Data provided here comes from our team of experts who have been working on business plan for a hotel. Furthermore, an industry specialist has reviewed and approved the final article.
Is operating a hotel profitable, and what is the expected income range for hoteliers?Let's check together.
Revenue metrics of a hotel
How does a hotel makes money?
A hotel makes money by charging guests for lodging and services.
Aside from accommodations, what do hotels offer?
Hotels offer a range of services and amenities to ensure a comfortable and enjoyable stay for their guests.
These include various room options such as single or double beds, suites, and accessible rooms. Many hotels provide in-room facilities like television, Wi-Fi access, a desk, and often a coffee maker. Common areas like lobbies, lounges, and dining spaces are designed for relaxation and socialization.
On-site dining options, such as restaurants and room service, cater to guests' culinary needs.
Additional amenities may encompass fitness centers, swimming pools, spas, and business centers, serving both leisure and business travelers. Some hotels also feature event and conference facilities for meetings and gatherings.
Concierge services are available to assist with travel arrangements, recommendations for local attractions, and other guest needs.
What about the prices?
A hotel offers a variety of products and services at different prices.
Room rates typically range from around $50 to $500 or more per night, depending on factors like room type (standard, deluxe, suite), view, amenities, and location.
Meals and beverages can vary widely: breakfast might be included with the room, while lunch and dinner prices can range from $10 for a simple dish to $50 or more for a fine dining experience. Hotel bars often offer drinks priced between $5 and $15 for non-alcoholic beverages, and $8 to $20 for cocktails.
Spa services, such as massages and facials, could range from $50 for a basic treatment to $200 or more for a luxury package.
Additional amenities like gym access, Wi-Fi, and parking might be free or incur extra charges, usually ranging from $5 to $30 per day.
| Product/Service | Price Range ($) |
|---|---|
| Room Rates | $50 - $500+ |
| Meals (Lunch/Dinner) | $10 - $50+ |
| Breakfast | Included or $5 - $20 |
| Non-Alcoholic Beverages | $5 - $15 |
| Cocktails | $8 - $20 |
| Spa Services | $50 - $200+ |
| Gym Access, Wi-Fi, Parking | $5 - $30/day |
What else can a hotel sell?
In addition to offering comfortable accommodations and services, hotels can also enhance their revenue by:
- Hosting special events, workshops, or themed classes for guests
- Allowing local wellness practitioners to use their space for treatments
- Assisting guests with personalized dining experiences and meal plans
- Organizing engaging activities or friendly competitions for entertainment
- Renting out event spaces for private gatherings or filming
- Teaming up with local businesses to provide exclusive guest perks and packages
- Offering online concierge services and virtual travel guides for remote assistance
Customer segmentation for a hotel
Hotels cater to a variety of customer types, ranging from business travelers to vacationers.
Which segments?
We've been working on many business plans for this sector. Here are the usual customer categories.
| Customer Segment | Description | Preferences | How to Find Them |
|---|---|---|---|
| Business Travelers | Individuals traveling for work-related purposes | Proximity to business centers, fast Wi-Fi, business amenities | Partner with local companies, advertise on business travel platforms |
| Leisure Travelers | Individuals and families traveling for leisure and vacation | Recreational facilities, family-friendly activities, tour packages | Collaborate with travel agencies, promote on vacation planning websites |
| Event Attendees | People attending conferences, seminars, or special events | Conference facilities, event planning services, group rates | Partner with event organizers, advertise on event registration platforms |
| Long-term Guests | Guests staying for extended periods, such as relocation or work projects | Extended stay amenities, kitchenette, laundry facilities | Offer corporate housing packages, promote on relocation platforms |
| Budget Travelers | Value-conscious travelers looking for affordable accommodation | Budget-friendly rates, discounts, shared accommodations | Advertise on budget travel websites, offer loyalty programs |
How much they spend?
In our thorough analysis of the hospitality sector, we find that guests typically spend between $100 to $300 per night at a standard hotel. These figures can fluctuate based on several factors, including the category of room selected, the season, location of the hotel, and any additional services or amenities utilized during their stay.
Research indicates that the average length of stay at a hotel for these guests ranges from 1 to 5 nights. Some guests prefer short stays, perhaps due to business trips or short getaways, while others may be enjoying a vacation or extended travel.
Thus, calculating the lifetime value of an average hotel guest would be from $100 (1x100) to $1500 (5x300), taking into account all possible variations in the length of stay and daily expenditures.
Considering these factors, we can estimate that, on average, a guest would contribute approximately $800 in revenue to a hotel, balancing out shorter stays against longer, more luxurious stays.
(Disclaimer: the figures mentioned above are generalized averages and might not precisely reflect your specific business circumstances. Various influences, like global travel trends, economic conditions, and local events, can significantly impact these numbers.)
Which type(s) of customer(s) to target?
It's something to have in mind when you're writing the business plan for your hotel.
The most profitable customers for a hotel typically fall into the category of "business travelers" or "frequent corporate guests."
These customers are often the most profitable due to several reasons:
Firstly, they tend to book rooms more frequently, contributing to consistent revenue streams.
