Hotel Rates and Occupancy: Why Less Is More

05th Dec 2012

Author LogoNB: This is an article written By : Matt Shiells-Jones – International hospitality writer

People I have worked with, and some revenue and business models I have seen, rely on (for want of a better phrase) ‘packing people in’ – generally fill the hotel as much as possible (sometimes overfill it) and then we will look brilliant….

But in many cases, you can actually make more money by…shock horror… sacrificing your occupancy for the sake of a higher room rate.

Lets have a look – now lets say that theoretically we have a 100 bedroom hotel with the following operating costs per day (these are all theoretical but generally not too far from the truth):

  • – Staffing 20 staff a day, 8 hours each at £6.50 per hour = approx £1000 (allowing for variation in pay) per day
  • – Electricity of around £100 a day
  • – Gas of around £66 a day
  • – Sky/Satellite TV Licensing of around £83 a day
  • – Business rates and taxes of around £66 a day
  • – Cleaning and supplies of around £60 a day
  • – Advertising and marketing of around £5 a day
  • – Phone/fax and internet at around £50 a day

Total outgoing of around £1430 a day (to be fair these may be inflated, but I like a high-end hotel!). That means you would need to sell every room in the hotel at a minimum of £14.30 a day to cover cost.

Now lets say you sell every room at £25 for the night and achieve 100% occupancy – you then get £2500 total revenue, minus your costs achieves you revenue per room of £10.70. Lets now start looking at some of the nitty gritty of this rate and how you could actually be destroying your business for the sake of 100% occupancy. so here comes the analysis.

Lets say that this £25 was bed and breakfast rate through a third party agent – now a very large online third party agent charges commission of 25%. So lets say that this is worst case scenario and the guest booked through this agent and the rate included breakfast (notice that food costs were not included in our breakdown above?). So we take off our 25% commission of £6.25 – leaves us with a total of £18.75 we receive for the room; now let us remove the tax we will have to pay (UK VAT of 20%) – This has just eaten in to our profit even further and left us with only £15.63 approx, but now let’s say it is a bed and breakfast rate. We take £2 off per person, so £4 for the breakfast. Leaves us with £13.63. And our costs per room are £14.30 meaning an actual loss of £0.67 per room. And this does not even account for the cost of general building maintenance or a myriad of other things a hotel could have to pay for. Best case scenario is that you don’t have commission to pay, so an extra £6.25 is yours – hooray, we finally achieve a profit but can you actually afford not to use third party agents to get people in to the hotel?

So lets have a look at reworking this with a 75% occupancy rate at a higher rate of £35. This time we get a total revenue of £15.93 per room because our operating cost per sold room has actually increased to £19.07 (£1430 divided by 75 as only 75 rooms are actually able to generate revenue for the hotel). So now lets take off our commission, which has increased to £7, tax of £4.38, and breakfast of £4 – leaves us with an actual profit of £0.55 per room. Okay, we are not talking multi-million pound profits, but this is a case example – multiply this up to the £100 a room mark, and you start to see my point.

Now there are those who will say that as you reduce occupancy, so you reduce costs as you save on staffing and supplies – and you will also get those who say that as you increase occupancy, the costs decrease as you get things cheaper in bulk. It is a vicious argument to entertain, however the calculations above take in to account these variations by varying the operating cost per sold room, instead of maintaining the one flat cost across all rooms, vacant or sold – if you spread the operating cost across both vacant and sold rooms, then your profit appears to increase even more.

To make this clearer – lets upscale the figures and say that half of the rooms sold were through third party agents.

100 rooms sold at £25:

  • – £1430 total operating cost
  • – £2500 paid for rooms
  • – £312.50 paid out in commissions (@ 25% commission)
  • – 50% direct and 50% through travel agents is total revenue so far of £2187.50
  • – £364.58 in VAT (20% of £2187.50 revenue) reduces revenue to £1822.92
  • – £400 paid out for breakfast costs reduces revenue to £1422.92
  • – Leaves a loss of £7.08 – no great loss, but still a loss! Hardly world beating profits even if you do skim costs! But you would be losing even more if you do not fill all the rooms!

75 rooms sold at £35:

  • – £1430 total operating cost
  • – £2625 paid for rooms
  • – £328.13 paid out in commissions (@ 25% commission)
  • – 50% direct and 50% through travel agents is total revenue so far of £2296.87
  • – £382.82 in VAT reduces revenue to £1914.06
  • – £300 in breakfast reduces revenue to £1614.06
  • – Leaves a profit overall of £184.06!

Okay, so the above is not an exact science, and I may have lost a few of you along the way, but the premise is simple – increasing a room rate and reducing occupancy, can actually be beneficial! I have seen many hotels undersold on their rate, and others that are oversold on their rate. The difference of £10 in a room rate is not too much for a guest, as this is a standard variance across pricing – why sell at £29 if all your competition is selling at £69 (another point I discuss in a minute).

The point made above is that whilst occupancy rate being healthy is a fantastic thing, sacrificing room rate in order to achieve it can be very detrimental as it can lead to a loss of money, instead of a profit. A slightly higher room rate can deter some guests, but taking a lower occupancy in exchange for more profit just seems logical! Few hotels are able to charge thousands of pounds for their rooms, so for the rest of us, we have to survive by any means possible – just a change of £5 or £10 in a room rate can make a huge difference to the hotels success.

On the subject of room rates – there is a very common thing within hotels where rates are slashed, drastically, in order to get rooms filled; it felt apt to talk about this now. The truth here is that if your competitors are all selling at £100 and you are selling at £99, you are still likely to receive just as many bookings as if you sold at £69! You are still the cheapest in the area at £99.

This starts a get a bit sticky when yo talk about pricing-standardisation within guest expectations. If you are a small B&B selling rooms at £99 and the 5-star resort up the road is selling at £100, they are likely to get more bookings, and because of your have overpriced yourself, and they have underpriced themselves! I will be writing another post about this soon, but basically the point is that all you need to do is match your competitors rates, or undercut them by £5 to £10 in order to succeed (as long as your hotel has the standards to truly compete).

Never underestimate the power of pricing – I have met many a person who has booked a hotel room for a stupidly low rate of about £30 when everywhere in the area is full of people paying £100 upwards because there is a local event on – think of all those people staying in a hotel that is full of people paying stupidly low rates, whilst the nondescript worse hotel down the road is full of people paying over-the-odds – your pricing should fluctuate according to demand; remember that if you do not sell all your rooms, it is not the end of the world, it is simply a sign that you may have got your pricing a bit too high, or maybe, just maybe, you are getting it right!

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