In any business, you must determine your profit margin. It’s one of the metrics that will let you know how your company is doing. That is certainly true in the hotel industry.
In this article, we will talk about what a hotel’s profit margin is and how to calculate it. We’ll also discuss some profitability metrics and go over ways you can increase your hotel’s profitability if it is lacking at the moment.
With hotels, you can define profit as whatever money a property has left after it has collected its revenue and paid whatever expenses it has. This does not mean all the money that’s left over goes directly into the pockets of the owner, though.
You can differentiate between gross operating profit, which you can regard as a measure of your property’s operating revenue minus its operating costs, and net profit. Net profit is a measure of your property’s revenue minus all expenses, which include taxes and interest. If you’re looking for the real “bottom line,” that would be your net profit.
If you’re trying to determine your hotel’s profit margin, you should look no further than the business’s profit and loss statement, sometimes abbreviated as P&L. You might also hear some hotel owners refer to this as an income statement.
You will produce one of these every month for the whole fiscal year. In your property’s P&L, you should itemize your hotel’s revenue, its expenses, and its profits or losses by department. Your P&L can also tell you your non-operating activities and your hotel’s net profit.
Now, let’s learn how to calculate your hotel’s profit margin. You will get a percentage for your profit margin, unlike profit itself, which is reported as an absolute number. If you have a higher profit margin, that generally means the property is performing better and it has high operational efficiency.
This is the formula for calculating gross operating profit, or GOP, during a given period, such as a month or year:
Gross Operating Profit = Total Revenue - Total Operating Costs
If you want to calculate your gross margin, that formula is:
Gross Profit Margin = (Gross Operating Profit / Total Revenue) x 100
Let’s say that your hotel takes in $75,000 in March of one year. It has $64,800 in expenses. That would mean its monthly gross operating profit is $10,200.
At this point, you’re probably wondering what the average profit margin is so that you can calculate yours and see how it compares. It’s natural to do this, but you must also keep in mind that profit margins vary widely. You just factor in things like the location, type, and size of your particular hotel. Operating efficiency, what competition is like where you’re located, pricing, and amenities will also play a part.
That being said, here are some hard numbers to give you some idea of where your hotel’s average profit margin should be. For 2022’s first 10 months, the US hotel average gross operating profit was 38%. You can compare that to 2019, which was the year before the pandemic. That year, it was 39%.
Staying with 2022, hotel revenues and profits actually saw record highs. However, labor costs were also higher than ever before.
There are also some vital profitability metrics that you should be paying attention to as a hotel owner. GOP and profit margin are obviously important, but there are several other KPIs, or key performance indicators, that are likewise indicative of how healthy your hotel is.
You should benchmark, analyze, and track these metrics regularly. This is how you can determine whether what you’re doing with your hotel is working or whether you need to make some adjustments.
You can also look at KPIs to identify areas where your property is underperforming. Once you’ve identified such areas, you can institute changes that hopefully will get you back to profitability.
At a time when inflation is running rampant and hotels experience frequent staffing shortages, monitoring these metrics can be a real lifesaver. By keeping a close eye on them, you can instantly notice if costs are exceeding revenues.
Let’s look at some of the KPIs you should always watch closely.
Guest Acquisition Cost (GAC)
The GAC is a measure of the expenses that you use to attain bookings for your hotel relative to the room revenue that you are generating. You can include marketing and sales fees in this area, as well as booking transaction fees and online travel agency (OTA) commissions.
If your guest acquisition costs are lower, that generally means your hotel’s room sales are more profitable. You can calculate GAC in the following way:
GAC = (Total Acquisition Costs / Total Rooms Revenue) x 100
Labor Cost Per Available Room (LPAR)
A hotel can reasonably expect labor to be its highest operating cost. Most estimates put it at about half of a hotel’s total costs on average. Labor costs per available room is a metric that lets you potentially understand and control those costs. You do so by measuring your labor expenses relative to the available number of rooms in your hotel. The formula is:
Labor Cost Per Available Room (LPAR) = Total Labor Costs / Total Available Room Nights
Gross Operating Profit Per Available Room (GOPPAR)
Gross operating profit per available room, or GOPPAR, acts as a way to capture a more comprehensive picture of your hotel’s financial performance. It considers both total operating costs and total revenue. It measures the average profitability that is generated for each available room in your hotel. The formula to calculate it is as follows:
Gross Operating Profit Per Available Room (GOPARR) = Gross Operating Profit / Total Available Room
Total Revenue Per Available Room (TrevPAR)
The total revenue per available room, also known as TrevPAR, is an excellent metric for the tracking of total revenue. You could say that TrevPAR takes things a step further than RevPAR. That is because it measures your total revenue and divides it by the total number of available rooms in your hotel. Total revenue may include things like parking, spa services, and food and beverages in addition to rooms. The formula to calculate it is below:
Total Revenue Per Available Room (TrevPAR) = Total Revenue / Total Available Room
Now, we’ve talked about some of the most vital metrics to watch in addition to your hotel’s profit margin. Let’s move on and discuss how to potentially increase profitability for your property, particularly if your hotel’s profit margin is not where you’d like it to be.
