Opening a Second Restaurant Location? Consider These Important Things First

To be a restaurant owner brings its highs and lows (what profession doesn’t?) You can do what you do every day, but you also have a huge amount of responsibility on your shoulders. Nonetheless, you have found success in establishing and operating your first restaurant, so much so that you are planning a second.

Due to the success of your first restaurant, you might be excited to add a new one. Because of this success, however, you may also be afraid as to how the business will be affected by the arrival of a second restaurant location.

There is no simple, clear way of knowing whether you are prepared to open a second (or 20th) restaurant location. However, before you begin planning, here are some essential questions to ask yourself.

  • Is your restaurant so busy it’s difficult to deal with crowds?
  • Are your customers driving long distances to visit your restaurant?
  • Do you have plenty of cash flow?
  • Do you believe that opening a second location will increase your capital?
  • Are you ready and able to put in long hours to launch the new restaurant?

If yes is your answer to all of these, then congrats! You’re likely prepared to open another restaurant. Before you do, though, here are some important things to think about.

Do You Have Steady Cash Flow?

Consider the cost before you jump into launching another restaurant. You’ve already created the groundwork to open a venue, and you know how much money is required to get your project off the ground. So far you’ve been successful, but have you time to do everything again?

When you have enough cash flow to finance the new location, you are probably ready to open a second location. But beware of using the profit from your existing location to break new ground. If you take this risk you don’t want to lose your existing profits

When you have enough cash flow to finance the new location, you are probably ready to open a second location.

One choice is to obtain capital from an outside source, particularly from investors who concentrate more on expanding their investments than on making immediate profits. But debt with high return rates is always risky, but even more so when your new location is unlikely to turn a profit for the majority of the first year.

Have You Found the Right Location?

You’ve heard it said, time and time again, location, location, location. But in this case, it’s important to consider where you’ll open your second restaurant in relation to your first restaurant’s location. Opening too close to your flagship could weaken your customer base. On the other hand, it could be an ideal solution to open a second location nearby if your product is trending and there is low competition.

If it’s too close, consider opening further away from your existing restaurant to attract a slightly different audience. As always, the population of the area, demographics, and market will need to be weighed. You’ll likely want to look elsewhere if you intend to open a Mexican restaurant in a town that already has 7 competitors.

If possible, try a ‘pop-up restaurant’ where you are considering to open your next location.

If possible, try a ‘pop-up restaurant’ where you are considering to open your next location. This is a great way to test the concept in a new market. This allows you to measure the audience, demand, and popularity to see whether it fits properly.

You can either make it a mobile kitchen or rent an empty space that once held a restaurant when you launch the pop-up. Arrange a dining area and advertise the pop-up in a way that clearly indicates its temporary aspect.

Have your employees explain to your guests the purpose of the pop-up and ask your guests for feedback. You will get opinions as to whether or not people want to see your restaurant become a more permanent location in the area. From this point, you can choose whether to open up there or to start searching for a new location.

Do You Have the Right Team & Resources in Place?

You’ve got the cash flow, you’ve found a suitable location but now think about the long-term. If you want your second location to succeed, you will need to train and retain a quality team. You can’t be in two locations at once as the owner (unless you have magic powers) so you have to make sure you can trust the people who operate your restaurants.

You’ll need to be as involved as possible at the start of your second location. By this point, your first restaurant should be a well-oiled machine, thriving on its own enough that you can trust the current staff in charge is doing well. You’ve already set quality standards at your first restaurant, and setting your new location up for equal success is just as crucial. In the early stages, being highly involved as the owner can help ensure that your operations run as they should.

During the early days, devote your attention to the new locations so that you are hands-on in preparing your new employees for success.

To ensure that things are operating as efficiently as possible, monitor each area of the restaurant; front of house and back. When changes are needed, it is best to get these out of the way quickly. Spend your energy on this new location and ensure that you give it the attention it needs to run successfully and grow.

Is it Time to Rebrand?

You may get too large and grow beyond the previous brand identity of your restaurant. This is often a good thing! But if you never invested the time to create your brand with a vision of the future, it can cause problems for you as you expand into new markets with your second restaurant.

