Maximizing Profits By Calculating Your Hotel's Break-Even Point

By James Downey Professor, Program Coordinator MBA Hospitality & Event Management, Lynn University | January 21, 2018

The notion behind break-even analysis or more formally known as cost-volume-profit (CVP) analysis centers around calculating your operations fixed and variable costs. One can catagorize fixed costs as a hotel general manager's enemy and variable costs as a financial friend.

This is so because a salaried employee's pay does not vary typically over one year offering no ability to lower its impact on the bottom line while a wage earners pay can be adjusted up or down depending upon the hours worked

Fixed Costs 

Fixed costs are the hotel manager's nemesis because they do not change in the short run. (under one year) Why are they considered a nemesis? Because they do not change regardless of increases or decreases with actual sales revenue or volume. A primary example of a fixed cost is a manager's salary at any level. Other fixed costs may include insurance, depreciation, rent, property taxes and income taxes, among others.

Variable Costs

Unlike a fixed cost, a variable cost is the hotel manager's friend because it changes in relation to sales revenue or volume. A primary example of a variable cost is cost of sales for the food and beverage department. If food and beverage sales go up, more costs increase proportional to purchase those food and beverage items. Another example is the wage a worker receives. These workers are "on the clock" and can be a taken off the clock at any time. Unlike salaried personnel who earn an amount the entire year whether they work short or long hours, wage earners can save the operation money simply by utilizing them on a need only basis.

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Coming up in February 2019...

Social Media: Getting Personal

There Social media platforms have revolutionized the hotel industry. Popular sites such as Facebook, Twitter, Pinterest, Instagram, Snapchat, YouTube and Tumblr now account for 2.3 billion active users, and this phenomenon has forever transformed how businesses interact with consumers. Given that social media allows for two-way communication between businesses and consumers, the emphasis of any marketing strategy must be to positively and personally engage the customer, and there are innumerable ways to accomplish that goal. One popular strategy is to encourage hotel guests to create their own personal content - typically videos and photos -which can be shared via their personal social media networks, reaching a sizeable audience. In addition, geo-locational tags and brand hashtags can be embedded in such posts which allow them to be found via metadata searches, substantially enlarging their scope. Influencer marketing is another prevalent social media strategy. Some hotels are paying popular social media stars and bloggers to endorse their brand on social media platforms. These kinds of endorsements generally elicit a strong response because the influencers are perceived as being trustworthy by their followers, and because an influencer's followers are likely to share similar psychographic and demographic traits. Travel review sites have also become vitally important in reputation management. Travelers consistently use social media to express pleasure or frustration about their guest experiences, so it is essential that every review be attended to personally. Assuming the responsibility to address and correct customer service concerns quickly is a way to mitigate complaints and to build brand loyalty. Plus, whether reviews are favorable or unfavorable, they are a vital source of information to managers about a hotel's operational performance.  The February Hotel Business Review will document what some hotels are doing to effectively incorporate social media strategies into their businesses.