Operating costs directly impact profit margins for hotels. Understanding the major expense categories allows owners and managers to control costs and boost bottom line returns.
In this comprehensive guide, we’ll explore the top expenses that comprise a hotel’s operating budget. With insider tips throughout, you’ll discover opportunities to run a tighter fiscal ship without compromising the guest experience.
Table of Contents
Key Takeaways
- Labor is the #1 operating expense for hotels, followed by supplies, utilities, maintenance, and marketing.
- Match staffing to occupancy patterns, control overtime, automate tasks, and monitor productivity to optimize costly labor.
- Renegotiate vendor contracts, reduce excess par levels, and optimize usage to control expenditures on guest amenities, linens, and cleaning supplies.
- Energy efficiency upgrades, lighting sensors, low-flow devices and solar panels help minimize utility costs over the long run.
- Maintenance requires proactive preventive measures on equipment plus diligent daily repairs and upkeep from handymen.
- Marketing costs can be justified by driving occupancy, but focus on high ROI channels and direct bookings over OTAs.
Defining Hotel Operating Expenses
A hotel's operating expenses cover the day-to-day costs of running the business. Key categories include:
- Labor – Staff payroll and benefits
- Supplies – Guest amenities, linens, cleaning products
- Utilities – Electricity, gas, water, heating/cooling
- Maintenance – Repairs and upkeep
- Marketing – Advertising, promotions, distribution
- Insurance/Taxes – Risk coverage and local fees
- Management Fees – Contracted management company costs
- Credit Card Commissions – Processing fees for payments
| Expense Category | % of Total Costs | Cost Reduction Tips |
|---|---|---|
| Labor | 45-55% | Control staffing, overtime, productivity |
| Supplies | 10-15% | Optimize par levels, renegotiate contracts |
| Utilities | 5-15% | Energy efficiency, conservation tactics |
| Maintenance | 5-10% | Preventive maintenance program |
| Marketing | 5-10% | Review campaign ROI, shift to direct bookings |
| Insurance/Taxes | 5-15% | Shop premiums annually, follow tax codes |
| Credit Cards | 2-4% | Negotiate processor rates, apply fees |
| Management Fees | 5-15% | Assess value provided, explore alternatives |
Tips To Optimize Top Expenses In The Hotel Industry?
Controlling these core expenses directly impacts profitability. Let’s examine the largest hot spots.
Labor Costs
Staffing represents the single biggest expense for hotels, accounting for 45-55% of operating costs. Positions driving labor costs include:
- Front desk and guest services
- Housekeeping and janitorial
- Food and beverage servers
- Kitchen staff
- Banquet setup crews
- Management salaries
- Security personnel
- Reservations team
Managing labor spend requires balancing staffing needs with profit goals. Here are tips to optimize labor costs:
Match Staff Levels to Occupancy Patterns
Anticipate and staff up for peak occupancy periods while reducing hours on slower days. Avoid overstaffing during seasonal lows.
Cross-Train Employees
Having cross-functional staff allows you to move people between departments based on business volumes.
Monitor Productivity
Regularly review metrics like rooms cleaned per housekeeper and upselling rates for servers. Address performance issues promptly.
Control Overtime
Limit overtime by managing schedules tightly. Require pre-approval for extra hours.
Automate Where Possible
Use technology like mobile check-in apps to reduce front-desk workload. Automate payroll, scheduling and routine tasks.
Supplies - Guest Amenities, Linens and More
From guest room consumables to cleaning chemicals, supplies represent 10-15% of a hotel’s operating expenses. Areas of significant spend include:
Guest Room Amenities
Mini toiletry bottles, soap, shampoo, tissue boxes, coffee supplies and water bottles add up across hundreds of rooms. Control costs by:
- Renegotiating rates with high-volume vendors
- Adjusting par levels based on occupancy
- Switching to eco-friendly dispensers vs. individual use packaging
Linens and Uniforms
The volume of bedding, towels, napkins, tablecloths and staff uniforms that must be cleaned is staggering. Manage related processing and replacement costs by:
- Using ozone cleaning to extend textile lifespans
- Patching/repairing items where possible before replacement
- Optimizing linen change schedules based on occupancy
Cleaning Supplies
Multi-surface cleaners, sanitizers, disinfectants, floor cleaners and pool chemicals help maintain hotel standards. Tips to reduce costs include:
- Buying concentrated formulas and diluting on-site
- Monitoring usage and waste by housekeeping staff
- Renegotiating vendor contracts annually
Printing and Office Supplies
From guest receipts and folios to brochures and printed collateral, paper and print costs add up. Go paperless where possible, print double-sided, and reduce ordering of low-use items.
