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The Cost of a Filled Room
This article is from the Fall  2008 issue of Hospitality Upgrade magazine.To view more articles covering technology for the hospitality industry please visit the Hospitality Upgrade Web site or to request a free publication please call (678) 802-5307 or e-mail.
By Bill Geoghegan 

Anyone who has taken a recent airline flight has seen that on most flights, all the seats are full.  Airlines have been the masters of revenue management for many years.  Their accountants have carefully calculated the amortization cost of the plane, the number of hours it can fly in its lifetime, maintenance cost per hour flown, etc., and determined a fixed cost-per-seat mile.  The cost of the crew is the same no matter whether the plane is half empty or fully loaded.  Whether the crew has to work harder on a flight does not factor into the costs, and the cost of the peanuts (if any) is peanuts. 

Of course, there are many factors that go into the cost-per-seat mile calculation, including a complex but straight-forward cost associated with the amortized cost of an airplane, the number of hours it can be flown, maintenance, crew costs, etc.  Today, in the age where passengers are paying for drinks and meals, the variable costs are few —primarily the additional fuel required to fly an incremental passenger.  If a seat goes empty, it still has a cost associated with flying that seat to a destination.  As a result, any revenue defrays that cost, even if that revenue is less than the fixed cost of the empty seat.  There can be other services contributing to the revenue for that airplane, including the amount of freight or mail that is flown, but for an airline to be profitable, it must fill all the seats on the plane.  On occasion, a factor known as density altitude (a combination of the altitude of the runway and the ambient temperature) may limit the amount of weight under which a plane can take off, therefore limiting the number of passengers that can fly on that flight, but for the most part, an empty seat is a non-recovered cost. 

Some hotels take an opposite position on the fixed cost for a room.  For the purpose of revenue management, many hotels consider the cost of an empty room to be $0, assuming that leaving a room empty has no cost. While flying an airplane empty takes a small bite out of the useful life of the plane, leaving a room empty means that there is less wear and tear on the furniture and carpet, and, if properly controlled, little or no energy cost.

 Putting one or two people in that room for one night has a very specific cost, that being the assigned cost of cleaning the room (guestroom attendant wages, linens, towels, etc.) plus the amenities (shampoo, mouthwash, water).  Additionally, the wear and tear factor must be considered, but that is a cost in terms of the number of nights occupied, not a daily cost or per mile flown cost as you might have with an airplane. 

In surveying a number of hotels, depending on the location’s labor costs and quality level of the hotel, these costs could range from less than $15 up to $50 or more per room night.  If the room goes empty for the night, these costs are not incurred.  If the room is occupied, the hotel must receive net revenue not less than those costs.  This means that a very simple calculation of the minimum price that can be charged for a room is that cost plus the cost of any distribution channel commissions and royalties that must be paid.  A hotel with a $35 per room night cost with its highest distribution channel receiving a 20 percent commission and a chain or brand royalty of 6 percent must set its minimum rate at about $46.50 per night.  Any reservation coming in through the highest cost channel will still cover the incremental costs of the room night, and a reservation through any other channel would be positive revenue.

Of course, simply covering the incremental cost of occupancy would not cover the fixed costs of the hotel.  In addition to any debt service, mortgage, real estate taxes and utility costs, there is also the cost of staffing the hotel for the targeted occupancy.  Most staff must be paid whether the hotel is fully occupied or not.  Many Las Vegas hotels run at a staff level that can handle 100 percent occupancy, so gaining an incremental room does not have any additional staffing costs, but many more rural casino hotels are lucky to run at 50 percent to 60 percent occupancy, and getting additional trained staff to cover higher occupancy is problematic.  While a hotel can occasionally handle more guests than the number for which it is staffed, eventually the customer service will suffer and with it the reputation of the hotel. 

For a transient (non-resort) hotel, there are few other sources of revenue beyond the room night charges, especially where there is no restaurant or bar on premise.  For the casino or resort hotel, there is often enough incidental revenue gained to offset a lower price for the room.  As a result, the minimum price that can be charged for a room at a transient hotel must also include a per room night amortization of all the fixed and staffing costs.  Basing the incremental room cost at $0 for a hotel that cannot gain revenue beyond room night charges would result in costs that exceed revenues (i.e. a loss).
Not so many years ago, a major Las Vegas casino hotel was staffed for 80 percent occupancy.