Secondly, they often book higher-priced rooms, dine in the hotel's restaurants, and utilize additional services like conference facilities or room service, boosting their overall spend.
To target and attract them, hotels can offer corporate discounts, loyalty programs, and amenities like complimentary Wi-Fi and convenient business centers.
To retain these customers, personalized service is key; remember their preferences, offer room upgrades when possible, and provide seamless booking and check-in experiences to make them feel valued and appreciated, encouraging repeat stays and long-term loyalty.
What is the average revenue of a hotel?
The average monthly revenue for a hotel typically ranges between $10,000 and $600,000. Let's delve deeper into this estimation.
If you wish to make a more personalized estimation based on varying assumptions, check out our financial plan for hotels.
Case 1: A quaint bed and breakfast in a remote village
Average monthly revenue: $10,000
This type of hotel offers a homely experience, and is usually located in a peaceful setting away from the hustle and bustle of city life. It might not offer all the modern amenities, but it provides a unique, personalized touch.
Such establishments are likely to have limited rooms, around 10 on average. They might not provide extra services such as spa treatments, gyms, or event spaces.
Assuming an average room rate of $100 per night with an occupancy rate of 33%, which is about 10 nights a month, the monthly revenue for such a bed and breakfast would be approximately $10,000.
Case 2: A standard hotel in a bustling city center
Average monthly revenue: $90,000
Located in the heart of a city, this hotel provides easy access to various attractions and caters to both business and leisure travelers. With a modest number of rooms, say around 50, it offers amenities that guests expect from city accommodations, such as free Wi-Fi, room service, and conference rooms.
In addition to room bookings, the hotel might also generate revenue from its in-house restaurant, bar, or event spaces for meetings and small gatherings.
With an estimated room rate of $150 per night and an average occupancy rate of 40%, or about 12 nights a month, this hotel can pull in a monthly revenue of $90,000 if it maintains this occupancy.
Case 3: A luxury resort in a popular tourist destination
Average monthly revenue: $600,000
Think of a sprawling resort with stunning views, first-class amenities, and an unmatched level of service. This type of hotel offers guests an escape from reality and ensures a memorable stay, be it for a honeymoon, family vacation, or corporate retreat.
Such resorts are equipped with facilities like swimming pools, spas, gourmet restaurants, private beaches, and might even offer activities such as water sports or guided tours.
Given the premium nature of their services, the room rates for these luxury resorts are considerably higher. They may also have villas or suites, which are priced even more steeply.
With an average room rate of $500 per night and a capacity of 100 rooms, even at an occupancy rate of 40% (12 nights per month), this resort can rake in a whopping monthly revenue of $600,000.
The profitability metrics of a hotel
What are the expenses of a hotel?
Expenses for a hotel business typically include property maintenance, guest services, staff salaries, marketing and advertising, and utility bills.
| Category | Examples of Expenses | Average Monthly Cost (Range in $) | Tips to Reduce Expenses |
|---|---|---|---|
| Utilities | Electricity, Water, Gas | $2,000 - $5,000 | Invest in energy-efficient appliances, implement water-saving measures. |
| Staff Salaries | Front desk, housekeeping, kitchen staff | $15,000 - $40,000 | Optimize staff scheduling, cross-train employees for multiple roles. |
| Maintenance | Repairs, upkeep, landscaping | $1,000 - $3,000 | Regular maintenance to prevent costly repairs, negotiate with contractors. |
| Inventory | Food, toiletries, linens | $2,000 - $6,000 | Implement inventory control systems, reduce waste. |
| Marketing | Advertising, online presence | $1,000 - $3,000 | Focus on cost-effective digital marketing, analyze ROI. |
| Insurance | Property, liability, workers' compensation | $1,500 - $5,000 | Shop for competitive insurance rates, review policies regularly. |
| Taxes and Licensing | Property tax, permits, licenses | $2,000 - $7,000 | Ensure compliance to avoid penalties, explore tax incentives. |
| Technology | Software, Wi-Fi, maintenance | $500 - $2,000 | Consider open-source software, negotiate tech service contracts. |
| Guest Amenities | Toiletries, complimentary breakfast | $1,000 - $3,000 | Source amenities in bulk, offer a limited selection. |
| Contingency | Emergency funds, unforeseen expenses | $1,000 - $5,000 | Maintain a financial buffer for unexpected costs. |
When is a a hotel profitable?
The breakevenpoint
A hotel becomes profitable when its total revenue exceeds its total fixed costs.
In simpler terms, it starts making a profit when the money it earns from room bookings, events, catering, and other services becomes greater than the expenses it incurs for property mortgages/rent, staff salaries, utilities, and other operating costs.
This means that the hotel has reached a point where it covers all its fixed expenses and starts generating income; this is referred to as the breakeven point.
Consider an example of a hotel where the monthly fixed costs typically amount to approximately $50,000.
A rough estimate for the breakeven point of a hotel would then be around $50,000 (since it's the total fixed cost to cover), or between 250 and 500 guests paying a room rate ranging from $100 to $200 per night.
