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When it comes to profit margins, the hotel industry is one of the most competitive industries out there. Understatement of the year, right? But it’s true.

There are predicted to be almost 3,000 new hotels built in 2023 alone. But with profit margins tight and competition fierce, how many of them will still be around in 2024?

We’re going to dissect:

  • How much money hotels actually make
  • 7 practical tips for increasing your profit margin
  • Why investing in hotel tech can boost revenue

Ready to implement our hospitality experts’ best practices for increasing your hotel’s profit margins? Read on.

Increase your hotel revenues today!

How Much Do Hotels Really Make?

The first thing to remember is that there are a lot of variables. Where is the hotel? What level of service is it providing? You can even go deeper — what’s the general state of the economy right now? All of these will have an effect on our answer.

Luxury hotels, for example, typically have higher profit margins than budget hotels due to their higher room rates and additional services.

With all that in mind, it’s difficult to give an exact number. But in general? Hotels are known to be an industry with low-profit margins. That’s due to high fixed costs like:

  • Rent or mortgage
  • Soft costs (lawyers, designers, insurance, taxes, etc.)
  • Hard costs (furniture, fixtures, and equipment)
  • Staff salary, working capital, etc.

A hotel’s profit margin is a good indicator of how healthy a business is. Next up, we’re going to dive into how to calculate that.

How To Calculate Your Profit Margin

Here’s our formula below:

(Net Profit * 100%) / Total Revenue = Profit Margin

Hoteliers might make a large net profit, but they can’t just take that to the bank. They have to pay their staff and other fixed costs (see above).

What’s a healthy profit margin?

According to our sources, a hotel should have an average profit margin of 25 – 40%. But it does depend on who you ask: according to Statista, hotels have an average profit margin of 14-25%.

That means if you’re doing $1,000,000 in annual net revenue, you can take home between $250,000 and $400,000 every year.

“Profit margins can often be slim, making every decision crucial. The key to success? Finding the right balance between offering a high-quality experience for guests, controlling operational costs, and adapting to customer demands.” — Adir Ron, CMO, Duve.

In recent times, hoteliers have faced two threats to their profit margins.

The staffing crisis is showing no signs of abating, with good staff being harder to find and even harder to keep. Also, the rise of alternate accommodation (for example, AirBnB) has put pressure on hotels, with OTAs (online travel agencies) taking up to 30% commission on bookings.

7 Strategies Hoteliers Can Use Right Now To Boost Their Profits

money made arrow points up

It’s not all doom and gloom. There are steps you can take to reduce costs and improve your profit margins. We reached out to our network of hoteliers and hospitality industry veterans and asked for their advice.

Here’s what they had to say:

1. Manage Your Labor Costs

Staff salaries can account for between 40 and 50% of your net income – which is a lot. But hospitality is fundamentally a human-centric business. How’s a hotelier supposed to manage costs without damaging their guests’ experience?

The answer? Hotel technology.

Hotel technology like online check-in, a contactless concierge, and smart keys take the pressure off the staff you have, often allowing one person to do the work of three. It’s an indispensable tool in the battle to improve hotel profit margins.

When you automate key aspects of your guest experience, you free up the staff you do have to focus on providing excellent hospitality — without them being stressed because they’re short-staffed.

Learn More: Elevate your Guest Experience Using Hotel Automation

2. Invest In Hotel Management Software

Investing in hotel management software is just that — an investment. A good hotel technology provider will be able to supply you with hotel management software that can help you boost profits in a number of ways.

Hotel tech allows hoteliers to automate whatever can be automated — think room bookings, payment, inventory management, etc. – which helps reduce human errors and increase overall savings.

3. Leverage Guest Data For Targeted Upselling

One of the best ways to improve your profit margins? Upselling your guests more efficiently.

But here’s the thing: your staff are hospitality experts, not salespeople. Hotel owners that leverage customer data to craft custom upsells as unique as their guests are far more likely to see upsell conversions than those who don’t.

That’s because offering a spa retreat to the couple on a romantic city break is far more likely to convert than offering it to the lone business traveler in town for a conference.