Let’s imagine you’re a little Italian restaurant. Your first location has been established and the restaurant has been successful. Fast forward a few years, and you’ve launched three new locations in your area. At this point, you’ve been presented an opportunity to expand your restaurant into new states/cities beyond your current market.

Your name, unfortunately, is ItalianKitchenOhio.com. This could be a major issue and a valid reason to rebrand.

This is a fairly regular occurrence in businesses that grow rapidly. Your business that started with humble beginnings has now outgrown itself. Suddenly, you moved from the small local cafe to an up-and-coming restaurant enterprise. Ensure that you are setting your business up for long-term success with a brand refresh, or complete brand overhaul.

Because your first restaurant experienced so much success, it’s common for restaurateurs to consider opening another location. It’s exciting to think and dream about it, but it also means many possible risks that you have to face. Before you step into it, make absolutely sure that you’ve thought through all the details, and every scenario to make sure that you make an informed decision. And after all of those considerations, if you believe you’re all set, I hope you experience huge success with your new location!

“10 Commandments” to Create a Strong Culture for Your Business

I had weekly meetings with a very busy General Manager. People would see me stepping out of her office and ask how I was able to get one-on-one time every week with the GM. I said, “I asked.” They actually thought that was a great idea. No one had ever asked!

In preparation for these meetings, I would build an agenda all week long. I made a deal with her: instead of me coming down to her office a few times a day to ask for some information I needed, to get direction for one of my projects, or to share a marketing idea I had I would build a list of these things which would be our agenda for the meeting. In exchange for not interrupting her all week long, she would give me an uninterrupted block of time once a week. To be productive in that business environment I had to learn how to manage the GM to accomplish what I needed.

To be productive in that business environment I had to learn how to manage the GM to accomplish what I needed.

As we met and I shared ideas I had come up throughout the week and went over the list of questions I had compiled, I began to see patterns. She was sharing an issue that had come up on the sales floor and had to decide which employee was in the right. I simply looked at her and said: “Well, what does the Policies and Procedures manual say?” She looked at me like I was speaking a foreign language. I said, “We do have a P&P, right?!” I quickly figured out that this business with 100 employees did not.

*Note: This post involves two lists: #1. P&P – a list of employee and business situations that arise, #2. Your 10 Commandments – a list of attitudes and actions expected of employees

There were issues like the one she was dealing with that came up regularly. I told her I could easily start a P&P for the business in a couple of days if she wanted. I told her “As situations like this come up, simply add them to the already compiled list of situations in this rule book that will be created.” I told her the best way to get this started is to think back on employee situations the company had to deal with like this:

  • An employee verbally asked a manager for the weekend off and was told it was okay, but no one except the employee remembers having this conversation. Now the business is short-staffed.
  • An employee was on a sales phone call and their coworkers in neighboring cubicles were playing around, yelling and laughing loudly, and the employee couldn’t hear the customer to complete the sale.
  • Two employees are claiming that a sale belongs to them. One says they started the order, so it’s theirs. The other says there was no information in the order and they did all the work and finished the sale so it belongs to them.

Create Your 10 Commandments List

After making this list of business issues set it aside for a moment to build a second list. This new list is your 10 Commandments list. This will help guide you through the process of building your P&P manual. It will communicate what attitudes and actions are important to you as a GM or owner.

For instance, if someone is looking to get married in the future, they might sit down and make a list of things they’re looking for in a lifetime partner: smart, funny, honest, loyal. You can do this same thing for your business by answering questions like “What characteristics should our business look for in a potential hire?” and “How do we expect our employees to treat customers and each other?”

You can use your 10 Commandments as a culture list to guide you as you respond to situations like those listed above. Here are three examples of things a business might include in their 10 Commandments:

  1. “We over-communicate” – When communication is important, we make sure there is a record of it, and that we clearly communicate what we want or need.
  2. “We respect each other” – We consider others’ needs over our own.
  3. “We work hard” – We seek to do as much as possible, not as little as possible. We always give our best work.

