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Having an outstanding customer experience and increasing revenue are the goals of every hotel owner. But many hoteliers (both small and large) struggle with high operating costs. It is even more challenging for new hotel owners, as they do not yet know how to balance having a minimal operating cost and maximizing profit.
Running your hotel business on high expenses can deplete the profit margin and threaten the financial health and the long-term viability of your hotel business.
If cost reduction is something you’ve always wanted to do or you have failed at, I’ve made it easy for you in this article. The article contains a comprehensive breakdown of hotel operating expenses and how to cut them down.
What are the Hotel Operating Costs?
In simple terms, operating cost refers to the expenses incurred while ensuring and maintaining a smooth day-to-day operation of your business.
Hotel owners can make smarter decisions when they have an insight into the amount. Spend to keep their hotel running.
Two Types of Hotel Operating Costs
Hotel operating cost involves any cost needed for your hotel’s maintenance and smooth operation. They are divided into two major categories. Let’s look at how they affect your hotel:
1. Fixed Cost
Fixed costs are always the same, irrespective of adjustments in the volume of services you render. Whether your hotel is prospering or struggling to stay afloat, fixed costs remain unchanged.
They include rent and mortgages, property taxes, staff salaries, cables and internet, hotel management software costs, health premiums for staff, maintenance fees, internet, televisions ads, and franchise fees (if applicable)
2. Variable Cost
Variable costs are costs that vary depending on the operational efficiency and demand of your hotel. Daily activities influence them—for instance, the number of guests occupying the hotel.
Further examples of variable costs include utility cost, marketing and distribution, Floral arrangement, housekeeping supplies, hourly labour, credit card commissions and other payment processing charges, hotel management software fees, food and beverage inventory, linens, cleaning materials, toiletries marketing, and distribution cost.
How to reduce Hotel Operating Cost
Although certain expenses cannot be avoided. But with the right strategy in place, you can reduce operating costs while running a profitable hotel business. The following strategies will help you manage operating costs at your hotel:
Track and manage your cost
This is the first and most crucial step in cutting down expenses at your hotel. Tracking operating costs might require some hours of dedication, but the outcome can positively impact your bottom line. You wouldn’t know what area of your hotel business incurs more extraordinary expenses if you do not perform an analysis.
To begin with, carefully examine and find out where your expenses go. Get a breakdown of your expenses and overall spending and spot areas where there are unusual spikes or irrelevant expenses.
Tracking and analysing your operating cost from time to time will help you run your hotel at minimal operating.
Investing in marketing channels is a great thing to do, but if you are not convinced that all the marketing channels you have invested in aren’t generating enough revenue, you can review a few of them.
We wouldn’t advise eliminating or downsizing your marketing budget, as this can be disastrous. Instead, you can reduce the percentage you allocate to non-producing channels and reallocate resources to those channels that drive the high ROI.
Reduce labour cost
Labour indeed makes up a more significant portion of your operating cost. You must approach labour costs with caution and find the right balance between underutilized and overscheduled workers, which can affect your overall service delivery at your hotel.
Periods of economic difficulties require a thorough review of your entire labour asset. You can either place some clerks on temporary hiring or utilize an on-demand approach.
Focus on energy conservation
This is one of the most ordinary ways to reduce operating costs. You can cut out wastages and inefficiencies by focusing on low energy consumption equipment and energy conservation.
For example, you can Introduce new energy-saving measures such as installing power consumption metres, investing in a highly efficient HVAC system, training staff to always turn off lights in guest’s rooms, and installing occupancy sensors that ensure that lights, TVs, and heating/cooling appliances do not remain ON when guest leave,
Practice preventive maintenance
Generally, preventive maintenance is cost-effective compared to repairs. It will help minimise energy consumption, extend the lifespan of equipment, and reduce the breakdown frequency.
Fixing a system after a breakdown is usually expensive, and it can cause inconveniences to guests and interfere with their experience. Create a routine for maintaining both light and heavy-duty equipment
Leverage technology to cut cost
Reducing operating costs may seem challenging, but numerous tools can help you run a profitable hotel. With these tools, reducing operating costs has become a lot easier. You can cut down costs by automating specific processes.
Sometimes the cost of acquiring new technology is relatively high, and some have argued that it could lead to increased operational costs. But that is not true.
