Hotel profit margin: Guide to hotel profitability

What is hotel profit margin?

Hotel profit margin is defined by the percentage of a hotel’s revenue remaining after subtracting all business expenses, including staff costs, maintenance, and marketing. It reflects a hotel’s financial health – the higher the margin, the more profitable the hotel.

Margins at hotels and other accommodation properties can be manipulated in a number of ways, from reducing expenses to increasing revenue in specific areas to contribute to better overall finances.

With the revenue of the hotel market projected to have reached US$426.40bn by this year worldwide, it’s important to know how you can maximise your share.

This blog will give you a full guide to hotel profit margins and how you can boost the profitability of your hotel or accommodation business.

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Why are hotel profit margins important to measure?

There are a few reasons you should be measuring your hotel’s profit margins:

It gives you a clear indication of the overall financial health of your business. You need to know if you’re gaining or losing money on a regular basis.
You can use it to compare your hotel with industry benchmarks and any available data you have on competitors to assess where you stand.
Understanding your profit margins in detail will allow you to make better, more informed, strategic business decisions such as where to invest your money to further improve.

Additionally, the healthier your profit margin the better position you’ll be in if you ever want to sell your business or if unexpected events occur, such as the COVID-19 pandemic.

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How are hotel profit margins calculated?

Hotel profit margins are calculated by determining the percentage of a hotel’s revenue that remains after taking away all the costs associated with running the business, including staffing, marketing, maintenance, utilities, catering, waste, and more.

Hotel profit margins can be calculated in two main stages:

Gross Operating Profit (GOP) Margin: This reflects the efficiency of core hotel operations. It’s calculated by subtracting the cost of goods sold (expenses directly tied to room sales) from total room revenue. Dividing this number by total room revenue and multiplying by 100 gives you the GOP margin as a percentage.
Net Profit Margin: This is the ultimate profitability metric. It takes the GOP and subtracts all other operating expenses (salaries, utilities, marketing, etc.) from it. Dividing this final number by total hotel revenue (including room revenue and other income streams) and multiplying by 100 reveals the net profit margin as a percentage.

For example, using random sample numbers, if in a given time period your:

Total revenue equals $120,000
Cost of goods sold equals $10,000
Operating expenses equals $55,000
GOP equals 120,000 – $10,000 = $110,000
GOP Profit Margin equals (GOP / Total Room Revenue) * 100 = 110%
Net Profit equals GOP – operating expenses. $120,000 – $55,000 = $65,000.
Net Profit Margin equals (Net Profit / Total Revenue) * 100 = 54%

Are hotels profitable?

Is owning a hotel profitable? The answer is relative and depends on a range of variables. Some hotels are certainly profitable while others don’t survive long term.

Just like any B2C business, the profitability of a hotel relies heavily on:

Having a solid business plan
Implementing effective revenue management strategies
Ensuring customer satisfaction and building a positive reputation

Of course, this just scrapes the surface and there are full guides on all the aspects of running a hotel business that you’ll need to master to achieve profitability at your hotel. The short answer is yes, hotels are profitable when they are managed successfully.

What is a good net profit margin for a hotel?

If we are talking about a good hotel net profit margin to aim for, most hotels would be happy with a margin of 15-20%.

Very healthy margins lie between 25-35% while the average might be closer to 5-10%.

Generally, luxury hotels and bigger brands can drive a higher margin while smaller properties and independent brands can expect slightly lower margins.

Typically though, hotels have a lot of fixed costs which can cause profit margins to be lower than a lot of other industries.

What drives profit at a hotel?

How do hotels make money? Hotels can drive revenue and profit through primary and secondary sources.

The primary source of income for a hotel is room sales and the associated packages connected with these reservations. Generally a guest’s biggest expense when staying at a hotel is paying for the room itself.

Secondary sources of income might include food and beverage sales, amenity fees, health and wellbeing services, social classes, event and meeting spaces hires, or ticket sales to local attractions.

Profit comes from being able to sell these services at a high value while keeping costs low, and balancing the expectations and experiences of customers.

hotel profit margin

How to improve hotel profitability

The first step you can take in your journey towards profit is to perform a hotel profitability analysis. This means taking a deep look into the current state of your business to identify current revenue, costs, and margins. Looking into where money is coming in and going out will help you understand the most important areas to make improvements.

For example, you might find that your room revenue is very high but is being offset by equally high operating expenses. Or perhaps you aren’t generating enough revenue from secondary sources.

But if you’re looking for a general plan, here are the five best ways to boost profit at your hotel.

1. Boost hotel room income

It goes without saying that if you can drive more revenue from your most valuable asset – your rooms – you’ll be on the right track to boosting profit.

There is more to it than simply raising your rates however. Optimising room revenue requires a dynamic pricing strategy which takes into account real-time data, seasonality, competitors, guest trends, and more.

You can also increase your room revenue by adding value via packages, running promotions, and offering extras and upsells. Sometimes guests just need a small incentive to turn them from a looker to a booker and put money in your pocket.

Additionally, if you do some research and guest segmentation, you might be able to target guests who are willing to spend more on premium reservations and be more inclined to purchase more expensive packages.

2. Increase ancillary revenue

Ancillary revenue can be a huge bonus on top of your room revenue. Whether it’s a massage, the gym, transport services, dinner at your in-house restaurant, anything that is not connected to the room revenue can be considered ancillary revenue.

You could even go so far as to produce and sell some of your own products, such as acquiring soaps or linens made locally and taking a commission from their sale.

3. Reduce expenses

Besides pumping up your room revenue, perhaps the biggest impact you can have on your profit is by reducing your hotel’s costs. Since a hotel can incur so many costs, this also means there’s plenty of opportunities to make improvements.

Consider how you spend less on energy, limit your waste, reduce cleaning and maintenance expenses, lower your cost of guest acquisition, boost staff efficiency, and more.

4. Track important metrics

To measure your progress and keep track of your profitability it’s vital that you’re aware of important performance metrics.

Make sure you’re regularly keeping tabs on your total revenue per available room (TrevPAR), Gross Operating Profit per Available Room (GOPPAR), cost per occupied room (CPOR), and cost per acquisition (CPA) among others.

This will help you decide if you need to generate more revenue or reduce the amount you’re spending.

5. Leverage technology

In your endeavours to achieve all of the above, nothing makes it easier than investing in the right technology.

There are tools and solutions that help in all aspects of revenue management, hotel management, and guest satisfaction.

Using technology will allow you to be more efficient, make more informed decisions, gain access to more powerful insights, and implement more effective processes and strategies.

What tools and solutions can boost hotel margins and increase hotel profit?

So what technology is the best to use to boost profit margins at your hotel?

Some of the most effective solutions that will help you sell more rooms, maximise the value of your rooms, increase guest spend, and access smart data include:

Channel managers: A channel manager automates and optimises your inventory management. It allows you to sell your rooms on as many channels as you wan at the same time, without the risk of double bookings or the need to perform manual or individual updates.
Booking engines: Booking engines can boost your profit by delivering direct reservations rather than you paying commission fees to third-party channels. You can also use a booking engine to create valuable packages, offer upsells, and entice guests to purchase extras.
Payment systems: Payment tools can make it easier and more convenient for guests to pay, and for you to receive your money. This will improve cash flow and reduce abandoned bookings, resulting in greater revenue.
Pricing intelligence: Pricing intelligence tools provide you with accurate, real-time, market data so that you can be aware of pricing fluctuations and opportunities to maximise your rates.
Revenue management systems: Revenue management systems are basically like your expert personal assistant, offering optimised recommendations, sending out alerts and notifications, and producing detailed reports.