Many times, and in many niches, you can implement new technology to drive up your profits. That is certainly the case in the hotel industry in the modern era.
If you have the right tech in place, it can grant you insight into a guest’s behavior. It can also automate tasks and amplify your hotel’s reach.
There are many hospitality solutions that you might think about purchasing or developing. They may include a simplified payment system that will attract more bookings. Automatic payment processing can enhance the guest experience.
You might also look into keyless entry software and self-check-in services. This can reduce your labor costs and increase efficiency. If your guests can check themselves in with a mobile phone or a digital code, they will not have to interact with members of your staff as much. This frees up the staff to work on other tasks, while guests arriving late or checking out early should appreciate it as well.
A good property management system, or PMS, is also an option. You can use one to manage your operations more efficiently. You can also automate various tasks to provide a high level of guest experience and to maintain a robust database of guest profiles.
If you can drive down your guest acquisition costs, that should also boost your hotel’s profit margin. You can measure your GAC across different distribution channels to see which ones are costing you more and which ones less. Usually, you will find that guests you attract through online travel agencies (OTAs) come with a higher GAC than ones that come to you through direct reservations.
You should look for the channel mix that brings you the best rate of return for the money you’re spending on it. While you probably can’t do away with OTAs entirely, anything you can do to encourage more bookings through direct reservations is always encouraged.
You might also think about setting up referral incentives, loyalty programs, and similar promotional efforts if you have not done so yet. You can talk to your marketing department about these options.
It’s not always easy to take control of your operating costs, but there are frequently options open to you in this area. What you’re looking for is optimal efficiency. You want to try and implement it everywhere from laundry costs to staff scheduling.
For instance, this might be an area where you try to reduce the number of staff at the hotel after hours by giving guests personalized codes to check in. These changes can quickly make a significant impact on your operating costs.
You can often boost your profit margin by increasing your ancillary revenue. This might include upsells, various recreational events, a spa, room service, conference room availability for meetings, and sales from your bar or restaurant.
You might use guest messaging, such as social media, WhatsApp, SMS, and email to promote these services and bundle them into packages that are easy to purchase. This is a relatively easy way to try and raise the average amount a guest spends when they stay with you.
Perhaps you’ll create enticing room packages that include a continental breakfast or some other perk.
Profit margins are always going to vary across your hotel’s different departments. You should look at what your profit margins are like across each department to see if any are not performing up to your standards. Those are the ones you need to focus on as areas that need change.
You can talk to your management team about departments that need improvement. If you hire the right minds to help you, they should be able to come up with some ideas to decrease departmental operating costs.
Maybe something as simple as reducing energy consumption by buying a new boiler might help you.
Perhaps the most essential thing you can do if you’re not seeing the profit margin that you want is to focus on delivering high-quality service and standards in your hotel. You might need to get back to basics with some property upgrades, enhanced amenities, and additional staff training.
This should ensure that your guests have a phenomenal time at your property and that they spread the word to all their friends and family members. If they were blown away by the quality of service and their general level of satisfaction while staying with you, that often translates to recommendations online. That kind of publicity is part of what can make your hotel a powerhouse and a known commodity within your particular niche or geographic region.
Now you have some idea of what your hotel profit margin should be. You know the formulas to calculate some KPIs that you’ll want to watch carefully. You also know some strategies for potentially raising your hotel’s profit margin if it is not where you want it to be quite yet. To make your hotel profitable, you need to be mindful of all the small but necessary details that will make your property as desirable of a place to stay as possible.
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