Add More Specific Scenarios

As you begin to build your list of “10 Commandments” (it doesn’t have to be exactly 10), go back through the list of issues that we first listed and begin to add these details and scenarios to your P&P. It might look like this:

  • Scenario #1 “We over-communicate” – When an employee wishes to request time off, they must verbally communicate with a manager. After that manager agrees, the employee must send that manager an email so that there’s an electronic record of the interaction. The manager must then reply to that email with official approval. The request is not approved until the manager replies to the email.
  • Scenario #2 “We work hard” – Any employee requesting time off must find their own replacement so that their shift is covered. Just like with our vacation policy the employee must have both verbal and email interaction with their co-worker who is covering their shift. This information must also be forwarded to the manager so that they know all shifts are covered.
  • Scenario #3 “We respect each other” – The sales floor is a professional environment and is expected to be treated that way. It’s important that we are aware of the needs of our customers and coworkers, and create an environment that makes it easy for everyone to succeed.
  • Scenario #4 “We work hard” – Although the first employee did begin the order so that they can claim ownership of it, they did no work to close the sale. There was not even a single item listed in the order. This order will be split, but in the future, there must be at least one item listed in an unfinished order for the original employee to claim it as their own.
  • Scenario #5 “We respect each other” – It is not respectful to your coworkers to do the minimal amount of work, so that you get credit for the sale, while they are having to complete the entire order on your day off when the customer calls back.

You are the leader, the Moses of your business, and as such you get to etch the 10 Commandments of your business. Building this list and sharing it with everyone will help to begin to set the culture of your business.

Building this list and sharing it with everyone will help to begin to set the culture of your business.

You can then use these broad principles to start your P&P manual. This manual is a rulebook or Bible that simply answers the questions: “How do we do business? What do we do in this situation?” As situations arise, consult your list of 10 Commandments. Display them prominently around the building for both your employees and customers to see. When a decision is made, simply add that to your P&P to communicate clearly to employees what is expected of them.

Doing this will help lessen frustration since employees won’t have to guess what’s expected of them. Also, this is respectful to employees because they can see that you were willing to take the extra time and effort to put this together when it would have been easier for you to just make rules up on the fly.

10 Influential Hospitality Leaders That You Should Be Following

One of the best ways to stay up on the hottest trends and best practices in your industry is by following industry leaders on their social media accounts. This is also an excellent strategy for finding inspiration and guidance for your own marketing efforts. Additionally, many of the most successful individuals in the hospitality industry also share advice and perspectives on managing their careers or work-life balance, which can help any professional thrive. Here are 10 of the brightest minds in the hospitality industry, in no particular order:

Stephanie Ricca

Follow Stephanie on Twitter: @HNN_Steph

Stephanie is the editorial director at Hotel News Now and has been a hotel trade journalist for more than 12 years. She is known for having impartial opinions and giving excellent analyses on the global hotel industry. In her role, she sets the content direction for Hotel News Now and its extensive suite of newsletters and web content. She also helps manage the multimedia editorial calendar. On her social media accounts, she shares interesting and insightful hotels and travel news. If you are a hotel owner or marketer, she is one you won’t want to miss.

The latest from Stephanie:

Bruce Faber

Follow Bruce on LinkedIn

Bruce has been in the hospitality industry since a young age – age 4, as a greeter in his grandmother’s restaurant, the Rathskeller in Chicago, Illinois. After graduating from school, Bruce began working for Levy Restaurants as a manager. Throughout his 9-year tenure with Levy Restaurants, he was promoted to General Manager and then Managing Partner. In 2008, Bruce joined the EHS Hospitality Group as the owner of the Chicago Market. Although he specializes in the Chicago market, his office also works with areas throughout the U.S. As an owner, he works to supply his clients with top talent in the hospitality industry. To keep a pulse on that talent, he maintains a comprehensive database of the industry’s top leaders at every level and shares their content from his social media channels. Consider Bruce’s channels a hospitality RSS-feed, with his own expertise mixed in from time-to-time.

The latest about Bruce:

Colby Hutchinson

Follow Colby on LinkedIn

If you get your inspiration from folks who started from the bottom – look no further than Colby Hutchinson. He has held nearly every position in the hospitality industry – from dishwasher to now serving as the director of customer experience and brand management administrator for Best Western Hotels and Resorts.

Follow him on LinkedIn, where he writes critiques and shares links to articles that relate to customer experience and marketing, as well as issues that could affect the entire hotel industry.

