The Pandemic Chokehold: Dried Up Revenues and Inevitable Fixed Costs
Are you ready to win your customers' trust back?
By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | July 26, 2020
The Hospitality Business model is a unique one. It is seasonal and business volumes differ from month to month. Hotels strive to keep the revenue graphs on an upward trend as much as possible while battling the phenomenon of fixed costs.
A hotel goes through annual cycles of high, low and moderate volumes of monthly business. Occupancies are barometers of hotel business volumes. A hotel could technically reach occupancies of above 90% (and a full house too on select days) in peak months. Low months are huge challenges for the hotel business. With occupancies dipping below the 40% mark, revenues shrink. An ongoing strategy of most hotels is to drum up more business (at high commission costs often) during the low months so that the overall revenues graph does not dip.
However, occupancies and revenues are only one side of the picture. Hotels have also to deal with the other insidious enemy - fixed costs. These are costs which do not change with business volume. While fixed costs turn into an advantage during high occupancy months (because they are covered many times over by substantially high revenues), they depress bottom lines in months of low occupancies. So, this see-saw battle of high and low month occupancies goes on in the hotel business regularly.
This seasonality makes sustenance of revenues consistently over time a major hurdle to be crossed on a daily basis. It is critical to understand that we are talking only about low occupancy months (which could mean anything from 40% to say 50%) and their effect. At 40% occupancy, the hotel still runs and revenues are earned.
Imagine a worst case scenario where there are no customers coming to the hotel. In other words, occupancy is at zero or close to it. Imagine employees ready to serve customers who just aren't there. Imagine hotel restaurants having prepared food menu items but no one to serve. Aside from the colossal wastage that would happen, the hotel business would be devastated if this situation continued for a month or more.
This is exactly what happens when a pandemic strikes. Life safety takes on a stark, real meaning when the pandemic descends on communities. So, hospitality businesses which thrive on volumes and which are cheerful, busy establishments undergo the mind numbing reality of absence of customers.