Three Cost Categories to be managed
Understanding Hotel Cost Categories
From the moment you open your hotel's doors to when guests check out, various costs come into play. To make sense of these costs, they can be classified into three primary categories: fixed, capacity, and variable. Each has its unique characteristics and implications for your bottom line.
Fixed Costs
These are the expenses that a hotel incurs even when its doors are closed and no guests are staying. Despite zero occupancy or operations, these costs still need to be paid. The pandemic brought fixed costs to light as hotels closed.
Capacity Costs
Capacity costs refer to the expenses a hotel incurs by simply being open and ready to serve a certain number of guests. These costs arise from the hotel's decision to maintain and prepare a certain level of service, rooms, or amenities, even if they are not fully utilized. The essence of capacity costs lies in the hotel's readiness to accommodate guests in the rooms and facilities it has made available.
Variable Costs
Variable costs in the hotel context are expenses that vary based on the volume of services provided, yet they remain consistent on a per-unit basis. These costs can be quantified on a per-room or per-meal metric or even as a percentage of the revenue derived from each rented room or served meal. Regardless of the total number of units sold (rooms or meals), each unit's cost tends to remain consistent. Importantly, if there are no guests in the hotel, these variable costs should not be incurred, as they are directly tied to guest consumption and activity.
Transitioning to Cost Management: Setting the Stage
Now that we've understood these core cost categories, we must understand how to manage them effectively. Controlling costs isn't just about cutting corners; it's about optimizing resources, ensuring efficiency, and providing the best possible experience for your guests. I provide actionable guidelines for each cost category in the following sections, ensuring you're well-equipped to navigate toward a successful business.
Guidelines for Managing Fixed Costs
If a cost is fixed, there is nothing to manage daily, monthly, or even annually. The cost is fixed, which means that you cannot do anything to change the cost. However, fixed costs are set over a specific period, often related to a term in an agreement.
Audit and Analyze
You can begin by thoroughly assessing all fixed costs to understand each cost's nature, purpose, necessity, and contractual obligations, such as the term.
Negotiate Contracts and Agreements
Review terms in contracts with vendors and suppliers. When the contract is up for renewal, it can be renegotiated for better prices and general terms. Until then, there is nothing you can do.
Rightsize the Organization
Only a tiny share of staff costs are fixed. Every hotel needs to define appointed staff costs since each has unique features. The main question is: Who do you need if the hotel is closed for a long time?
Maintenance
Even a closed hotel needs maintenance to prevent the asset from deteriorating. Every hotel should have a preventive maintenance schedule for all facilities, infrastructure, and equipment to extend lifespan and efficiency, and this should be considered a fixed cost.
Increasing or decreasing fixed assets
Reassess fixed asset investments by evaluating the need for certain fixed assets. Can additional investments be avoided, or can underused assets be sold?
As these guidelines show, there is not much work to be done. Spending time managing fixed costs will not make a hotel successful. The only way to decrease fixed costs as a percentage of revenue is to attract more customers and sell more to each customer to increase revenue. Let's move on to managing capacity costs.
Guidelines for Managing Capacity Costs
Many hotels do not manage capacity costs. The hotel is either closed or open at total capacity. Some hotels manage peak periods by adding a few extra staff members to ease the burden of regular staff members. There is much more to be done. Here are a few guidelines.
Forecast Accurately
The key to capacity management is forecasting. Hotels must have a reasonably accurate forecast of the number of occupied rooms and guests so the capacity can be adjusted based on the estimates to avoid costs for unused capacity. Capacity management includes labor scheduling that has to be adapted to the forecasted capacity level.
Optimize Operational Hours
If certain facilities (like a spa or restaurant) don't see much use during particular hours or days, consider adjusting their operational times. This can be done based on demand patterns based on the historical number of guests and revenue.
Cross-train Staff
Ensure staff are versatile and can shift roles based on demand and guest flow. For example, when guests eat breakfast in the morning, housekeeping can assist with breakfast before they start cleaning rooms.
Energy Management
Employ intelligent systems to manage lighting, heating, and cooling in parts of the hotel that aren't being utilized, ensuring they aren't operating at total capacity when not needed.
Regularly Review Service Offerings
Periodically assess which services are most used by guests and underutilized. This can inform decisions on where to cut or scale back.