The latest from Colby:

Loren Gray

Follow Loren on Twitter: @lorengray

If you are on the revenue management side of the hospitality industry, Loren Gray is a must-follow. Loren is currently the founder of the Hospitality Digital Marketing agency. Previously, he was the Vice President of Digital Strategy for Standing Dog Interactive, which is an agency that focuses on integrating all aspects of digital marketing into one strategy. Before that, he was the director of e-commerce for Ocean Properties Ltd., which is one of the largest privately held hotel franchises in North America. He is an excellent resource for all things hospitality digital marketing and finance related.

He hosts a “Week in Hospitality Marketing” online show. The show covers tools and techniques, recent industry news and real-world case studies with actionable how-tos with the insights hospitality leaders need to know and how it could impact their business. This show is geared towards owners, managers, asset managers, as well as sales and marketing folks in the hospitality industry. Loren makes it a point to cover all verticals within the industry including restaurants, spas, hotels, and attractions. Loren reminds followers about the show each week on social media – so be sure to follow if you don’t want to miss an episode!

Playbacks for episodes are also available on a quarterly basis.

The latest about Loren:

Chip Conley

Follow Chip on Twitter: @ChipConley

If you’ve ever stayed at (or worked at, or owned) a boutique hotel, you owe some gratitude to Chip. Chip is one of the iconic founders of the modern boutique hotel movement, and he is an undisputed expert in the hospitality industry.

What makes Chip stand out is his ability to adapt very well to societal changes that impact the hospitality industry. He recognizes innovation and change within the industry before those changes become trendy.

In addition to boutique hotels, Chip is a strategic advisor for Airbnb. In addition to his expertise in hospitality, Chip also serves as a mentor and speaker for middle-aged businesspeople. As such an influential person within the hospitality industry, Chip’s account is a one to follow.

More about Chip:

Chris Willard

Follow Chris on LinkedIn

Chris Willard is the owner and director of marketing and hospitality for Crown Choice Inc. He also serves as Event Coordinator for Black Rose Hospitality. He has worked in several of the leading U.S. markets including New York City and Las Vegas, which has helped him develop a keen eye for detail. Chris also founded a non-profit organization, 2 Hands 2 Employ, that helps to educate and employ those who may need help in the hospitality industry. Part of the organization offers internships to help young professionals launch their careers in the hospitality industry – especially hotels and restaurants.

With so much experience in the industry and a big heart, Chris is clearly one to follow, especially for those in the hotel and restaurant verticals.

The latest on Chris:

Lindsey Ueberroth

Follow Lindsey on Twitter: @lueberroth

Lindsey is the CEO of Preferred Hotels & Resorts and also a member of its Board of Directors. Lindsey became CEO in 2004, and since that time, she has helped solidify the company into an iconic hospitality brand. In 2015, Lindsey led the rebrand from Preferred Hotel Group to Preferred Hotel & Resorts, which lead to generating more than $1 billion in reservations revenue on behalf of its member hotels, which was a 15% increase over the prior year. This success led to Lindsey being named as one of the 30 most influential women in the hospitality industry. She has also been named one of the 10 most noteworthy hoteliers in the world by HOTELS magazine and one of the 20 most influential females in the lodging industry by Lodging Magazine.

She uses social media as a vehicle to promote sustainable travel and how to better embrace work-life balance.

The latest from Lindsey:

Edward Mady

Follow Edward on Twitter: @EdwardMady

Edward Mady is the top manager of one of the most iconic and well-known hotels in the world – The Beverly Hills Hotel. He has received countless awards, and is known for inspiring teams and delivering growth. In addition to being a hotel manager, he is a business coach and mentor. He is also a leading author and speaker who has been recognized by Harvard Business Review, Fast Company, and Forbes. In 2017, he was named Hotelier of the World by Hotels Magazine.

Edward uses social media to encourage teamwork in the industry. He encourages other hospitality professionals to utilize their teams for ideas and inspiration. He also makes sure his own team members are recognized and valued. If you are a leader or aspire to be one, Edward can be an excellent source of inspiration.

