fluctuate based on factors like occupancy rates and business activity.
Variable costs
Variable costs in hotel operations fluctuate based on productivity levels, directly correlating with business volume and hotel occupancy. As occupancy rates increase or decrease, so do these operating expenses. Hoteliers must make daily decisions to manage costs and maintain operational efficiency. Examples of variable costs include:
- Hourly wages: Part-time or overtime wages for workers fluctuate based on demand, requiring adjustments to match staffing levels with occupancy rates. You should match the costs to demand to avoid overstaffing or understaffing.
- Advertising and marketing costs: Marketing expenses increase with high bookings due to commissions, and additional advertising may be necessary during low occupancy periods to attract customers.
- Food, beverage and housekeeping supplies: Supplies must be adjusted based on occupancy levels to meet guest demand effectively, minimizing waste and optimizing costs.
- Utility costs: Utilities like HVAC systems and electricity usage vary with occupancy and weather conditions, impacting costs accordingly.
Monitoring variable costs is crucial for hotel profitability. High daily expenses can challenge profitability, but effective management can optimize productivity and financial health. Adjusting variable costs based on business volume and demand will contribute to sustainable operations and improve your profitability.
List of most common hotel expenses
Hotels incur various daily expenses to remain operational. Below, we list some of the most common expenses.
Labor
Labor expenses encompass staff payroll along with benefits such as paid holidays, sick leave, and insurance. It's estimated that approximately 45-55% of expenses are allocated to labor costs, underscoring the importance of avoiding overstaffing during low seasons and aligning staffing levels with projected occupancy rates to optimize productivity.
Supplies
Supplies represent another significant area of expenditure for hotels, covering guest amenities, linens, towels, and cleaning products. It's crucial for hotels to monitor their spending on supplies and maintain appropriate inventory levels to avoid excess, which can lead to profit leakage.
Utilities
Utilities such as electricity, gas, water, and heating and cooling systems represent significant expenses for hotels. Guests tend to be more careless about water and electricity usage when away from home, leading to unnecessary resource consumption.
Marketing
Marketing is another significant expense for hotels, involving investments in advertising, promotions, and distribution to reach the ideal target audience. This often entails trial and error, leading to substantial costs for hotels.
Insurance and taxes
Hotels are also responsible for local fees, taxes, and insurance coverage for risks associated with staff and guest safety on the property. Each local government where a hotel operates will have specific permissions and fees related to operations.
Supplier commissions
Credit card processors charge fees for payment processing, while OTAs and other distribution channels may have fixed fees or work on commissions. Promoting direct booking channels is advisable to increase hotel profits. Additionally, loyalty programs and other sales initiatives aimed at driving demand also contribute to relevant costs.
6 indicators to control hotel operating expenses and how to calculate them
Controlling operating expenses and understanding how to calculate them are crucial aspects of ensuring profitability. Let's explore some of the most common indicators along with methods for calculating them.
Cost per Occupied Room (CPOR)
CPOR helps you measure the average cost your hotel incurs for each occupied room. Understanding CPOR allows you to identify areas where expenses can be reduced or optimized. A lower CPOR indicates higher potential profitability from room sales. This indicator is calculated by dividing Total Operating Expenses by the Total Number of Occupied Rooms.
Revenue per Available Room (RevPAR)
RevPAR helps your hotel understand how much revenue is being generated from the available room inventory. The goal of calculating and maximizing RevPAR is to increase revenue without significantly increasing costs. RevPAR is calculated by dividing Total Room Revenue by the Total Number of Available Rooms.
Cost per Available Room (CostPAR)
CostPAR helps your hotel understand the average costs associated with servicing all available rooms, regardless of occupancy. This KPI provides a comprehensive view of your hotel's cost structure and resource utilization. To calculate CostPAR, divide the total costs (both fixed and variable) by the total number of available rooms and days.
Gross Operating Profit per Available Room (GOPPAR)
GOPPAR helps your hotel understand its gross operating profit per available room. This metric considers room sales revenue while deducting operational expenses to provide a better idea of your hotel's financial performance. GOPPAR is calculated by dividing the gross operating profit (GOP) by the total number of available rooms in the hotel (TAR). It's important to note that GOP represents total revenue without considering total operating expenses.
Labor per Available Room (LPAR)
LPAR assesses how efficiently labor resources are utilized in relation to the number of available rooms. Since labor constitutes a significant portion of a hotel's costs, it's important to evaluate whether these costs are being used efficiently. LPAR is calculated by dividing total labor costs by the total number of available room nights.
Guest Acquisition Costs (GAC)
GAC is calculated by dividing the amount spent on guest acquisition (including marketing, advertising, and distribution costs) by the total room revenue and then multiplying the result by 100 to obtain a percentage. GAC measures the average cost of acquiring new guests or bookings and helps assess the efficiency of your hotel's marketing and distribution strategies.
How to reduce hotel operating costs
Hoteliers rely on high-quality customer service to succeed, but controlling costs without compromising service provision is a significant challenge. How can you limit operating costs while ensuring long-term benefits for the hotel?
1. Optimize Labor Costs with Training and Scheduling
Staff salaries and hourly wages often account for up to 50% of hotel expenses, making it a primary target for cost reduction efforts. However, simply cutting labor without considering demand can lead to unhappy guests and frustrated employees. Utilizing proper scheduling based on occupancy forecasts allows you to align staffing levels with demand.
