Operating costs for hotels are a real concern. If they aren’t kept under control, they can impact your profitability. You must manage expenses effectively to ensure that your hotel remains financially healthy in the long term.
That won’t happen if you are losing money through excessive expenses. If this is the situation you are in, then you need an actionable plan to reduce hotel operating costs.
Profitable hotels tend to track operating costs very closely. These costs are analyzed carefully to ensure that any cost is balanced by creating additional income, increasing efficiency, or reducing liability. To achieve maximum profit from revenue, management must find ways to reduce hotel operating costs.
Spending less money is certainly one way to reduce operating costs for hotels. However, that approach can impact productivity, customer service, and amenities. These impacts can lead to lower profits in the future.
In this article, we explore the most common operating costs for hotels and review some strategies to reduce them or extract a better return on investment.
Operating Costs for Hotels Defined
It may help to clarify exactly what we mean by operating costs. These costs are the money spent to cover all of the expenses related to running a hotel. Operating costs are the money that is spent to make generating income possible. Here are some examples of operating costs for hotels:
- Rent or mortgage payments
- Cost of supplies
- Cost of services
Marketing costs are a further expense that contributes to overall revenue generation.
It’s important to understand what all of your operating costs are. When you set your prices, you must consider these costs. Otherwise, you risk not charging enough for your services to be profitable. Gross revenue is the product of your income minus your operating costs.
Some line items — such as taxes or interest payments — are not operating costs.
Fixed and Variable Operating Costs for Hotels
Hotel operating costs fall into two main categories — fixed and variable. Fixed operating costs are any costs that do not change according to the health or profitability of your property. For example, your lease doesn’t go up or down based on the amount of money you make. Neither do your workers’ salaried wages.
Variable costs do fluctuate depending on your business. Hourly wages will go up if you schedule employees for more hours or pay overtime when it’s busy. Food and beverage costs are also variable.
How to Reduce Hotel Operating Costs
The challenge hotel managers face is controlling costs while maintaining high standards of customer service. The following strategies will help you do both:
Lower Your Utility Costs
When you want to reduce hotel operating costs, utilities should be one of your first considerations. Not only will you save money, but you will also have a positive impact on customers who care about sustainability and reducing energy use.
To get started, begin tracking the energy consumption in your hotel. Fortunately, most utility providers offer extensive information on this cost, even down to the energy used within a single hour. Once you know where you are spending money, you can begin optimizing to lower those costs. Here are a few things to try:
- Ensure you are having maintenance done on your mechanical systems
- Replace bulbs with energy-efficient options
- Add solar power where it makes sense
- Use sensors to turn lights off in unoccupied areas
It may be possible to partner with your utility companies to conduct audits and identify areas that can be improved.
Automation is something that is proving to be truly transformative for the hotel industry. It allows many guests the option of interacting with your hotel in the way they prefer — and it also allows you to reduce your hotel operating costs.
For example, guests may be able to check in on their phones and receive a confirmation message via SMS. This setup reduces lines at the front desk and could allow you to staff fewer clerks — especially overnight.
Other automation technology can handle a variety of administrative tasks. This approach saves money and gives staff members additional time to curate better guest experiences.
Optimize Your Staff Schedules
Labor costs comprise a large portion of the overall operating cost for hotels. That makes labor a prime target for reducing expenses. However, it’s important to tread very carefully here. If you simply cut staff, you’ll end up with overworked employees and high attrition rates. Customers will then suffer from a lack of attentive service.
It’s important to use data to accurately forecast your scheduling needs. Then, plan your workers’ hours accordingly.
Additionally, you can maximize the value you get out of your workers by cross-training them. When they have a lull in activity, team members can pick up other duties as a way to increase productivity.
Use Marketing to Encourage Direct Bookings
Your hotel’s profitability depends on the number of bookings you receive. If all these bookings are coming from third-party websites or other providers, you could be losing nearly a third of your profits to commissions. Those paid commissions are variable depending on the number of bookings, but they always reduce your revenue.
Fortunately, you can reduce this cost by investing in marketing that drives guests to your own website or app to book rooms directly through you. A campaign that engages pay-per-click advertising, social media, SMS, and email marketing will reduce the amount of money you pay in commissions.
Decrease Food and Beverage Waste
Food and beverage spending are significant operating costs for hotels that offer those amenities. When there is waste, you lose the money you spent on those items and the opportunity to earn profit through food and beverage sales.
If you aren’t already taking a regular food product inventory, start by doing that. This work is how you can identify excess and determine which foods you may lose to spoilage. You can also learn the difference between popular items and poor sellers. Post the inventory results so that whoever does the shopping can spend efficiently.
Continue these efforts by committing to tracking food waste from all sources. This consideration isn’t just about the food thrown out because it goes bad — it’s also about food that is prepared in excess, lost due to poor sanitation practices, spilled, burnt, or otherwise wasted.
Food prices are up. In some cases, costs may have doubled or tripled. An audit of your current menu may reveal dishes that you can no longer offer while still being able to turn a profit. You may also find that it is well past time to raise prices on some of your menu items.
Finally, a good food and beverage director can set your hotel up for success in this area. They should take a balanced approach that prioritizes serving guests quality food and drinks while ensuring that costs are well-managed.
Reduce Hotel Operating Costs and Turnover with Onboarding
Unfortunately, employee turnover in the hospitality industry is very high. This churn means higher operating costs for hotels. The cost of recruiting, hiring, and onboarding is significant. You incur more of these costs every time someone leaves and needs to be replaced.
Of course, some turnover is going to be expected. People find better opportunities, or the work no longer interests them. However, many employees quit because they find the work environment frustrating or toxic. Others don’t feel adequately trained and experience being overwhelmed by work they aren’t prepared to do.
You can reduce hotel operating costs associated with employee turnover by perfecting your hiring and onboarding processes.
Start by refining your recruiting. Make the duties and expectations of each position clear. Screen workers thoroughly. Work to identify what causes workers to quit or be let go for cause. Then adjust your interview processes to recognize signs of those issues before you invest in hiring new employees.
Once you are better able to recruit workers who are a good fit, you can begin to improve your training and onboarding. Consider implementing job shadowing or a mentoring program to provide new employees with the support they need as they learn their jobs.
You can also engage in preliminary onboarding by using email to send workers helpful tips, a welcome letter, and other information that will help them get off to a positive start.
Manage Insurance and Tax Expenses
Another way you can reduce the costs is by staying on top of your tax and insurance expenses. Both of these are significant costs, but you may be able to have some influence over what you pay. This influence depends on certain variables, including laws and regulations that apply to you.
In many instances, the amount of property tax you pay depends on the valuation of your property. Is your hotel property being assessed properly? Has it been assessed recently? Are there gaps between the valuation the assessor is providing and your own?
It may be worth talking to your tax advisor about this and pursuing it if they believe you could lower your tax liability in this area.
You may have heard that it is wise to have your personal insurance policies reviewed each year and to shop around for policies at a better price. While business coverage isn’t exactly the same, it’s good to take a similar approach here.
Review your coverage from time to time to ensure it is adequate. Speak to multiple providers and get quotes. Remember that your current insurance company isn’t going to let you know you can save money with a different policy or agency — you’re going to have to pursue this yourself.
As you can see, it takes a phased approach to control hotel costs and offer guests the experience they deserve. If you decide to implement solutions that involve improved communications or outreach marketing, Contact Consumers has many services that may be beneficial to your business. A representative can help you review your options.