The latest from Edward:

Aliya Khan

Follow Aliya on Instagram: @aliyazk

If you’re looking for interior design inspiration in the hospitality industry, be sure to follow Aliya Khan. Aliya is the Vice President of Global Design Strategies for Marriott International. Prior to working for Marriott, Aliya was a designer for W Hotels and Aloft Hotels. She went on to work for Starwood Hotels as a Sr. Manager of Design and then was promoted to Director of Renovations. She then worked as Global Director of Design and Development at NeueHouse until taking her role at Marriott. In addition to her role at Marriott, she is a speaker at conferences.

She has lived in six cities of the world, and she brings that experience into her designs. She also has degrees in Architecture and Industrial Design. On her social media accounts, Aliya gives you a sneak peek into upcoming hotel projects as well as the inspiration she finds in the world around her.

The latest about Aliya:

Ian Schrager

Follow Ian on Instagram: @ianschrager

Ian Schrager is a hospitality visionary. He has worked as a nightclub owner, hotelier, designer, restauranteur, and more. Despite his extensive work in the hospitality industry, Ian considers himself as being in the entertainment business. He is also the co-founder of the world-famous Studio 54 nightclub. He is also known as one of the co-creators of the boutique hotel movement.

On his social accounts, he posts things that entertain him, spanning from the humorous and beautiful. He often posts images and videos that he not only likes, but that also inspires him and what you’ll find in his hotels.

The latest from Ian:

Final Thoughts

When looking to social media for inspiration, it is best to follow a wide mix of individuals who vary outside of your vertical, or your specialty within the vertical. We have chosen 10 who are fairly active on social media who come from a variety of backgrounds and positions within the industry. However, there are hundreds of other social media accounts relating to the hospitality industry that can also be a source of inspiration for you.

One of the best parts of working within the hospitality industry is that most professionals are willing to help and share information and ideas. By contributing to and following up on the thought-leading activity in the industry, you can ensure your success within the industry. Many of these professionals also share their personal struggles and advice for overcoming and managing those, and that can always be helpful, even if they are outside of your hospitality specialty.

Top 5 Popular Restaurant POS Systems Roundup

In the last 10 years, cash registers have been completely replaced with something quicker and more high-tech, especially in restaurants: point-of-sale systems, or POS systems. They have become the new age cash registers. But not only do they accept payments, but they also track inventory, provide digital receipts, calculate sales data, manage employees, and more.

As a restaurateur, my job is to basically control the chaos and the drama. There’s always going to be chaos in the restaurant business.

Rocco DiSpirito

The data and insights you can gather from these POS Systems can also allow you to not only optimize and control your food costs but also help you improve your efforts related to customer loyalty programs, brand activation, and restaurant marketing efforts.

Additionally, the Top 5 POS systems being reviewed today work for a variety of small or large businesses. So, with the multitude of POS systems on the market now, how will you know which one is the best for your café or restaurant?

I hope this article helps shine some light on the options available, and you’ll be able to make an informed decision as to which Restaurant POS System will work for your specific needs.

TouchBistro

The TouchBistro POS system is operated on an iPad and is best for full and quick restaurant service. It also aids with increasing sales by providing you smarter business decisions based on your monthly sales data.

Pros: The best part about TouchBistro is that it is versatile for whatever food service you own; general restaurants, bars, coffee shops, food trucks, and more. Additionally, as stated beforehand, it can give business owners ideas on how to increase monthly sales by analyzing previous data and providing you with business ideas.

Finally, TouchBistro is very user-friendly and easy to use for both employees and customers. For one user license, it’s a reasonable price of $69 monthly.

Cons: because TouchBistro is operated by an iPad, an Apple device, this means that it is not compatible with Androids or other desktop computers.

Additionally, it can get quite pricey for restaurants that have multiple leadership job positions, meaning that if they need multiple user licenses for optimal business operation, it can cost anywhere from $129 to $400 a month.

Square

Square is another popular POS system that is usually seen in retail stores, mobile or small businesses, and smaller, quicker restaurants or cafes.

Pros: Just like TouchBistro, Square additionally is easy to use for both employees and customers and provides real-time sales data. What is different about Square though is that it provides inventory management, item tracking, and alerts when stock is low. 

Additionally, Square is compatible with most smart devices and the software is free, which is great for new businesses who are strictly Android users and want to skip out on buying new electronics. Therefore, this POS system would be great for keeping low costs.