Training staff to perform various duties can also optimize labor costs. Cross-trained employees can cover for absent colleagues without the need to hire additional staff, reducing unnecessary expenses.
Reducing employee turnover is another way to minimize labor costs. Research indicates that businesses spend approximately 33% of an employee's salary on recruitment. Improving the onboarding experience and offering competitive benefits can help retain valuable staff and reduce turnover costs over time.
2. Reduce utility expenses
Keeping utility costs low is essential for reducing expenses. Start by tracking energy consumption to identify opportunities for cost savings. Here are some recommendations:
- Use Energy-Efficient Bulbs and Occupancy Sensors: Install energy-efficient light bulbs and occupancy sensors to ensure that lights automatically turn off when guests leave their rooms, reducing unnecessary energy consumption.
- Maintain HVAC Systems: Stay on top of HVAC maintenance to prevent faults and inefficiencies. A faulty HVAC system can increase energy consumption by up to 15%.
- Utilize Solar Heaters for Pools: Consider using solar heaters to heat your hotel's pools, reducing reliance on traditional energy sources and lowering utility costs.
3. Rethink your software needs
On-premises software can lead to increased overhead costs due to software licenses and recurring maintenance fees, which vary depending on the property size and needs. Additionally, managing this software typically requires hiring specialized personnel.
Most hotels require essential systems like a PMS, a channel manager, a revenue manager (either software or personnel), and a POS system if the hotel includes a restaurant. However, costs can be reduced by opting for hotel software that bundles multiple functionalities into a single suite.
Cloud-based solutions like Mews can significantly reduce costs by centralizing services. They eliminate overhead expenses associated with managing on-site software and ensure seamless sync of hotel operations. Moreover, cloud-based PMS offers enhanced security compared to physical servers, which are vulnerable to unauthorized access.
However, it's important to note that maintaining hotel standards still requires hiring personnel to ensure smooth operations, as software has not yet replaced the need for human resources.
4. Take advantage of automation
Automation is the future (and the present) of the hotel industry. The best part is that it improves efficiency and optimizes costs while ensuring your guests are happy. For instance, you can manage reservations and allow guests to check-in remotely instead of queuing at the front desk.
Mews also comes in handy in managing housekeeping via a dedicated app. The software helps to improve efficiency and use real-time reporting to schedule staff. Automation can also reduce administrative tasks and free up time to concentrate on the customer experience.
You can also use the software to collect guest data and provide a personalized experience. With data automation, the collection is seamless and aids in informed decision-making.
5. Limit your marketing costs
Marketing expenses can burden a business, especially if commission costs are high. Hoteliers can minimize advertising fees by securing commission-free bookings. Increasing direct bookings can be achieved by optimizing your website for search engine traffic or investing in search engine or social media ads, which typically yield higher revenue compared to bookings through OTAs.
4 tips to consider when reducing hotel expenses
Reducing hotel expenses requires a strategic approach to ensure all factors are carefully considered.
Focus on Efficient Resource Use
Invest in energy-efficient technologies like solar panels, LED lighting, motion sensors, and efficient heating, ventilation, and air conditioning systems. Encourage guests to save water by reusing towels, which also reduces laundry costs. Upgrade to low-flow fixtures in bathrooms and use energy-efficient appliances throughout the hotel.
Optimize Labor Force
Align staffing levels with occupancy and peak hours to avoid overstaffing. Cross-train employees to perform multiple tasks efficiently. Consider outsourcing non-core functions such as laundry, maintenance, and landscaping to reduce overhead costs.
Manage Supply Costs
Pay attention to the cost of amenities, water bottles, and complimentary items provided in rooms. Invest in high-quality linens and towels to reduce replacement frequency and lower long-term costs.
Negotiate Smartly
Consolidate suppliers to leverage higher volume for discounts. Negotiate better pricing with longer-term contracts and obtain bids from multiple vendors to increase negotiating power.
By focusing on these areas, hotels can effectively manage expenses while maintaining service quality and sustainability.
Increase your revenue and reduce costs with Mews
When you use a comprehensive hospitality cloud like Mews, you can focus all your efforts on revenue-driving activities rather than investing in separate software solutions. Mews enables you to optimize revenue generation by promoting direct bookings and adjusting rates in real time using dynamic pricing based on demand, occupancy and market conditions.
Automation of processes ensures that you have the appropriate number of staff available at any given time. Additionally, you can identify revenue opportunities through upselling, guest profiling, and built-in revenue management features within the software. This comprehensive approach streamlines operations and maximizes revenue potential for your hotel.
Conclusion
Despite the significance of optimizing costs, you should not reduce them at the expense of your customers. If your customer service falls below a guest’s expectations, negative reviews can harm your hotel business.
For this reason, it’s essential for the staff and the General Manager to know and understand how the hotel functions like the back of their hand, enabling them to identify areas where costs can be reduced without compromising service quality. Without this knowledge, there's a risk of making decisions that could negatively impact the hotel’s operations.
Therefore, as you contemplate the best strategies, remember to maintain a balance. With a little creativity, you can streamline your hotel operations and improve profits.
Download our guide Embracing Metrics that Matter
Operating costs are only one of dozens of important metrics that your property should be tracking. Want to explore the rest?
The Metrics that Matter is the ultimate guide to the new generation of hospitality metrics that will encourage you to think differently about your property and ultimately boost revenues.
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