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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Sales & Marketing: Opinions Matter

Hotel Sales and Marketing Directors manage a complex mix of strategies to attract and convert customers into guests. Part of their expertise includes an awareness of customer behavior during the reservation process, so they can make sure their hotel is favorably positioned. One such trend is the growing popularity of travel review sites. According to one recent survey, 61% of prospective customers consult online reviews in order to validate information about the hotel before making a purchasing decision. Another survey found that the average hotel customer reads between 6-12 reviews across 4-10 properties before making a final decision on where to stay. Similarly, other studies have shown that consumer reviews are a more trusted source of information for prospective customers than other kinds of marketing messaging. In fact, reviews are often considered to be as influential as price regarding whether a customer decides to complete a purchase or not. Plus, travel sites with the most reviews - including recent reviews from satisfied customers and thoughtful responses from staff - were also found to be the most appealing. So having positive reviews on a travel website is essential and can help to increase a hotel's conversion rates dramatically. Of course, there are all kinds of additional marketing strategies for sales and marketing directors to consider - the importance of video and the emergence of live streaming; the implementation of voice search; the proliferation of travel bots; and the development of Instagram as an e-commerce platform. The June Hotel Business Review will report on some of these issues and strategies, and examine how some sales and marketing professionals are integrating them into their operations.