Instead of charging you for its services and equipment, Square charges 2.75% of credit card revenue and 3.5% plus $0.15 revenue for keyed-in payments. This is another perk for those small businesses focusing on keeping a tight budget.

Cons: While Square is ideal for small restaurants and businesses, it isn’t for large, busy restaurants and businesses.

Additionally, while the software for Square is free, the processing fees can be high.

Lightspeed Restaurant

There are a few different versions of Lightspeed, but today we will be discussing Lightspeed Restaurant, which is the POS version that is ideal for restaurants instead of retail.

Pros: Lightspeed Restaurant is suitable for any sort of food service: restaurants, bars, cafes, food trucks, even takeout, and delivery businesses. Useful features include opening tabs and splitting bills, a floor planning option that allows immediate clarity on which tables are free, a “quick-serve” screen for busy hours, and a mobile ordering option which is considered legendary in the POS world. 

With this last feature, orders can be sent directly to the kitchen while giving customers plenty of payment options. Lightspeed still offers all these features for delivery businesses as well as the ability to process card payments while still on the road. Additionally, Lightspeed is very user-friendly and the price is reasonable, starting at $69 per month and increasing based on how many registers are needed.

Cons: Unfortunately, Lightspeed Restaurant is only compatible with Apple devices, with an iPad being most suitable for restaurants. Additionally, Lightspeed would not be ideal for large restaurants because their price model suggests that this POS system would function best with 1 to 5 registers.

It can handle more registers; however, the price becomes astronomical. It would also be a poor choice for large restaurants because the inventory and reporting features are not as extensive as other POS systems. Another downside of Lightspeed is that if there isn’t Wi-Fi available or if data is slow, then it will not process payments.

Upserve

Formerly known as Breadcrumb, Upserve was specifically created and designed by former managers, bartenders, baristas, and waiters, among many other employees who work in the foodservice industry. The goal of Upserve is to be a user-friendlyPOS system that is ideal for working with many of the common hospitality and restaurant issues.

Pros: A few useful features this POS system offers is table management, menu management, and restaurant management, online ordering directly from a customer’s table, processing all types of payments including written checks, and a partnership with GrubHub so that any restaurant who uses Upserve can have their food delivered anywhere.

Additionally, Upserve is compatible with both Apple and Android devices so anyone can use it without fear of having to invest in a new smart device. Another perk about Upserve is that it does not discriminate against restaurant size. Upserve is designed to adequately serve restaurants as big as the most popular steakhouse in town or as small as a hidden coffee shop.

Cons: Upserve is a more expensive POS system compared to others with its $99 monthly fees and $50 per each extra terminal license (Upserve includes one POS terminal license). In fact, while many users are impressed with Upserve’s system and features, many admit that it still seems a bit overpriced for what it offers.

Also, this POS system wouldn’t be ideal for food trucks because the system requires more pieces and more space to function properly. Finally, the last downside of Upserve is that it has been known for outages during some restaurants’ busy hours. It also experiences downtime during mandatory system updates that cause the whole system to be offline until all updates have been installed.

Toast

Toast is an all-around restaurant management system, meaning it isn’t just for taking money at the counter. Toast offers a full suite of business management options in addition to prioritizing the customer experience. The overall goal of toast is to ensure that employers and employees can focus on the things that matter rather than being bogged down by the time consuming, routine tasks.

Pros: Toast is an all-encompassing platform that includes systems to manage payroll, transactions, inventory, customer relationships, and online ordering. Toast has an easy-to-use system for ordering and employee management of customers’ orders. You’ll find that orders can be easily modified and reassigned to different staff members with relative ease. 

Whether you’re a large or small business, you’ll find that Toast will meet you where you’re at. Toast is easily scalable, and it will easily move with you from your first location to multiple as your business grows. These features will benefit you later when you have multiple employees and locations to manage and you can’t be at each location every day.  

Another reason that you’ll want to consider Toast is that it is a restaurant-specific platform. Unlike others, Toast is made with restauranteurs in mind. From small taco-stands to full-service restaurants, Toast has the flexibility to meet your needs.

