HENDERSONVILLE, Tennessee—During these challenging economic times, hoteliers have tried different sales and marketing techniques. Because properties have been managing their rates differently to capture more demand, some operators have forgotten to consider how profitability is affected by these pricing strategies.
If no new demand is coming into a market, many hoteliers have resorted to reducing rates to steal demand from competitors. But keep in mind full-service properties’ bottom lines are affected not only by rooms revenue (and related expenses) but by other sources of revenue such as food and beverage. Many of these operating departments are affected by levels of occupancy that can impact profitability.
The same pricing logic can affect profitability in different ways at a full- and limited-service hotel in the same market. Assume two hotels—a midscale-without-F&B and an upper-upscale property located at the same intersection—have decided to reduce their current rate by 5 percent in hopes of stealing an average of five additional roomnights per night from competitors. How will this affect their profitability?
| Full-service hotel | Limited-service hotel* | ||||||||||||||||||||||||
| Rooms available (per day) | 300 | Rooms Available (per day) | 100 | ||||||||||||||||||||||
| Occupancy (month) | 55% | Occupancy (month) | 60% | ||||||||||||||||||||||
| ADR (month) | $120 | ADR (month) | $84 | ||||||||||||||||||||||
| Rooms revenue/occupancy room | $120 | Rooms revenue/occupancy room | $84 | ||||||||||||||||||||||
| F&B revenue/occupancy room | $40 | ||||||||||||||||||||||||
| Other operating revenue/occupancy room | $10 | ||||||||||||||||||||||||
| Total revenue/occupancy room | $170 | Total revenue/occupancy room | $84 | ||||||||||||||||||||||
| Rooms expense/occupancy room | $30 | Rooms expense/occupancy room | $21 | ||||||||||||||||||||||
| F&B expense/occupancy room | $28 | ||||||||||||||||||||||||
| Other operating expense/occupancy room | $5 | ||||||||||||||||||||||||
| Total distributable expense/occupancy room | $63 | Total distributable expense/occupancy room | $21 | ||||||||||||||||||||||
| Undistributable operating expense/available room | $30 | Undistributable operating expense/available room | $14 | ||||||||||||||||||||||
* Because other operating revenue and expense sources generally are immaterial to profitability for limited-service hotels, none were listed for this example. Full-service calculation example
In the full-service-hotel example below, the hotel currently sells 4,950 rooms per month at a US$120 average daily rate. After the 5-percent decline in ADR, the new ADR would be US$114, and the projected new number of rooms sold would be 5,100 per month. Under the current pricing structure, the hotel captures US$259,650 in monthly gross operating profit (30.9 percent GOP); however, with the new strategy, it will only capture US$245,100 in gross operating profit (29.3 percent GOP). In this case, although the hotel gained 1.7 points in occupancy for the month, it lost US$14,550 in profit.
| ADR reduction % | 5% |
| Actual ADR reduction | (US$6.00) |
| New ADR | US$114 |
| New roomnight demand/night | 5 |
| New rooms sold/month | 5,100 |
| New occupancy | 56.7% |
| Full-service hotel’s current performance*: | Full-service hotel’s planned performance*: | ||||||||||||||||||||||||
| Rooms available (30 days) | 9,000 | Rooms available (30 days) | 9,000 | ||||||||||||||||||||||
| Rooms sold (30 days) | 4,950 | Rooms sold (30 days) | 5,100 | ||||||||||||||||||||||
| Room revenue | $594,000 | Room revenue | $581,400 | ||||||||||||||||||||||
| F&B revenue | $198,000 | F&B revenue | $204,000 | ||||||||||||||||||||||
| Other operating revenue | $49,500 | Other operating revenue | $51,000 | ||||||||||||||||||||||
| Total revenue | $841,500 | Total revenue | $836,400 | ||||||||||||||||||||||
| Room expense | ($148,500) | Room expense | ($153,000) | ||||||||||||||||||||||
| F&B expense | ($138,600) | F&B expense | ($142,800) | ||||||||||||||||||||||
| Other operating expense | ($24,750) | Other operating expense | ($25,500) | ||||||||||||||||||||||
| Total operating expense | ($311,850) | Total operating expense | ($321,300) | ||||||||||||||||||||||
| Undistributable operating expense | ($270,000) | Undistributable operating expense | ($270,000) | ||||||||||||||||||||||
| Gross operating profit | $259,650 | Gross operating profit | $245,100 | ||||||||||||||||||||||
| Gross operating profit percentage | 30.9% | Gross operating profit percentage | 29.3% | ||||||||||||||||||||||
*all values in U.S. dollars Limited-service calculation example
Because limited-service hotels’ other operating revenue sources typically run nominal profit, strategies to change pricing to improve room revenue can affect the bottom line more directly. In this example, the hotel currently sells 1,800 rooms per month at an US$84 ADR. With the 5-percent reduction in ADR, the hotel is planned to sell 1,950 rooms at a US$79.80 ADR. This will result in a US$4,410 in room revenue increase each month. However, although the hotel improved its gross operating profit to US$72,660 (a US$1,260 monthly increase), its gross operating profit declined 0.5 percentage points (to 46.7 percent).
| ADR reduction % | 5% |
| Actual ADR reduction | (US$4.20) |
| New ADR | US$79.80 |
| New room night demand/night | 5 |
| New room night demand/month | 150 |
| New rooms sold/month | 1,950 |
| New occupancy | 65.0% |
| Limited-service hotel’s current performance*: | Limited-service hotel’s planned performance*: | ||||||||||||||||||||||||
| Rooms available (30 days) | 3,000 | Rooms available (30 days) | 3,000 | ||||||||||||||||||||||
| Rooms sold (30 days) | 1,800 | Rooms sold (30 days) | 1,950 |
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| Room revenue | $151,200 | Room revenue | $155,610 | ||||||||||||||||||||||
| Room expense | ($37,800) | Room expense | ($40,950) | ||||||||||||||||||||||
| Undistributable operating expense | ($42,000) | Undistributable operating expense | ($42,000) | ||||||||||||||||||||||
| Gross operating profit | $71,400 | Gross operating profit | $72,660 | ||||||||||||||||||||||
| Gross operating profit percentage | 47.2% | Gross operating profit percentage | 46.7% | ||||||||||||||||||||||
*all values in U.S. dollars Comments
These examples are created for illustrative purposes. There are full-service properties that have high profitability percentages from other operating revenue sources that would result in favorable profitability projections if it discounted rates to increase the number of rooms sold. However, the main point is to stress the importance of considering total profitability, not just the effect on room revenue with pricing strategies.