Remember when hotel supply prices changed once in a blue moon instead of every payment cycle? It’s true that controlling your hotel's profit margin used to be simpler. 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.
Profit (or loss) is the result of two forces at play: revenue and cost. Net profit margin is what is left over after dedicating a hotel’s total operational costs from its revenue. 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 4.85% and 7.28% in the last year, despite continuous growth in average daily rate (ADR).
Of course, profit margins will differ across luxury, midscale and limited service hotels, so we do suggest taking this data with a grain of salt. A more accurate benchmark would be to compare your own hotel’s past performance to today’s numbers.
Whether your target is 5% or 25% and beyond, there are ways to influence this dynamic for hotels across all property types, including for boutiques.
To maximize profits, you’ll need to identify specific areas that need attention, such as fluctuating occupancy rates or rising costs in housekeeping products.
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.
Reducing costs in hotels requires a strategic approach rather than blanket cuts. While small changes such as sourcing cheaper cleaning products might help, it may not be as impactful as reducing waste in your restaurant. The key is to identify the most significant cost-saving opportunities unique to your hotel.
Break down your costs into three categories:
The table below highlights a few ways you can cut costs across your property.
Analyze your expenses across all departments line-by-line to uncover areas where you can afford to cut back and remember that small, incremental savings add up quickly.
For example, the Days Inn by Wyndham Saskatoon eliminated a $5,000 yearly expense simply by optimizing how they process and authorize payments. Learn how to fight fraud and chargebacks for your hotel in this on-demand webinar.
Boosting revenue is usually attributed to the revenue management department. To increase profit margins they’ll typically deploy two common strategies:
Both strategies require finding a reasonable middle ground between room rates and occupancy levels. The greater your occupancy, the greater potential you have to increase profit margins. And guests are more likely to book your hotel and return if you provide a great experience.
Here are a few other actions you can take to increase revenue and occupancy while also maximizing guest satisfaction.
What if you could make money throughout the guest’s stay instead of just at booking? This strategy is known as total revenue management, and is used to optimize all revenue streams at your hotel. One way to achieve this is to start upselling to increase guest spend per room (TRevPAR).
Your number of rooms is limited, but your upsell opportunities are unlimited — even in limited service hotels!
Unlike low-cost airlines that charge for essentials, hotels that master upselling allow guests to customize their experience, which increases their perceived value of the stay. Get creative here — some upselling techniques you can use to stretch your profit margins include:
Consider adding some free “upgrades” to your list of paid offerings. Guests who see a free add-on are more likely to explore your other revenue-generating options.
Be intentional about how you offer these upgrades to guests, too. A successful upsell strategy does not include staff reading from a repetitive script at check-in, but rather intentional suggestions throughout the guest journey at times when they’re more likely to buy.
Ready for more ideas and upselling techniques? Our free e-book provides tailored upselling techniques for any type of hotel, from budget to luxury resort.
Until the costs of essentials stabilize, hotel profitability will remain unpredictable. Generating demand is crucial, but with fluctuating costs, hotels must adapt and embrace relevant industry innovations.
Wherever you are on this journey, analyze your results over time to identify the factors impacting your hotel most. Then weigh your actions accordingly.
With the right solutions, this won’t feel like an uphill battle. Instead, it will become the flywheel of modern hospitality. To learn how Canary's guest experience platform streamlines operations and makes hotels more money, set up a demo today.
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