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.

——

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

6 Biggest Revenue Management Mistakes That Hotels Make

Operating a hotel is no easy task; managing staff and schedules, staying on top of the latest technology and trends, keeping up with maintenance and renovations; not to mention ensuring your guests are happy and working long irregular hours. It’s a lot.

One of the most challenging aspects of running a hotel is revenue management. Hotel revenue management is something that often confuses or overwhelms people, and for many hoteliers, it’s something they don’t even attempt. However, even some small adjustments can go a long way.

In this article, we get a glimpse into the world of hotel revenue management by one of the best revenue management experts out there, Mr. Chris Hunter of hotelrevenueman.com.

Chris began his career in tourism and has years of hotel management experience under his belt. Throughout that time, he developed a system to help hoteliers find the demand curve for any property – allowing them to know when to raise or lower rates. With his special focus in the hospitality industry, his clients are regularly seeing increased annual profits of upwards of 30% using his hotel revenue management strategies.

Chris is also one of our hotel consulting partners. So lucky for us, this means we’re able to pick his brain and share his knowledge with you. Here’s Chris’ list of the Top 6 Biggest Revenue Management Mistakes That Hotels Make. We hope you enjoy.

6. They Don’t Even Try

“Not changing your rates daily based on demand is a big mistake and I’ll show you why.

There’s a hotel in one of my client’s cities that has the same rate everyday: $63. During the week this is too high which causes guests to stay elsewhere. During the weekend it’s too cheap which causes them to sell out quickly. It feels good to be sold out a week ahead of time, but they could raise their rate to $80 and still sell out. They’re leaving $17 per room on the table and for a hundred room hotel that’s $1,700 a day and $3,400 per weekend. Multiply that by the 13 weeks of summer and they’re missing out on tens of thousands of dollars!”

5. They Sell Out Before the Day of Arrival

“In theory, perfect revenue management works like this: you sell your last room at 11:59 pm on the day of arrival. In reality, you want to have at least a handful of rooms to sell throughout the day of arrival.

The demand curve continually increases with the day of arrival having the highest demand and commanding the highest rate. If you sell out before the day of highest demand it means that your rooms were too cheap and you left money on the table.”

4. They Price All of Their Rooms the Same

“One of my clients reached out to me asking me to help him increase revenue at his property. He had a two story, horseshoe-shaped property with exterior entrances to the rooms and no elevator. At the center of the property was a pool and on the outside was a parking lot. He told me that everyone wants to stay on the poolside.

I asked him how much more it costs to stay on that side, and he told me all the rooms are priced the same.

I assumed people preferred the ground floor so they could skip the stair climb and told me I was right. I told him to take his current rate and make that his discount rate, then build from there. Add $5 for poolside and $5 for the ground floor. So, a ground level (+$5), poolside (+$5) room will cost $10 more per night than an upstairs, parking lot view room. This property instantly found revenue they had been leaving on the table.”

3. They Don’t Go Low Enough During Times of Low-Demand

“Typically, in a tourism destination, Sunday is the biggest checkout day of the week leaving Sunday night with the lowest demand.

Each day of the week the demand slightly increases to the weekend (Friday/Saturday night). With demand being low during the beginning of the week and the city being full of rooms to sell, leaving your rates as high as they were during the weekend is a mistake.

I figured this out, lowered rates for my clients during times of low demand and stole market share. One of the OTAs (Online Travel Agencies or websites that resell hotel rooms like Booking.com or Expedia) reached out to me at the end of a season and told me that in one of my client’s markets only one other hotelier figured this out.”

2. They Don’t Look Far Enough Into the Future

“The majority of hotel bookings come two weeks prior to arrival. If you only get the last two weeks right your property will still probably do pretty well.

But, if you look further into the future you will be able to spot potential problems and fix them before they cost you thousands of dollars. Right now I help my clients manage about a month out, but I also take the opportunity to quickly scan data for three months out.

Recently I saw that one of my clients had a holiday weekend about three months out priced too low and I encouraged him to increase the rate by 50% to an appropriate rate. A few guests who were planning that far ahead found that deal and had already booked rooms, but that was much better than having half of the hotel sold at a discount rate.

Concentrate the majority of your efforts on the approaching week, two weeks and month, but don’t forget to at least glance into the future to see if anything stands out as being a possible issue.”

1. They Don’t Go High Enough During Times of High Demand

“This is EASILY the biggest mistake I see hoteliers make.

Right now stop reading this, open google docs, and type out the 10 busiest times of the year in your market.

I’ll give you a head start: Holidays like Memorial Day and Labor Day, summer weekends, special events like the annual car show or strawberry festival.

Now, look at your list. Your rooms are not priced high enough during those times.

Look at last year’s occupancy. Every day that your property was 100% occupied (or really close like 95%) is a time where you could have gotten more money for your rooms.

I had an out of state client that had been on Hotel Impossible. A year later he found my revenue management videos on youtube and asked if I could help him. He had bad reviews and no money to fix issues. I taught him this principle and asked him for the dates where demand was so high that it was likely that the entire city would sell out.

I then taught his GM my system for tracking demand. We ended up raising rates to almost double the previous year’s rates during those times of high demand. His busiest month saw a revenue increase of 47.2%, his busiest quarter was up $171,000, and his revenue increased 24% for the whole year.