Cons: Toast is, right now, an Android-specific system, which for loyal Apple users may be a drawback. It’s no secret that Apple devices are coveted for their prestige, consistency, and ease of use. For some, this will be a drawback and may steer users away from this platform. Toast is priced at $79/month and with installation and equipment costs that can cost up to $1200, you can consider Toast an investment in your business.

Wrapping it up

If you’re considering starting a restaurant, consider checking out one of these services. They’re more than your grandparents’ cash register of days gone by. These are sophisticated points of sale systems that help manage customer relationships by keeping track of their purchases and providing options for loyalty clubs and gift cards.

They streamline the ordering process by making order management easier from the time the customer places the order to send it to the kitchen. These modern points of sale also help management keep track of employee performance and hours worked and makes it easier to pay them, improving employee satisfaction and keeping management from having to spend needless time fretting over the payroll.

Finally, a POS system introduces modern technology into your workspace and enables future growth more easily through updates to your system and ease of replacement if something happens to your device.

If you’re in the restaurant business and don’t have a modern Point of Sale system, you should really consider one. Not only do they make almost everything easier, but they also save valuable time which can be spent on diving into your passion: providing good food and top-notch customer service so that you can achieve your dream of having the best food in town.

How to Calculate Room Cost – Hotel Revenue Management Tips

This article goes into detail about how to calculate room cost, and what that can mean for your hotel. For those who would prefer to watch, I’ve also created a video on this topic which you can watch below.

Finding the Right Number

Someone walks up to your hotel counter at 11:59 pm and says “You have 10 unoccupied rooms that are going to sit empty, and I need a place to stay. Here’s $20. It’s $20 more in the cash register that wasn’t there before.” Do you take it?

For successful revenue management for hotels, knowing how much it costs to put someone in a room is an important first step.

Knowing this number will let you know how low you can go when changing rates throughout the year. Restaurateurs will be familiar with this concept because they have to “plate food” or calculate how much each part of a given dish costs, then use that information to calculate how much to charge the guest.

Figuring how much it costs to rent out a room is a little bit of a tricky question because there are two answers. I’m going to explain both of the costs, the differences between them, and I’ll show you step-by-step how to calculate these for your property.

Incremental Cost

The first cost is called “incremental cost”. It doesn’t matter that you remember the name of this cost (you can even make up a name that helps you remember it), it’s just important that you understand the concept.

Remember our late-night guest standing at the counter offering us $20? If we reject his offer and leave a hotel room empty, we incur no additional incremental cost. Why? Incremental cost answers the question “What is used up if I rent a room to someone?”

Imagine this: the hotel owner’s family member has a house fire, so he lets them stay at the property for one night for free. It’s not free for the hotelier to let them stay there. He will incur additional costs. Those costs are the incremental costs. What will those guests “use up”?

Here’s a quick brainstorm list that you can add to:

  • Electricity (lights, TV, charging cell phones, AC/heat)
  • Water (washing hands, brushing teeth, showers, flushing toilets)
  • Wear & Tear (walking on carpet, sleeping on the bed, turning doorknobs, using lightbulbs)
  • Breakfast
  • Housekeeping (room must be cleaned after they leave, cleaning supplies used)
  • Laundry (sheets, towels)

Some people won’t include wear and tear, but then I give them this example: if a mattress costs $1,000 and is rated up to 1,000 nights before it needs to be replaced, then each night someone sleeps on that mattress they use up $1 of the lifetime value of that mattress. Although difficult to track this same scenario is playing itself out as guests sit in your chairs and walk on your carpet.

To calculate the incremental cost, look at your expenses from your P&L (Profit and Loss Statement) for the previous calendar year for the categories we mentioned above. Take that number and divide it by the number of room nights sold for the year and this will be your incremental cost to put someone in a room. (Spoiler alert: it’s usually about $20.)

Example: A hotel’s expenses for these categories is $200,000 and they sold 10,000 room nights last year. $200,000 ÷ 10,000 room nights = $20 incremental cost.

So, do we sell the late-night guest a room for $20?

Really, it’s just a waste of time to let him stay because you’re just spinning your wheels, not making any profit. You’re also training your customers to not pay the going rate for your property and to just wait until the last minute and give you a low offer.

On the other hand, it will put an additional $20 of revenue on the books. So if you’re getting ready to sell you want to have as much revenue on the books as possible (even if it’s not profit), because banks and buyers really like that.

