Suppose tomorrow morning a tour operator contacts you to offer you a deal: they will buy all unsold rooms during the year from you the day before on an allotment basis.
Jackpot!
Maximum occupancy guaranteed for every day of the year!
But of course with the proposal comes a non-negotiable condition: they will buy at €35 per room with breakfast included, take it or leave it.
What do you do? Do you accept or refuse? Quite the dilemma!
On the one hand € 35 is very little, but multiplied by all the empty rooms you have in a year it becomes a lot of money.
On the other hand, all this also brings you many extra costs that you need to calculate accurately to avoid that in the end you are the one who loses out (that would be the last straw, wouldn't it?).
The right question to ask yourself is:
How much does it cost me to occupy a room rather than leave it empty?
Although this scenario will never happen to you (probably), knowing the answer to this question will open the door to optimal price management at all times of the year.
So let's see how.
What you need to know is that a hotel's costs fall into two categories:
Fixed costs represent those expenses that you have to incur in whole or in part regardless of whether or not there are guests in the rooms.
In short, they do not vary as occupancy changes.
Variable costs, on the other hand, are those costs you incur based on the presence of guests.
In practice, they vary proportionally as occupancy changes and are equal to zero in the absence of rooms sold.
Any examples?
I'll give them to you now, but know that there is no universal breakdown of fixed and variable costs.
It depends on the logistics of the individual hotel, and you have to analyze each cost item to figure out which of the two categories it belongs to.
In any case, here are the main items that are usually part of fixed costs:
If you want to speed up the process, I recommend that you identify variable costs first and consider all other costs fixed.
Some typical variable costs are:
The result we are interested in obtaining at the end of this painstaking work is the Average Cost per Room per Night (also called CostPAR).
Start by calculating the Average Variable Cost: sum the annual total of the cost items you have classified as variables and divide it by the annual total number of rooms sold.
You can also use a timescale of less than a year if you want, but in most cases going into detail moves the figures around really little.
So if we had a 35-room facility spending a total of € 150,000 per year in variable costs against 7,500 nights sold in the same period, we would have:
€ 150.000 / 7.500 = € 20
The Average Variable Cost per room would be € 20 per night, done!
At the same you can calculate the Average Fixed Cost.
Actually there are two ways to do this depending on whether you use the cost per room "sold" or the cost per room "available."
The formula for the "sold" room is similar to that for the variable cost.
If the same facility as before had total annual fixed costs of € 325,000 we would have:
Total fixed costs / Total rooms sold = Average (Fixed) Cost per Room per night
€ 325.000 / 7.500 = € 43,30
In case you want to calculate the cost per available room (I, for example, prefer it), replace "total rooms sold" with the number of rooms available in the same period.
In this case the calculation is on an annual basis, so you will use the number of nights actually available in the calendar year (e.g. 35 rooms x 300 opening days = 10,500 available rooms, of course depending on your situation you will base the calculation on a longer or shorter period).
Thus you will have:
Total fixed costs / Total available rooms = Average (Fixed) Cost per Room per night
€ 325.000 / 10.500 = € 31
But what is the difference between the two formulas?
Mostly it is personal preference, however, it can be said that the value per available room is based on invariable data (your fixed costs and the number of rooms in your facility).
The value per room sold, on the other hand, is based on your historical data: it is reliable only if the sales data on which it is based are also reliable, and it is merely hypothetical if you use it for a future forecast.
Well, once you have added up the average fixed cost and the average variable cost, you can give an answer to our hypothetical Tour Operator:
Average (Fixed) Cost + Average (Variable) Cost = Average Cost per Room per Night
€ 43.30 (fixed cost on rooms sold) + € 20 = € 63.30
€ 31 (fixed cost on rooms available) + € 20 = € 51
Knowing that you would have to sell the room for € 35, you would end up with a liability of € 28.3 or € 16 per room!
Do you firmly reject the proposal?
Wait, you risk making a mistake!
Fixed costs, unless you want to close for certain a period, should be considered an expense you will incur in any case, whether you occupy rooms or not.
You must therefore consider that if you can cover the variable cost and still have something left over, that something goes to cover part of your fixed costs.
In our example, with a projected revenue of € 35 minus the variable cost of € 20, you would still have € 15 per room.
This € 15 would partially cover the "debt" of € 31 or € 43.3 per day that your unsold rooms would otherwise cost.
If you calculated fixed costs based on available rooms, you are basically cutting a certain liability in half.
If you have 3,000 unsold rooms in a year, you have € 93,000 in fixed costs (€ 31x3000), which would drop to "only" € 48,000 (16x3000) with this arrangement, a useful saving of as much as € 45,000.
Not counting the onsite resale of extra services, possible word-of-mouth, disintermediation and the benefits on the organization of a constant workflow.
A proposal like this may never happen to you, but you will certainly come across, or have already come across, similar conditions.
There are always times when for a variety of reasons you can't or won't give up keeping the facility open, even if you don't reach the break even point, the point where you cover total fixed and variable costs.
But now you know that even in those circumstances you can take the variable cost per room and use it to aim to reduce your fixed costs as much as you can.
To make it easier for you, we have prepared an Excel sheet where you can calculate the fixed and variable costs of your accommodation.
