All hotels would like to know which of their guest segments are the most profitable.
NB: This is an article from Demand Calendar
The main reason is to dedicate more resources to finding more guests belonging to this segment to increase profitability. Here is a blog post about how to calculate profitability per segment.
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Hotels rarely measure profitability by segment. One reason is poorly defined segments which lead to confusion about which segment a reservation belongs to. In addition, the low data quality will make it difficult for the hotel management to trust the information about the segment mix. Let’s assume that the hotel has sorted out its segmentation and wants to calculate the profit per segment.
Three cost models
Start by defining all activities associated with acquiring and servicing the guests. An easy method to use is Activity Based Costing (ABC). The next step is to look at margins in products and services. For example, cleaning a larger room costs more than cleaning a small room. However, the cleaning cost per day is lower when the guest stays longer. In addition, the cleaning cost for a business traveler tends to be lower than for a family with small children. The final step is to factor in the size of the segment to understand the profit contribution in money since profitability in percent could be misleading.
Activity Based Costing (ABC)
Activity-based costing (ABC) identifies and assigns costs to specific activities or processes within a business. For example, the following steps could be taken to use ABC to evaluate the profitability of a hotel’s guest segment.
- Identify the activities or processes associated with acquiring and serving the guest segment. For example, these activities might include marketing, sales, housekeeping, and breakfast.
- Determine the costs associated with these activities or processes, including direct and indirect costs. For example, direct costs would include wages for employees cleaning the hotel room, while indirect costs would include utilities.
Use this information to determine the total costs of acquiring and serving the guest segment and their revenue. Then, compare the revenue and expenses to assess the segment’s profitability. By using this straightforward approach to ABC, hotels can have a more accurate and detailed understanding of which guest segments are the most profitable and where they should focus their efforts to increase revenue.
Contribution margin analysis
Contribution margin analysis: This method looks at the difference between revenue and variable costs for a specific product or service, such as a room type or package. It can be used to identify which products or services are most profitable and where to focus efforts to increase revenue.
Cost-volume-profit (CVP) analysis: This method looks at the relationship between costs, volume (number of guests), and profitability. It can be used to determine the number of guests that need to be booked to break even or achieve a desired level of profitability.