Utilities - Powering the Property 24/7
Utility expenses like electricity, gas, water, sewer, and heating/cooling range from 5-15% of operating costs. Conservation initiatives can yield big savings:
Energy Audit
An energy assessment identifies efficiency upgrades like LED lighting, low-flow water devices, and HVAC optimizations. The ROI from energy savings is typically under 2 years.
Lighting Controls
Install sensors to turn off lights in unoccupied spaces. Use smart thermostats to reduce AC/heating when possible.
Water Reduction
Low-flow showerheads, faucets, and toilets reduce water usage. Linen/towel reuse programs also conserve resources.
Solar Panels
On-site solar offsets electricity usage, lowering utility bills significantly. Solar works well for hotels with large roofs, parking covers, or open land.
Maintenance and Repairs
Keeping hotel facilities and equipment in working order requires constant upkeep and diligent maintenance. Key expenses include:
Preventive Maintenance Programs
Proactive inspections and scheduled maintenance on elevators, generators, HVAC systems, plumbing, appliances, pools and major equipment lowers repair costs and downtime.
Groundskeeping
Regular upkeep of facilities, fixtures, common areas, landscaping and exterior lighting is required to maintain standards.
IT/AV Systems
Business systems, internet networks, telephones, televisions, wireless access points and other tech require ongoing maintenance and eventual replacement.
24-Hour Handyman Services
Even preventive maintenance can’t avoid the constant minor repairs needed to fix guest room issues, clogged drains, leaky faucets and everyday wear-and-tear.
Marketing and Commissions
While crucial for driving occupancy and awareness, marketing represents 5-10% of hotel operating expenses including:
Online Travel Agency Commissions
OTAs like Expedia take 10-25% commissions on bookings, eating significantly into margins. Use marketing to emphasize direct bookings.
Loyalty Programs
Reward programs build repeat business but rack up costs for points redemptions, promotions and management. Ensure your most loyal guests are also your most profitable.
PPC and Paid Social Advertising
Ads on Google, Facebook and Instagram are costly but effective for targeted marketing. Measure ROI continuously and adjust bids based on conversion rates.
SEO and Site Optimization
Ranking organically on search engines provides more cost-effective exposure than paid ads. But it requires ongoing technical work and original content creation.
Insurance, Taxes and Fees
While not directly controllable, proper insurance coverage and compliance with local tax codes are mandatory:
- Property/Casualty Insurance – Protects against damage, accidents, theft and liability claims on premises.
- Group Health Insurance – Provides medical, dental and other benefits for employees.
- Local Taxes – Sales tax, occupancy tax, food & beverage tax, payroll tax and more.
- Credit Card Processing Fees – Typically 2-4% of all credit transactions.
- Licensing – Hotel operations require local permits and licenses for food service, events, alcohol, occupancy use and more.
Evaluating Cost Reduction Opportunities
When assessing potential cost cutting initiatives:
- Review expense performance versus local/industry benchmarks
- Prioritize high-spend categories like labor, supplies, utilities
- Consider investments balanced against longer term savings
- Analyze impact on guest experience - don't sacrifice service levels
- Continuously monitor for new efficiencies as conditions change
Controlling costs boosts the bottom line, but it requires vigilance to sustain savings long term.
In A Nutshell
Controlling operating expenses directly boosts profit margins for hotels. While certain costs like labor and utilities are largely fixed, significant savings can be found across categories.
Continuous monitoring of expense trends, ratios, and vendor contracts allows you to optimize spending over time. Striking the right balance ensures profitable operations without sacrificing the quality your guests expect.
For an independent assessment of cost reduction opportunities tailored to your property, reach out to Emersion Wellness. Our team of hospitality financial experts can help keep your bottom line healthy.
See Also: How to Build Your Own Hotel: A Guide to Maximizing Profit
Frequently Asked Questions
Here are more descriptive answers for the FAQs in the blog post:
What are the main operating costs for hotels?
The largest operating expenses for a hotel include labor costs like front desk, housekeeping, F&B staff, and management salaries. Supply costs for guest amenities, linens, and cleaning products also represent a significant expense. Utility bills for electricity, gas, water, heating and cooling are unavoidable. Maintenance and repairs on facilities, equipment, and grounds require ongoing upkeep. Marketing spends on advertising, OTA commissions, loyalty programs and sales initiatives aim to drive demand. Other costs like insurance, taxes, credit card fees, and management fees round out the major operating expenses.