Marketing and pricing
Marketing packages could be a way to utilize open capacity in all facilities in a hotel. Pre-booked packages will make it easier to set the suitable capacity and operate at high occupancy. Instead of selling a couple of rooms above the planned capacity, revenue management can focus on optimizing rates for the planned capacity. Rooms sold over the planned capacity tend to drive additional costs, decrease the perception of good guest service, stress staff, and produce a low marginal profit or loss.
Leverage Technology for Real-time Adjustments
Use hotel technology to monitor on-the-books, expected pick-up, and forecasts to adjust the capacity on the fly. Ensure that capacity adjustments are communicated to all stakeholders.
Managing capacity costs effectively is about flexibility and a keen awareness of demand trends. Hoteliers can optimize their resources and enhance profitability by staying adaptive and making informed decisions.
Guidelines for Managing Variable Costs
Hotels tend to be good at managing variable costs. Here are a few guidelines.
Forecast Accurately
The key to managing variable costs is forecasting. Hotels must have a reasonably accurate forecast of the number of occupied rooms and guests to deliver the guest experience, like producing the hotel room, meals, meetings & events, spa treatments, etc. The trick is to plan the variable costs based on the exact demand. Forecasting rooms and guests are essential for scheduling labor and purchasing goods and services.
Streamline Processes and Setting Standards
Hotels need well-designed processes to maximize guest service and minimize the workload for staff members. Based on these processes, hotels can set standards for producing a hotel room, such as the cleaning time, the cost of laundry, guest amenities, etc. In a restaurant, there is a standard food cost; in the spa, there is a cost for materials and therapeutics. Based on the set standards, the variable cost can be established.
Detailed Tracking and Monitoring
A standard is still a standard, so there has to be detailed tracking to follow up on variable costs. Use integrated systems to monitor consumption-related costs closely, ensuring anomalies or spikes are identified and addressed promptly. Regularly analyze variable costs to identify patterns, potential efficiencies, or areas of concern.
Bulk Purchasing and Negotiations
Based on annual forecasts, leverage volume discounts by purchasing consumables in bulk without compromising quality. Regularly renegotiate contracts with suppliers to ensure competitive rates.
Waste Reduction
Wast comes in many forms, from consumption above the set standard, over-serving guests, theft, expired shelf life, etc. Implement strategies to reduce waste, especially in food and beverage operations. Train staff to use resources judiciously and report wastage.
Feedback-driven Improvements
Encourage staff feedback on potential inefficiencies they observe in their roles. They're at the frontline and can offer valuable insights.
Strategic and Tactical Outsourcing
Consider outsourcing services if it's more cost-effective than managing them in-house. Hotels can also add resources during peak periods instead of outsourcing the whole function.
By diligently monitoring and managing variable costs, hoteliers can maximize marginal profitability without compromising the guest experience.
A Reflective Final Word on Costs
While the hospitality industry's intricacies are vast, the path forward can be surprisingly straightforward regarding hotel cost management. The nature of hotel costs, when broken down into their categories, lends itself to predictability and control. Each category has its parameters, making them identifiable and, to a large extent, manageable.
However, it's essential to approach this subject with empathy and understanding. For many hoteliers, especially those new to the business or navigating challenging circumstances, grappling with costs can feel daunting. It's not the mere knowledge of these costs that makes the difference, but the strategic planning, execution, and continuous evaluation that brings true mastery.
The hotel CEO or GM can establish guidelines for managing costs and delegate the responsibility for the different cost categories to the management team. With clear instructions and well-designed processes, managing costs will not take much time away from servicing guests.
So, what is the lever that will make a hotel a success? Since a significant part of the cost is fixed, fully fixed, or as a capacity cost, the only way to succeed is to grow revenue. With its unpredictability and elusive nature, revenue poses unique challenges. Unlike costs, revenues are influenced by myriad external factors, many of which are beyond a hotel's control. This is where the heart of the challenge and opportunity lies in the hotel business.
While this article has centered on managing costs effectively, harnessing the full potential of revenue generation deserves its spotlight. There are already many blog posts at
https://www.demandcalendar.com/blog that address challenges in growing revenue. Please stay tuned for more insights and strategies on this crucial aspect of hotel management.