02 Jan Where the money you pay for your hotel room goes!
To those in the industry, this post will come as no surprise, but have you ever wondered just what exactly you are paying for when you pay for your hotel room? Well, this is a breakdown of that room rate and those costs – as you will see, a hotel doesn’t make quite as much money as you may think from your stay!
It is worthwhile pointing out that these amounts will vary from hotel to hotel and are just a representation based on an average room rate in the UK – taxes etc may vary from country to country and even city to city, similarly staffing costs etc will all vary; in other words this is an example only and does specify exactly what money every hotel makes from a hotel room as there are many factors to consider.
Our Theoretical Hotel:
Our theoretical hotel is 4 star without a restaurant for evening meals and no conference or event facilities, based in the UK. It sells rooms at £100 a night (so you can work percentages out more easily) and has an 85% average level of occupancy.
You may be new to the industry, have worked in hotels for years or even never worked in a hotel, only stayed in one – hopefully this will show you exactly why you may struggle to see much bang for your buck in some hotels!
Every Hotel Room Has Some Basic Costs
So we start with £100, but in the UK there is an immediate loss of 20% of the room rate total for the tax man! VAT (Value Added Tax) is chargeable on hotel rooms at a rate of 20%. Now this does not mean you take 20% of the £100 for VAT, as that would be applying the tax retrospectively which is incorrect, instead we divide the £100 by 1.2 (essentially saying that £100 is actually 120% of what we need to find out – this is because we have a 100% room rate plus a 20% tax, so we divide it by 120% to get the before tax rate) – this means the hotel collects £83.33 as NET revenue for your room (earnings after tax is deducted) – if you add 20% to £83.33 you equal £99.996 which rounds to £100. Oh and let’s not forget travel agent commission – if you are one of the millions who book through a travel agent website such as Booking.com, Laterooms, Expedia etc, then you are costing the hotel a commission, of anywhere from 10%-25% of your total room cost (including taxes) – the average is around 16% of the room sale cost so thats £16 of your room gone to the travel agent on top of the taxes already paid! And then we have processing fees for the card providers – when you pay by credit or debit card, the company receiving the payment is charged a fee by the ‘merchant company’ who act as a payment gateway between the card issuer and the hotel. Typically these fees average around 2% of the total transaction cost. So that is an extra £2 that has gone to the merchant account provider.
Now Every Other Department Costs Money Too!
So the hotel now has £65.33 (already losing out £34.67 in taxes and commission and payment processing fees), but what about the breakfast cost associated with your room? Each department has to operate to it’s own revenue, therefore a bed and breakfast rate will always allocate a portion of the revenue to the restaurant for breakfast costs. In my experience the average cost for this is around £5.50 per person (yes a Bed and Breakfast rate can really give just that little an amount for your breakfast!), so that is another £11 taken off the room cost for another department. Remember that this £11 is given to the restaurant to pay for waiters, heating, power, chefs and food including everything that is cooked, cereals, cheeses, hams, croissants etc – everything on that buffet has been paid for by a small amount of money from your room rate. Generally with a more luxurious hotel, more money is allocated to the restaurant for breakfast.
Now we get to the rate after tax and breakfast cost – £54.33
£Staffing is one of the larger costs as this can be viewed as having multiple areas of involvement. From your room rate the hotel will need to pay for front desk, housekeeping, maintenance and reservations and possibly a few other areas as well such as security. So a 100 bedroom hotel with 10 front desk/nights staff at £7.50/hour for 39 hours a week each (total £292.50 per staff member = £2925/week), plus 2 night security at £9 per hour (as security staff cost more) based on 40 hour weeks (£720/week) plus the managers at approximately £20,000 each per annum (£770/week), and also 2 reservations agent on 40 hours a week at £7.50 an hour = £600. This is a total cost of £5015 per week. Take an average occupancy of 85% out of the 100 rooms a night you are selling – 100 x 7 nights x 85% = 595 rooms sold. Divide the total payroll by rooms sold = £5015 / 595 = £8.43 cost for front office per room. That is £8.43 to pay for someone to receive your booking, ensure it is entered to the system correctly.
NOTE: This is a rough estimate and excludes some payroll considerations such as pension contributions, holiday pay accrual etc which can add extra cost to this.
Add to this we have the cost of that fancy key card and key card envelope/wallet, plus all the cost of printing everything, I.T. contracts to maintain systems, paying for the telephone system, the pens and pencils and all the other stationery you have at a front desk. That could amount to a substantial amount for the purpose of this we will stick to a very basic estimate of £2 per room.