How can hotels control payroll costs?
Hotels can control costly payroll expenses by optimizing staff scheduling to precisely match projected occupancy volumes, avoiding overstaffing during seasonal lows. Monitoring productivity metrics for each role allows underperformers to be addressed through training or replacement. Limiting overtime requires tight shift scheduling and approval processes. Cross-training staff in multiple functions allows movement between front desk, housekeeping, and F&B based on business needs. Automating tasks like check-ins, inventory management, and reporting reduces manual workloads. Budgets factoring in average wages and total labor hours help rein in overall payroll costs.
What supplies represent major expenses for hotels?
Supply costs for guest room consumables like toiletries, soap, shampoo, coffee and water bottles add up quickly when multiplied across hundreds of rooms. Linens including sheets, blankets, towels, robes, and pool towels require constant replacement and cleaning after each guest stay. Napkins, tablecloths, uniforms, cleaning chemicals and paper products for F&B operations also drive high supply costs. Renegotiating vendor contracts, monitoring par stock levels, and optimizing usage through iniatives like linen reuse programs help control these expenditures.
How can hotels balance marketing costs and profitability?
Hotels weigh the ROI of marketing spends against profit goals. Online travel agencies deliver bookings but at high commissions of up to 25%, so driving direct reservations is preferred when possible. Paid search and social media advertising require constant monitoring of conversion rates and adjustments to maximize results within budget. Email marketing to loyalty members has lower costs per impression. Promoting ancillary offerings to existing guests boosts revenue. Reviews assess which campaigns, partnerships and channels are most profitable and which to potentially cut back.
How should hotels structure management fees?
Management fees should incentivize profit growth through a base fixed fee for contracted services plus an incentive bonus tied to hitting revenue and profit targets. If performance lags, termination clauses allow separation. A transparent annual budget process gives owners visibility into spending. Activity reports detail hotel financials and operations. With the owner bearing the most risk, the arrangement should provide oversight and alignment on profitable growth strategies.
What purchasing tactics help hotels control expenses?
Savvy purchasing techniques include consolidating suppliers to secure higher volume discounts. Multi-year contracts lock in favorable rates. Seeking bids annually helps renegotiate down. Monitoring contract compliance ensures accurate billing. Taking early payment discounts and paying quickly boosts working capital. Technology like e-procurement and auto-PO systems smooths and controls the process. Approval workflows regulate non-contracted spend. These procurement tactics maximize value while reducing maverick off-contract spending.
How much do utility costs impact hotel profitability?
Utilities like electricity, water, gas and HVAC typically comprise 5-15% of operating costs. Reductions from conservation initiatives like low-flow fixtures, sensors, and solar panels can significantly improve margins.
What maintenance costs are unavoidable for hotels?
Unavoidable maintenance costs include preventive maintenance on equipment, daily handyman repairs, groundskeeping services, maintenance staffing, and periodic technology/AV upgrades.
How can hotels balance marketing costs and profitability?
Hotels balance marketing costs by tracking ROI on campaigns, focusing spend on the highest converting channels, negotiating OTA commissions, and emphasizing direct bookings wherever possible.
What insurance coverage is essential for hotels?
Essential insurance includes property, casualty, liability, employee health, workers compensation, travel insurance, event coverage, liquor liability, cyber security, and director & officers policies.
How can hotels reduce credit card processing fees?
Hotels can reduce credit card fees by negotiating pricing, encouraging cash/debit payments, using lower cost processors, batching transactions, and offsetting costs by applying convenience fees where appropriate.
What taxes significantly impact hotel profitability?
Major taxes include sales taxes, occupancy taxes, food & beverage taxes, payroll taxes, property taxes, franchise taxes, and excise taxes on items like lodging services and alcohol.
How should hotels benchmark operating expenses?
Hotels should benchmark expenses against local competitors, chains, and industry metrics like cost per occupied room, cost per available room, labor cost percentage of revenue, and expenses as a percentage of total revenue.
I'm Nathan Baws, a nutrition nerd, exercise and weight loss expert, and an unwavering advocate for good health. As the founder of Emersion Wellness, I'm passionate about crafting Seamless Weight Loss Programs to supercharge hotel revenue and transform lives. We've pioneered the World's First Plug & Play Weight Loss Programs for top hotels and resorts, sparking a wellness revolution. Beyond my professional journey, you'll often find me hiking, swimming, and riding the waves, embracing every moment in nature. Join me on this exhilarating journey towards diet, health and wellness.