Instead of attempting to fill the hotel, they managed their occupancy by pricing the rooms high enough when they expected to exceed 80 percent to discourage the guest from booking.  If the guest booked at the higher price, they would accept the reservation, but continue to raise the rate to discourage additional guests.  Their ADR was excellent, and they made a good profit, but the restaurants and shops suffered, as did the casino business.  The resort was taken over by a larger entity, which immediately targeted 100 percent occupancy.  The ADR suffered, but the bottom line was much greater, the restaurants and outlets boomed, and the casino flourished. 

In the gaming environment, it has been the casino that has driven the greatest revenue to the resort, filling a percentage of the rooms and paying the hotel for those rooms.  While it is typically just a paper transaction, it allows the hotel to realize a base occupancy at a known rate.  Lesser players not sponsored by the casino are charged a rate lower than the published rate, the difference sometimes supplemented by the casino.  This second segment adds another level to the base occupancy and rate that the hotel can predict. 

A third level of guests is groups, and it is both these and the independent guests that cause a rethinking of the $0-based room cost.  When a resort attempts to raise occupancy by reducing the published rate, it will frequently do so at the cost of losing already booked business from groups or independent travelers.  Many companies and travel agencies monitor changes in booked rates, and will cancel previously booked reservations in favor of the newer, less expensive one.  As a result, lowering the price can actually cannibalize existing reservations made at a higher price.

In a non-casino resort, it is relatively easy to determine the non-room revenue contribution of a guest, because most (although not all) guests will charge any incidental purchase to their room folio.  At worst, the guest might pay directly with a credit card, but with some work, a large percentage of in-house guests charges can be identified by the name on the credit card, and most of revenue generated by in-house restaurants and shops can be attributed to registered guests. 

In the casino, this is not the case.  Notwithstanding the non-guests that visit the casino or shops, it is difficult to identify the in-house guests’ contribution to revenue.  In addition to playing anonymously (not signing up or using a player card) many guests pay cash for meals and other purchases, and many times use their winnings from the casino to make impulse purchases that they would never had made if they had not received a windfall.

The next step in predicting the value of a filled room will not occur until we can find a technique or technology that can identify a guest’s spending habits passively.  Disney created a way by providing a resort identification card that gets a guest into a room, and also allows charges at all outlets within the parks.  In addition to making it convenient for the guest, it also allows them to accumulate the real value of the filled room, no matter what the cost.


Bill GeogheganBill   is a consultant in Las Vegas. He can be reached for comment at Bill@LGTConsulting.com
 



© Hospitality Upgrade, 2008. No reproduction or transmission without written permission.



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Geneva Rinehart 
Managing Editor 
Hospitality Upgrade magazine 
and the Hospitality Upgrade.com website
http://www.hospitalityupgrade.com/
grinehart@hospitalityupgrade.com

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Also See: Dealerless Poker - Casinos reduce risks by automating /  Bill Geoghegan/ June 2008

Balance of Power / Tina McCrossan/ June 2008

Hospitality Technology Contracts and Pitfalls / Raymond M. Asad / June 2007

The Online Metrics Handbook for Travel Marketers / by Cindy Estis Green for TIA and HSMAI / March 2007

Future Proofing Your Property / by John Burns / March 2007

Ask Not For Whom the Wedding Bell Tolls / Mergers and Acquisitions - Good for the Hospitality Industry? / Michael Schubach / March 2007

Hello, Front Desk? I Think I've Been Robbed!/ Nick Price / February 2007

The Personal Data Privacy & Security Act– Is Your Hotel Ready? / Rick Warner / October 2006

Hospitality Loyalty Programs; Strategies for Points-based, Recognition-based Programs / Mark Haley / October 2006

How Fast Do You Want to Go? Understanding the risks and costs with technology implementation and getting there too fast/ Ed Klein / October 2006

What's New in the Hotel Guestroom? Digital, HD or IP Televisions / Ashok Kumar / June 2006

A Future Vision for Hotel Revenue Management / Caryl Helsel and Kathleen Cullen / June 2006

Marketing to the Next Generation of Buyers; Scoring Your Hotel Reservations System / Debra Kristopson / June 2006

Consortia-Corporate-Group Best Available Rate (BAR): Good or Bad for Hotels? / Caryl Helsel / October 2005

Check In Kiosks: Coming to a Hotel Lobby Near You? / Jerry W. Sheldon / October 2005

Moving into Compliance Mode; Realizing the Benefits, Cutting the Costs / Dorian Cougias / March 2005

What Hoteliers Need to Know About Flat Panel and HDTVs / Jake Buckstead / March 2005

