Industry  |  8 October 2021  |  Eva Lacalle  |  4 minute read

What is a good profit margin when managing a hotel?

hotel profit margin
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Understanding what comprises a good hotel profit margin is key to running a successful business in the hospitality sector. The margin considered is usually the net amount, which is after paying salaries and covering overhead costs. On a general basis, this number should grow on a yearly basis because it speaks to how profitable and operationally efficient your business is, and ideally, over time your hotel should be more profitable and more efficient.

This percentage can be calculated by dividing net profit by sales and multiplying by 100 to get the percentage amount. Net profit is essentially the amount of money that you are left with after detracting costs and business expenses from net revenue. Revenue, on the other hand, is the total amount of sales your hotel made, including both ancillary revenue and revenue made from room sales. 

In this article, we will look in more detail about what to consider when talking about profit margin in hotels, as well as looking at the average margins and what is considered a good net profit.

 

What is the average profit margin in the hotel industry?

The hotel industry is one of the industries with the lowest profit margins, seeing as there are a lot of fixed costs in order to have a hotel up and running. Those fixed costs include human resources, maintenance, rent, utilities, stock, and other costs which of course whittle away at the profit margins. 

While the average profit margin in the hotel industry fluctuates from year to year depending on market trends, it is safe to say that an average hotel profit margin lies at around 10%. Between 2014 and 2021 this rate has been as high as 14.71% in 2016, and at record lows in 2020 according to CSI Market trends by industry.

 

What is a good net profit margin for a hotel?

As a general rule, a healthy profit margin lies at around 10%, whereas 5% is a low margin and 20% is a high margin. Hotels can compensate for a low profit margin by trying to get a higher revenue per booking through ancillary revenue and upselling.

Learn more about how to drive ancillary revenue.

It’s important to have an idea of what the industry average is in order to get an idea of how your hotel stands against the general industry trends and where you need to focus your efforts in order to improve profitability, whether that be by cutting costs or having a more efficient use of resources, both human resources and utilities. 

 

Things to consider when talking about profit margin in hotels

There are many things to consider when talking about profit margins in hotels, from your pricing strategy to your own hotel’s margins, costs and operating expenses. Let's take a look one by one. 

Operating expenses

One of the reasons hotels have such low margins is due to the fact that operating expenses are so high. The challenge lies in maintaining a high level of customer service while at the same time reducing overhead and operating expenses

On average, salaries are around 50% of operating expenses, which is why it’s so important to forecast staffing needs so you can be sure to not be either understaffed or overstaffed while at the same time ensuring that you offer a top-notch level of service at any given time of the year. 

Learn how to manage and improve hotel staff productivity. 

Try to cross-train your team in different areas so that in times of low occupancy you can place your staff elsewhere, and be sure to have more staff at busy times of the day and less during slow times. Having more efficient control of your staffing needs is important because cutting operational costs by simply letting go of staff is counterproductive; you will just make guests frustrated that they aren’t getting the level of service they expect. Instead, you should focus on cutting variable costs elsewhere by switching to energy-efficient light bulbs, installing occupancy sensors and taking care to implement other energy-saving methods. 

Revenue management

One of the key ideas to maximize profit and to run a successful hotel is to understand and optimize revenue. Revenue refers to the amount of rooms you sell in any given period of time, which can be optimized with the right hotel revenue management system. With a revenue management tool, you can choose the rates according to demand, optimizing your inventory in order to maximize profits. 

Revenue management is a way of controlling distribution methods and pricing tactics in order to sell the right room to the right guest at the right time. When you get all these “rights” aligned, you have the secret to boost your margins because you are getting the best price for the hotel room at any given time.

Pricing strategies

Having the right pricing strategies is another key to increasing profit. If you lower your hotel room prices too much, your margin may end up being too low, and you may not end up covering expenses. Sometimes it can be more profitable to have a room left unoccupied than charging a super low price that doesn’t cover expenses.

Because hotel room prices fluctuate so much, it’s important to try to optimize RevPAR so that you get the most available revenue per room at any given time. It is also good to compare your hotel’s prices against the competition to ensure that you are pricing according to the current demand, and discount when necessary, especially in times of low demand. A competitor-based pricing strategy can ensure that your hotel has rates that accurately reflect the demand.

Conclusion

In this article we’ve looked at hotel profit margins, things to keep in mind, averages and what is considered a good margin. In such a competitive industry where margins are limited, it’s important to optimize your pricing strategies and practice revenue management, while understanding your operating expenses in order to determine where your profitability pitfalls lie. With the right strategies in place, you can forecast for periods of high demand, and cut back where necessary in periods where demand is lower.

By incentivizing direct bookings, providing a top guest experience, and investing in hotel software that allows you to optimize your revenue, you can ensure maximum profitability. Direct bookings allow you to cut down on the cost per acquisition of each client so that you can have a higher margin per booking and increase your revenue. A top guest experience is what you need to have repeat guests and to ensure that your hotel continues to flourish and guests choose you instead of the competition.

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Eva Lacalle
8 October 2021

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