Introducing technological solutions like hotel software, a booking engine, and a channel manager can help reduce the cost of labour, improve efficiency and streamline operations.
These technological systems can cater to inventory distribution, bookings, check-in and check-out, online reviews, billing, housekeeping, and other areas of your hotel business. It also reduces spending money on several operations and saves time.
Re-evaluate your menu
The food and beverage department is not left out when trying to reduce operating costs. The F and B department can help you evaluate those dishes that don’t have enough patronage. You can reshape your menus. Some items on the menu can completely be removed from the menu
Track Food wastage
Ordinarily, food waste means a loss in money, but very few hoteliers pay much attention to this. In some cases, food wastage could be one of the most significant causes of money loss in your hotel, therefore this is important to keep an eye on it. Make your hotel more sustainable today.
The chefs should focus on ingredients that have a more extensive menu usage.
Review Vendor Contracts
Many hotels rely greatly on vendors for the supply of food, beverages, and other essential consumables. Whenever your hotel faces economic woes, reassessment of vendor contracts should be one of the first things you should consider.
What may have suited your needs the previous year, may not be valid in the current year. Consider reaching out to your suppliers, renegotiating, or proposing a new agreement. If the negotiation doesn’t go down well, you may consider getting in touch with other suppliers with favourable rates that will reduce operating costs drastically.
Review your tech stack
Operating costs pile on quickly when multiple software is used at your hotel. There is software for housekeeping, property management, online booking, revenue management, guest relationships, point-of-sale, etc. If your hotel uses 10 software, that means ten account managers and ten monthly bills.
Conduct a technology audit to identify that software that has low usage or is no longer needed. By reducing the number of service providers and choosing the relevant ones, you will be able to cut costs tremendously and save money.
Practice revenue Management
Revenue management is a system that provides valuable insights into the total revenue of your hotel’s operation. It can also help forecast unexpected dips and demands that will be instrumental in the control of labour expenses and reduction in variable expenses.
Monetise underutilized spaces
Sometimes, when there is more than one source of income generation at your hotel, you may not feel the impact of high operating costs. One way to increase revenue at your hotel is to convert spaces in your hotel that serve no purpose into revenue generation sources.
You can use some of these spaces for massage centres, exercise and fitness centres, and event hostings, such as weddings, seminars, and workshops. This will both attract more guests to your hotel. The proceeds generated from renting out the spaces can be used to offset or balance the cost of operation.
Cross Train Staff take up multiple roles
This is another way to manage costs at your hotel. Train your staff with skills that will enable them to handle multiple duties, especially closely related roles. When employees are cross-trained, you won’t have to spend money on hiring new staff, and they can switch roles when needed.
Cross-training your employees will make it easier for you to manage labour costs in times of economic downturn.
Although sometimes, taking up multiple roles might seem like an overburden to some staff, it will help them develop new skills and open them up to newer opportunities in the near future.
Why is it important to reduce your Hotel’s Operating Cost?
No business owner loves to run their business on a high budget with little profit to show for it. Conversely, running your hotel at a high operating cost can affect your profit drastically.
Tiny adjustments can lead to a significant upsurge in your profits regarding reducing operating costs. If you see a significant ROI in your hotel business, knowing how to control operating costs is just one way to see that happen.
Here are some benefits of reducing your hotel’s operating cost:
• It will contribute to the sustenance of a good customer service
• It will enable you to maintain optimum expenses and keep spending under control
• It generally leads to increase revenue generation
• It ensures a long-term financial health
• Your staff could enjoy an increase in salary
• It can lead to the overall success of the hotel business.
Downsides of lowering operating cost
• You might be lowering the quality of your hotel’s services
• A reduction in operating cost may lead to a wipe of potential gains and result in a net loss
• It can result in diminished patronage from customers who aren’t comfortable with your new adjustments
• It might also lead to a gradual loss of market shares.
• If you can efficiently reduce operation without affecting the quality of your overall service delivery, then you can proceed with it
As you work through the list in this guide, find out if reducing costs is a viable option for your hotel and the possible impact it’ll have on your customer service. Consider the impact on your guest. It is also advisable you talk to an expert who can provide an audit and make profitable recommendations that’ll suit your hotel business.