It's important to note that this indicator can vary significantly depending on factors such as location, size, room rates, operational costs, and competition. A luxury hotel in a prime location would obviously have a higher breakeven point than a small boutique hotel that requires less revenue to cover their expenses.
Curious about the profitability of your hotel? Try out our user-friendly financial plan crafted for hotels. Simply input your own assumptions, and it will help you calculate the amount you need to earn in order to run a profitable business.
Biggest threats to profitability
The biggest threats to profitability for a hotel can include fluctuations in demand due to economic downturns or unforeseen events like a pandemic, which can lead to empty rooms and revenue loss.
Additionally, high operating costs, such as staff wages, utilities, and maintenance, can erode profits.
Competition from other hotels in the area can also drive down prices, reducing the hotel's income.
Negative online reviews and a tarnished reputation can deter potential guests, impacting bookings.
Lastly, regulatory changes or rising taxes can squeeze profit margins further, making it crucial for hotels to adapt, manage costs efficiently, and maintain a positive guest experience to ensure long-term profitability.
These threats are often included in the SWOT analysis for a hotel.
What are the margins of a hotel?
Gross margins and net margins are critical financial metrics used to gauge the profitability of a hotel business.
The gross margin represents the difference between the revenue generated from room bookings, services, and ancillary sales, and the direct costs related to rendering those services.
Essentially, it's the profit remaining after deducting costs directly tied to operating the hotel, such as housekeeping, staff wages, and utilities.
Net margin, conversely, factors in all the expenses the hotel incurs, encompassing indirect costs like administrative expenses, marketing, property rent or mortgage, and taxes.
Net margin delivers a more comprehensive insight into the hotel's financial health, reflecting both direct and indirect costs.
Gross margins
Hotels generally have an average gross margin between 30% and 50%.
For instance, if your hotel generates $20,000 per month, your gross profit would be approximately 40% x $20,000 = $8,000.
Here's an example for clarity.
Consider a hotel with 20 rooms, with each room booked at an average rate of $100 per night. If all rooms are booked for the entire month, the total revenue would be $60,000.
However, the hotel faces expenses such as staff wages, utilities, and housekeeping supplies.
Assuming these costs total $30,000, the hotel's gross profit would be $60,000 - $30,000 = $30,000.
Thus, the gross margin for the hotel would be $30,000 / $60,000 = 50%.
Net margins
Hotels usually have an average net margin that falls between 15% and 25%.
As an illustration, if your hotel brings in $20,000 per month, your net profit would be approximately $4,000, equating to 20% of the total revenue.
Sticking with our ongoing example for consistency:
The hotel with 20 rooms generates $60,000 from full occupancy. Direct costs were found to be $30,000.
Beyond these, the hotel shoulders several indirect expenses, such as marketing costs, maintenance, administrative expenses, and property costs. Suppose these additional expenses amount to $15,000.
After deducting all direct and indirect costs, the hotel's net profit would be $60,000 - $30,000 - $15,000 = $15,000.
Consequently, the net margin for the hotel would be $15,000 divided by $60,000, resulting in 25%.
As a hotel proprietor, recognizing that the net margin (vs. gross margin) offers a superior reflection of your hotel's actual profitability is imperative, as it encompasses the totality of expenses incurred.
At the end, how much can you make as a hotel owner?
Understanding that the net margin is key to discerning your hotel's profitability is crucial. It essentially reveals what portion of your earnings remains after covering all operating costs.
Your profitability will significantly depend on your execution quality and management efficiency.
Struggling hotel owner
Makes $2,000 per month
If you start a small hotel and make decisions such as minimizing maintenance, offering limited services, neglecting online marketing, and ignoring customer feedback, your total revenue might not exceed $10,000 per month.
If operational inefficiencies persist, your expenses could run high, making it challenging to secure a net margin above 20%.
In monetary terms, this scenario would leave you with meager monthly earnings - around $2,000 (20% of $10,000). This situation represents a less-than-ideal outcome for a hotel owner.
Average hotel owner
Makes $15,000 per month
Assuming you run a mid-range hotel with decent facilities, open a café or a small restaurant on the premises, maintain a strong online presence, and engage with your customers, your total revenue could climb to about $50,000 per month.
By keeping a close eye on operating costs and improving service efficiency, you could potentially push your net margin to around 30%.
This means your monthly earnings could be approximately $15,000 (30% of $50,000), situating you in the middle of the pack in terms of profitability.
Successful hotel owner
Makes $70,000 per month
As a hotel owner who prioritizes excellence, you invest in high-quality amenities, diverse services such as a spa or luxury dining, exceptional staff training, and strategic marketing, particularly online. Your proactive approach to customer satisfaction helps drive your total revenue to an impressive $200,000 per month or more.
Thanks to sophisticated expense management and maximizing your revenue streams (e.g., events hosting, business conferences), you could achieve a net margin of around 35%.
Under these optimal conditions, your monthly earnings would skyrocket, potentially reaching $70,000 (35% of $200,000).
Your journey to becoming a prosperous hotel owner hinges on meticulous planning, customer-centric decision-making, and continual investment in service quality.
May you reach this pinnacle of success! Remember, an exceptional hotel business starts with a robust, comprehensive business plan.