Raising rates feels scary, but I want to challenge you to at least start taking baby steps even if that means raising only $5. When you see that work, then look at the next time of high demand and try $10. Each time it works successfully you’ll gain the courage you need to make bigger, necessary adjustments in the future.”

In Closing

This is just the tip of the iceberg when it comes to the knowledge that Chris has regarding revenue management. And as you can see, revenue management is something that could be a game changer for your hotel. The potential upside is huge, and the amount of risk is low. But, you’ll likely need some help along the way.

Bottom line… the successful implementation of revenue management strategies for your hotel could help you experience more predictability and profitability.

Save Money on Marketing Your Independent Boutique Hotel with a Great Brand

As a boutique or independently owned hotel owner, you want to effectively market your brand. However, getting a strong return on investment (ROI) may be a challenge. For example, many independent, boutique hotel owners and managers are spending upwards of a $1000 a month on marketing. What they typically lack, though, is measurable results from their marketing spend. This lack of return can typically be pointed back to a poor or non-existent brand strategy. In this article you will learn some ways that a brand strategy and better visual identity can affect your marketing efforts for the good and create measurable returns on investment.

There are several ways how having a strong brand strategy and visual identity can greatly enhance and improve a hotel’s marketing efforts. Below are the four most effective strategies.

  • Develop a Strong Market Position
  • Understand Your Guests Needs/Decision-making
  • Have a Well-Crafted Message that Resonates with Guests
  • Create Better Brand Identity to Drive More Valuable Customer Perceptions

Building a great brand by implementing these four strategies can save your hotel from the effects of wasted marketing dollars. Great brands are contagious and the consumers start becoming brand ambassadors. However, getting to that point requires dedication to a clear strategy outlined in these four steps. As you execute on these strategies you will start creating better ROI from your marketing efforts. Helping your guests become evangelists for your brand becomes the end goal with the right strategy in place.

Develop a Strong Market Position

A market position is defined as the consumers’ perception of your brand in relation to other hotel options in your region. As an independently owned boutique hotel, your resources are very likely limited when it comes to marketing and branding expertise. However, that does not limit you on your ability to develop a strong market position.

Some of the steps any boutique hotel owner can take to develop such a position are:

  • Create a position statement – what do you stand for and why does it matter?
  • Identify how your position statement stands out against your competitors. What other offerings do consumers have when they come to your geographical location?
  • Create an outline of where your brand fits in the midst of all of the competition. This might look like a market position map of sorts.
  • What are the conditions of the marketplace? Is tourism up/down? What are guests looking for? Do you offer something unique that they cannot get anywhere else in the region?
  • How is your independent boutique hotel unique? A strong market position requires a clear differentiator. Something more than just a bed to sleep on.
  • Consider hiring a third party to provide some qualitative and quantitative testing of your market position. Will it hold up? Is it accurate?

Understand Your Guests’ Needs a Decision-making Process

Your brand identity and marketing message should align with your guest needs and be communicated through channels they use in their decision-making process. By understanding your guests, you can communicate clearly with them the way they want to be contacted. For example, maybe your guests are more advanced in age and are not on Instagram. Those dollars once spent to attract guests can be used where your customer is, in this case maybe the dollars are better spent on newspaper or radio? Once you have a clear market position, communication becomes the next most important thing. Rather than cast big nets to draw in guests, you can focus your efforts getting much more return for every dollar spent. Meet the customer where they are at. Know them and know their process for making a decision when it comes to lodging in your town.

Have a Well-Crafted Message that Resonates with Guests

When it comes to marketing, getting the message right is critical. There are examples over and over again where the brand message significantly increases the consumer perception of value. For example, big hotel brands use things like a robust reward program to drive engagement for frequent travelers. In fact, just recently Marriott merged loyalty programs of Starwood Preferred Guest and Marriott Rewards for exactly that purpose. The benefits for frequent travelers in their program are things like…executive lounges with gourmet snacks and drinks. What message resonates with your guests? What matters to them? Craft a clear message that reminds guests why boutique is unique.

Create Better Brand Identity to Drive More Valuable Customer Perceptions

Brand identity is defined as the image which is connected to your independent hotel’s brand culture. It typically includes a logo, typography, fonts, colors, positioning, white space, and strategy. A better brand identity improves customer perception. However, it is important that any change is executed right. You must be careful to build the image that drives perception of value. While there are several examples where building a brand identify have failed according to the brand and marketing community, most brands only fail if they don’t deliver increased perception of value to their buyer. The image should be designed to reflect your customer. Apple, Google, and Amazon are three companies that are good at building brand images and experiences that resonate with their customers.

In summary having a good strategy and solid brand identity helps guests connect with your independently owned boutique hotel. When they are connected to your brand’s position you turn guests into raving fans. They create a sense of need for the experience they had with your brand. Guests remember amazing experiences and associate brand image with that experience for good or for bad. Experience is important.

When guests are in love with your hotel experience and the brand image is strong, over time they will stand up and fight for your brand when needed. There are examples where boutique hotels were rebuilt after a disaster like a fire or a flood. While the hotel owners didn’t always want to rebuild, those that did were driven by their guests. When you have guests, who stand up for what your market position is, you have a powerful way to increase sold-out nights, price per night which result in increased revenue and profits. You must remember that guests want an experience… not just a bed to sleep in when it comes to going boutique.

What is your guest experience like?

 


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