So now we have paid for your reservation to be received, processed and everything allocated and to get you checked in and all set for your stay. You have paid £100 but as a hotel that equates only to actually receiving £43.90 so far. Seems good – a 44% profit margin? Not quite….
What about cleaning your room? Maintaining it?
These are other costs to consider! A typical housekeeping team will have a linen porter, several maids, a supervisor and/or manager. This equals around 10 staff for cleaning rooms at £7.50/hour for 40 hours a week, plus supervisor and manager at average £9/hour for another 40 hour week. That’s £3720 a week. Spread that over the 595 rooms and we have a cost of £6.25 for cleaning your room, just in staffing. Now we are receiving only £37.65 per room.
Now we have to account for laundry and linen, plus all those little things in your room such as soap, shower gel, tea and coffee etc. For a standard bedroom you wouldn’t usually get things like coffee machines, bath robes etc but if you did this would increase costs even further (each coffee pod can cost as much as 50p per pod). So lets set this as a rough average of £2.50 for laundry cost and £2.50 for guest supplies – it can be as low as £1 for everything in your bedroom depending on the companies and suppliers; the power in bulk buying! So that’s an extra £5 away from the room cost towards cleaning and servicing the room.So now we are at £32.65 that is being used for ‘profit’. Lets say that this a hotel without any conference facilities or evening restaurant (trust me, you would not want to get in to that minefield of accounting) – and lets say that it has a small administration team and a typical senior management structure of Operations Manager and General Manager. For arguments sake we will say there are 4 people in administration (accounts, sales) on an average salary of £19,000 each, and the Operations Manager on £25,000 and the General Manager on £30,000. That gives a total administration cost of £131,000 a year or £2519/week – over the 595 rooms average this is a cost of £4.23 per room to cover administration and management of the hotel.
Here we are at £28.42 profit per room. Doesn’t sound too bad does it? Well, we may have covered cleaning the room, checking you in and out, processing your payment etc, but we forgot all about what you will do whilst you are in the hotel. What about the cost of that ‘Free’ Wi-Fi, or the heating and lighting for your room, or the license for the television or cable channels. Also what about local business rates? What about rent, or land charges or even insurance. These could account for as much as 8-10% of your room cost, so lets say a conservative £8 for all of this.
What about maintaining the property and other property costs?
Well 2 maintenance team members at £9 per hour for 40 hours a week is £720/week or £1.21 per room and that doesn’t include the charges for contractors to do work such as electricians or for the cost of materials, so lets round this to £2 per room to account for materials.
What about advertising the property to people? Lets say this costs 50p per room for printed brochures or business cards and online adverts.
So that brings us to £17.92 per room in terms of money taken. But unfortunately that is not the end of it as there is still consideration for things like bank loans, interest, or even payments for the use of a franchise name (using the name of a brand such as Holiday Inn or Accor Hotels etc) so lets say another 25% of this comes away for corporation taxes and franchising etc – that leaves just…..
Yes only around £13.44 out of £100 you paid for your room is money made by the hotelier. For context, Apple and Microsoft work at approximately 20% profit margin – they make 20% of every sale as profit.
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And there you are – every time you spend £100 on a room, the company is only making around £13.44 from you staying there, so don’t be surprised when they say no to that upgrade or freebies as you will be eating in to their profit margins even more!
What this means!
It means that every time the hotel example above gives someone a refund of more than £13.44, they are losing money! Quite simply, if the above hotel gives more than 13.44% of the room rate back in rebate to the guest, then essentially the hotel has paid the guest to stay there! The key to staying profitable is quite simply getting it right! Are you aware of your profits? Do you know how many times you have paid someone to stay in your hotel because of the above?
It also means that to increase profits, you have to reduce costs associated with rooms – selling more rooms or at higher rates doesn’t always increase profits as it could also increase costs (especially if you need more staff to meet higher demand or comply with regulations). Some examples of cost saving would be removing the breakfast element and selling ‘room only’ rates, or removing elements such as check in desks to reduce staffing costs; alternatively taking free services and making them chargeable such as premium television channels or Wi-Fi – this will increase your accommodation-related margins.
There are many tricks you can use to adjust profitability and many differing ways in which margins can be adjusted, however to tell all would be far too revealing…. for now!
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