10 Trends Affecting Hospitality IT in 2005 / Bradford Iverson / March 2005

Searching for Bookings? Optimize / Dr. Matthew Dunn / August 2004

Instant Messaging: Age Is Everything - Expectations of Immediacy, Productivy and the Rise of IM / Elizabeth L. Ivey / August 2004

Baby It's Cold Outside the Firewall / Michael Schubach / April 2004

High Wired: The Hotel Room of the Future / Kelly Stanford / April 2004

We're Not In Kansas Anymore; Differentiating your hotel through technology / Mark Haley / January 2004

Understanding the Power of Customer Relationship Management / Neil Holm / Hospitality Upgrade Magazine / November 2003

The Case for Self Service in Hospitality / Marvin Erdly and Amitava Chatterjee / Hospitality Upgrade Magazine / October 2003

Five Questions to Ask Online Distributors / Michelle Peluso / Hospitality Upgrade Magazine / October 2003

Surf's Up - Internet Marketing for Destination Properties / Marvin Erdly and Amitava Chatterjee / Debra Kristopson / Hospitality Upgrade Magazine / October 2003

Wireless Changes Everything; So, do ya want a latte with that or what? / Jocelyn Valley / Hospitality Upgrade Magazine / June 2003

Customer Awareness or Customer Beware? Data Security in a CRM-Obsessed Industry / Elizabeth Ivey / Hospitality Upgrade Magazine / June 2003

Your Magnificent Selling Machine Would you Prefer Your Hotel to Get: the Web Hit or the Phone Call? / Robert Camastro / Hospitality Upgrade Magazine / June 2003

Tradeshows & Economic Soldiers / Dan Phillips / Hospitality Upgrade Magazine / April 2003

Hotel Telecommunications in the 21st Century / Geoff Griswold / Hospitality Upgrade Magazine / March 2003

The ABCs of CRM  / Mark Haley & Bill Watson / Hospitality Upgrade Magazine / March 2003

Getting the Most out of Your IT Investment / By: Clay B. Dickinson / Hospitality Upgrade Magazine / Fall 2002

The Role of Paper in a Digital World / By: Bill Fitzpatrick / Hospitality Upgrade Magazine / Fall 2002

The Rotten Pineapple (international symbol of hospitality) / By: Steve D'Erasmo / Hospitality Upgrade Magazine / Fall  2002

Focusing on Labor Can Improve More Than Just Cost / Hospitality Upgrade Magazine / Summer 2002

Attention Hotels - An Ounce of Prevention is Worth a Pound of Cure / Elizabeth Lauer Ivey / Hospitality Upgrade Magazine / May 2002 

HOSTEC - EURHOTEC 2002 - Room for Improvement / Christel Dietzsch / Hospitality Upgrade Magazine / Feb 2002 

Technology and the Human Touch / Dan Phillips / Hospitality Upgrade Magazine / Spring 2002

Wireless Technology:  Where We Have Been, Where Are we Going? / Geneva Rinehart / Hospitality Upgrade Magazine / Spring 2002

Effective Customer Relationship Management (CRM) Implementations / John Schweisberger and Amitava Chatterjee, CHTP / Hospitality Upgrade Magazine / Fall 2001 

What's Up With Call Accounting Systems (CAS) / Dan Phillips / Hospitality Upgrade Magazine / Fall 2001

Technology Dilemmas: What have IT investments done for you lately? / Elizabeth Lauer / Hospitality Upgrade Magazine / Summer 2001

Full Circle from Centralized to ASP - The Resurrection of Old Themes and a Payment Solution / Gary Eng / Hospitality Upgrade Magazine / Summer 2001 

A High Roller in the Game of System Integration / Elizabeth Lauer / Hospitality Upgrade Magazine / Spring 2001 

CAVEAT EMPTOR! Simple Steps to Selecting an E-procurement Solution / Mark Haley / Hospitality Upgrade Magazine / Spring 2001 

Your Bartender is Jessie James and He Needs to Pay for College / Beverly McCay / Hospitality Upgrade Magazine / Fall 2000 

Choosing a Reservation Representation Company / John Burns / Hospitality Upgrade Magazine / Spring 2001 

Understanding and Maximizing a Hotel’s Electronic Distribution Options / by John Burns / Hospitality Upgrade Magazine / Fall 2000 

The Future of Electronic Payments - From Paper to Plastic and Beyond / J. David Oder /  Hospitality Upgrade Magazine / Summer 2000

Timeshare Technology Steps Up / by Elizabeth Lauer / Hospitality Upgrade Magazine / July 2000 

Biometric Payment: The New Age of Currency / by Geneva Rinehart / Hospitality Upgrade Magazine / Mar 2000 


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