Remember when hotel supply prices changed once in a blue moon, rather than every payment cycle? Ah, yes, those were the days – controlling your hotel’s profit margin was simpler then.
NB: This is an article from Canary Technologies
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Historically, revenue management departments were the money-making experts, but today, you’ll need to deploy a multi-faceted approach across all departments to remain profitable.
There are two strategies you can apply to consistently unlock high profit margins for your hotel. Here, we’ll list those strategies and provide straightforward ways you can use them to optimize your hotel profit margin.
Volatility of Profit Margins (Or: Profit Margins: A Moving Target)
Profit (or loss) is the result of two forces at play: revenue and cost. What’s left of a hotel’s total revenue after deducting total operating costs is known as net profit margin. When costs are stable, hotel teams focus on boosting revenue to increase margins. However, rising costs can tip the revenue management scales in the opposite direction.
According to CoStar, hotel operating costs outpaced revenue growth in 2023. Data shows that total operating expenses per available room for U.S. hotels increased by 9.4% year over year. Global Commercial Real Estate Services (CBRE) puts growth in operating costs at 10% and revenue growth at 7.4% for 2023, and highlights rising insurance costs as a major contributing factor of the profit/expense disparity.
If your venue is feeling the squeeze, you’re not alone. To find average net profitability in the double digits, you have to look back to Q3 of 2018 when net profit margins for hotels were 13.29%. Since then, profit margins have cooled, ranging between 4.74% and 7.55% in the last year, despite continuous growth in ADR.
We suggest taking this data with a grain of salt, remembering that profit margins will differ across luxury, midscale and limited service hotels. A better, perhaps more worthwhile benchmark would be to compare your own hotel’s past performance.
Whether your target is 5% or 25% and beyond, there are ways to influence this dynamic for hotels across all chainscales, including boutique properties.
The Craft of Maximizing Profit Margins
As the expert at your hotel, you probably already have an idea about what’s happening across your property. To maxmize profits, you’ll need to identify specific areas that need attention, such as your occupancy rates or rising costs in housekeeping products, for example. Once you have a starting point for where your actions will have the biggest impact, you can start to strategize two ways to grow your profit margin: increase revenue and lower costs.
Combine any of the following methods based on what is most relevant for your hotel to create a tailored plan for controlling your costs and profits.
