Having a solid standard as a base for further exploration into new types of revenue, costs, and KPIs is good.
NB: This is an article from Demand Calendar
Unintentionally, USALI and other accounting standards are masters in hiding valuable information within the Profit & Loss statement and in the different accounts. One example is Customer Acquisition Cost (CAC), spread over several other accounts in several schedules.
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This means it is tough to fully understand the size of CAC and its development over time. It gets worse when it comes to different KPIs. USALI has a long list of KPIs without indicating any rank by importance.
Here is a simplified list of essential KPIs related to various profit levels in the hotel Profit & Loss statement.
Essential Profit & Loss KPIs
These eight essential Key Performance Indicators (KPIs) are all profit metrics that help hoteliers monitor and optimize their financial performance. The start and the end are the same as in USALI. The statement below focuses on who is responsible for producing each profit level. The commercial team (marketing, sales, and revenue) is responsible for total revenue and for the cost to acquire the revenue. The best KPI to track the performance of the commercial team is Net Contribution after Customer Acquisition Cost. This is what the commercial team hands over to operations to convert as much as possible into the following profit levels. The gross operating profit margin will show how much revenue the operations managed to turn into profit. By clarifying who is responsible for which profit level, the hotel management can easily find areas for improvement and direct the efforts to the correct department.
- Total Revenue: The overall income generated by all facilities and outlets in a hotel, including rooms, food and beverage, spa services, event spaces, and any additional income streams. Even though, total revenue is not a profit KPI, it is one of the most critical KPIs in a hotel, and you have to track this against budgets, previous years, and the market to understand your performance.
- Net Contribution after Customer Acquisition Cost (CAC): The revenue remaining after subtracting the costs of acquiring the revenue (or guests and customers), such as marketing, sales, distribution, commissions, and loyalty program costs. CAC is between 15 and 25 % on average of the room revenue for the hotel industry. Compare your net contribution with the industry averages and if it is increasing or decreasing.
- Gross Profit: The profit generated after subtracting the cost of goods sold (COGS) or variable costs associated with producing the room or delivering other products or services.
- Gross Profit Margin: The gross profit ratio to total revenue, expressed as a percentage. It provides insight into how efficiently the business generates profit from its core operations before accounting for other expenses.
- Gross Operating Profit: The profit generated from the business’s core operations after accounting for all variable costs and operating expenses.
- Gross Operating Profit Margin: The ratio of operating profit to total revenue, expressed as a percentage. It shows how effectively the business generates profit from its core operations after accounting for all variable costs and operating expenses.
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A measure of the business’s operational efficiency and performance, often used as a proxy for cash flow.
- Net Profit: The overall profitability of the business after accounting for all costs and expenses, including interest and taxes.
Essential KPIs to improve the profit
Hotel management and owners are traditionally always dissatisfied with their profit level. However, they all want more and must drill down into the details to find opportunities to improve the different profit-level KPIs. Here are five KPIs showing how well the hotel generates more profit with each revenue increase.
Marginal Profit: The additional profit generated by selling one more hotel room, an additional unit of a product or service, taking into account the associated variable costs.
Marginal Conversion Rate: The rate at which incremental revenue is converted into profit, highlighting the hotel’s cost management efficiency and optimization strategies.
However, the total marginal profit and conversion rate is a mix of both marginal contribution from volume and marginal contribution from the rate. Therefore, there is a need to understand how much volume and rate contribute to the additional profit to take the right action to improve profits.
Marginal contribution from volume: The rate at which additional revenue is converted into profit when the volume of sales increases. In a hotel context, the marginal contribution rate can never be 100%, as selling an additional room always incurs costs such as cleaning, laundry, guest amenities, commissions, credit card fees, etc. Still, there are no other costs than the variable costs of producing an additional room night, so the marginal contribution should be 70-90 % depending on the type of hotel and rate level.
Marginal contribution from rate: The rate at which additional revenue is converted into profit when an increase in the price or rate is charged for a hotel room, product, or service. The goal for marginal contribution from the rate is typically around 90-100%, as increasing the rate often has less impact on the associated costs than increasing sales volume. When a company raises its prices, the additional revenue generated tends to have a higher marginal contribution since the fixed and most variable costs remain constant. Variable costs calculated as a percentage of revenue, such as commissions and credit card fees, will increase when the rate increases.
Determining whether the rise in profit is due to an increase in volume or a rate increase is crucial in identifying areas that require improvement. This knowledge aids in making informed decisions that favor long-term profitability and overall success.