Also, if it’s a slow time, taking that additional booking will give your housekeepers an additional room to clean.

So again… do you book the room? A revenue manager’s favorite answer is “Depends!” Feel free to reach out to me and let me know what you’d do.

Burdened Cost

We’re not done yet. The incremental cost is only half of the story. I’d like to introduce you to “burdened cost”.

Again, I don’t care if you remember the exact name for this (there isn’t going to be a test later). Call it whatever you want as long as you understand the principle. This cost is a full or complete, all-in cost. It is “burdened” with all of the costs a property incurs.

We’ve already addressed the day-to-day costs associated with what guests use up with the incremental cost. If you’re reading this, you’re likely a manager, front desk or office worker and I want to make sure you get paid. That’s where this cost comes in.

Burdened costs are costs that you have to pay whether you sell 1 room or 100 rooms.

You’re going to pay the maintenance worker to go check and adjust the pool levels every morning regardless of occupancy. You’re going to pay a Night Auditor to be at the front desk all night watching Netflix…I mean running end of day reports regardless of the number of rooms sold. With an incremental cost of $20, that means anything we take over that goes to help offset these constant costs. I’m getting ahead of myself. Let’s stop and make a brainstorm list of burdened costs:

  • Staff (maintenance, front desk, management, breakfast attendant)
  • Mortgage
  • Insurance
  • Internet
  • Parking lot repair
  • New towels
  • Cable TV (Example: $10 per room per month regardless of occupancy)
  • Marketing
  • Trade shows
  • Chamber of Commerce membership

There could also be major costs such as all new furniture for all of the rooms that you might want to take an extra step with. If you expect that furniture to last 10 years, then you could divide that cost by 10. Use just a tenth of that cost in your burdened calculation to help keep from skewing the number. Just do this for major purchases like furniture, mattresses, and carpet.

To calculate the burdened cost look at your P&L again and at the bottom will be a list of total expenses.

Let’s use a number of $400,000. Take that number and divide it by the total number of rooms sold (this will be the same number you used for the incremental cost). Let’s use 10,000 room nights. $400,000 ÷ 10,000 room nights = $40. In America for a basic hotel usually the incremental cost is about $20 and the burdened cost is about $40. If you’re in a big city, or higher-end property these numbers, of course, will be higher.

So, what does this $40 number mean? If you are not consistently getting over $40 a night for your rooms, then you will soon be out of business!

Now, as we already mentioned you can dip below $40 for a short amount of time if it’s part of an overall strategy. Maybe January is a very slow month for your property, so you go to $30 on Sundays. This is $10 more than your $20 incremental cost meaning you can take the $10 you “profit” and use that to help offset your burdened costs like managers’ salaries.

You also might do this because you want to give your housekeepers a few more rooms to clean for the week and because it will help bring down the ADR (Average Daily Rate) for guests who are looking for longer LOS (Length of Stay).

A Word of Caution…

A word of caution when flirting with ultra-low rates even if it’s just for a short amount of time and as part of an overall strategy: there is a rate that is low enough that it starts to attract trouble. When I’ve run experiments of “how low can we go” at the properties I work with, we’ve found that number to be about $45.

Below that rate is when you start getting frequent visits from the cops and have lots of complaints of unruly guests. Suddenly those few extra dollars just aren’t worth it.

Conclusion

The first step in successful revenue management is knowing how much it costs to put someone in a room. The basic cost that guests use up by being on your property is the incremental cost, and for a budget hotel in America is often about $20. The big-picture, all-in cost that matters at the end of the year is the burdened cost and is usually about $40.

The biggest revenue management mistake that hoteliers make is not raising their rates high enough during times of high demand. You can read more about that and other top-six revenue management mistakes that hoteliers make by clicking here.

On the other end of that spectrum, you need to be competitive during times of low demand.

Going too low can cause you to get frequent visits from the cops and soon go out of business, but finding that sweet spot where you’re competitive and beating your competition on the rate is an effective strategy to steal market share.

Follow the process to figure both your incremental and burdened room cost and use those numbers to start your journey to successful revenue —-management.

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Chris Hunter operates HotelRevenueMan.com and is a preferred partner and content contributor for Longitude Branding.

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