Learn More: Advanced Guest Segmentation: The Secret To A More Profitable Hotel

Boost your hotel revenues now!

4. Rethink Your RevPar

Optimize your hotel’s profit margins by regularly reviewing and adjusting your RevPAR (revenue per available room).

RevPAR is a crucial KPI in the hospitality industry. It shows the amount of revenue generated from room bookings and helps determine the most profitable room rate. An increase in RevPAR can indicate either a higher average room rate or higher occupancy, or both.

Here’s how to calculate it:

Rooms Revenue / Rooms Available = RevPAR

For example: a 200-room hotel with an occupancy rate of 80% (160 occupied rooms) and a room rate of $100 would result in a daily RevPAR of $80 ($16,000 room revenue / 200 rooms available).

Read More: What is RevPAR? How to Calculate and Increase It

5. Increase Your Direct Bookings

It’s no secret that OTA (online travel agencies) are a significant source of many hotelier’s bookings. But with most of them taking steep commissions of up to 30%, they’re far less profitable than direct bookings.

Converting customers from OTAs to direct bookings is a long-term process. There are a number of strategies that make it easier:

  • Building a user-friendly website
  • Offering a loyalty program to guests who book directly
  • Having an active presence on social media

Curious? We dove deep into this topic in the blog post below.

Learn More: How To Increase Direct Bookings

6. Cut Down On Operational Costs

Hotels have high fixed costs — that’s a given. But there are things you can do to bring them down to manageable levels:

  • Reduce energy costs. Monitor energy usage in your hotel and identify areas where energy can be conserved. Think: occupancy sensors for lights and heating, switching to LED, or hiring an outside agency to do an energy audit and see where you can make significant savings.
  • Cut down on food waste. Reducing waste saves on inventory and is also great for the environment. In your restaurant, consider offering food options that have similar ingredients and prep so you can cut down on waste. Consider scaling back on portion sizes (especially with the current inflation around food) and making sure your staff are pouring drinks at the bar accurately.
  • Cross-training employees. Staff take vacations, and staff take sick days. The unexpected is known to happen, and when it does you’ll be happy you cross-trained your staff (e.g. training front-of-house staff as waiters or bar staff, or vice-versa). When there’s a lull in their primary role, they can help out with secondary roles. This will stop you from being caught short-handed during busy times without having to hire additional staff.

Profits aren’t just a result of filling rooms and raising prices. It’s about creating memorable experiences for guests, managing costs effectively, and continuously innovating to stay ahead of the competition

David Mezuman

CEO at Duve

7. Double Down On Marketing

At the risk of stating the obvious — the more rooms and upsells you sell, the more money you make, and the higher your profit margins.

That’s why it’s important to refresh your sales strategy from top to bottom periodically.

Are you meeting your most profitable customers where they are? Your guests are unique and will be active on different online and offline platforms. If you want to target them and drive more revenue, you need to target the right sales channel for maximum efficiency.

For Example: If your most profitable segment are business travelers, then you want to have an active presence on Linkedin. You might also consider sponsoring local trade shows, or just showing up and handing out some branded swag (or discounts on future stays).

This isn’t a quick fix — but when done consistently over the long run you’re sure to see measurable results.

Learn More: The Ultimate Hotel Sales Guide

Build Loyalty, Boost Revenue, & Optimize Guest Experience

Between ongoing staff shortages, chronic inflation, and greedy OTA commissions, turning a profit as a hotel owner can be a challenge. But with the right tech partner, it doesn’t have to be.

Hotels that want to set themselves apart from their rivals need to invest in hotel tech.

With Duve, you’re in control thanks to online check-in and check-out, customized and highly-targeted upsells, and an easy-to-use communication hub. With these tools you’ll be able to improve guest experience, take pressure off your busy staff, and boost profit margins.

Ready to take your hotel’s profits to the next level?

Take your property to the next level with Duve

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About the author

Hi, I'm Tal Lavi, a hospitality enthusiast dedicated to transforming your guest experience to an unforgettable one. With a passion for crafting engaging narratives and deep insights into guest behavior, let me take you on a journey to the future of guest experience.

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