Fixed or variable costs, let’s clear it out!

We get losts among the costs of a structure, without knowing exactly what they are, how they are subdivided, and above all how to rationalize them. We give you a few tricks to be successful!

Let’s take the total fixed costs of a structure randomly, divide it by the number of rooms then by the number of working days (Ex: 500.000 €: 38 rooms: 356 days = 36 €).

The small 2-digit number that will be obtained represents the fixed unit charge. It is not a theoretical and abstract value but how much each room costs you each day whether it is occupied or not.

Now write number 36 down on a series of small signs, put them in the rack for each room, or hang them on the doors of the rooms; at the end of the day, retrieve all the signs corresponding to the unsold rooms. Make the sum and you will know how much you lost: the fixed charges that you will have to pay for this day (Ex: for 15 empty rooms 36 X 15 = 540 €).

Put this money in a drawer…

you’ll need it at the end of the month!

It is necessary to move mentally move from the concept of an unsold room to the concept of a room with necessary submittal to get rid of the culturally rooted idea that an unsold room is only a missed income. IT IS A LOSS FOR SURE!

When setting up a bottom rate, should we start with Cost.p.a.r. (fixed unit costs + variable costs) or only variable costs?

Many argue that you obtain the room rate adding a series of data; I will try to enumerate some of them, because I have heard so many and some of them so original:

– Room variable cost
– Fixed unit room cost
– Otas’ commissions (acting as intermediaries)
– Room maintenance cost
– Percentage of revenue considered reasonable
– And… So many others… but here I stop.

Isn’t it weird to imagine a market being forced to absorb a price that has been determined among internal and subjective analyzes? And if the fixed costs of the structure were exaggerated and uncontrolled? Would you go and present to your employer your economic requirements (home credit, children’s private school, organic food, weekly dinner at the restaurant, cinema, holidays, etc.) and then ask for wage accordingly?… Does the market work like this?

I am not going through the psychological meanders of the minds of those who manage rates on the basis of their own costs. But anyone who knows about marketing also knows that this is an incorrect and damaging approach.

So, we must not rely on the Cost.p.a.pr to determine a rate?

Certainly not! The only value to be considered is the variable room cost, not the Cost.p.a.r.!

It is important to know our structure’s Cost.p.a.r. to achieve a good knowledge of room costs but without being conditioned by the decision of the hotel rate which has its own life, independently of the costs.

Costs and revenues

The charges and revenues are the offspring of the same lineage, but like in all siblings they are very different from each other. If the charges have a compressibility limit below which one must not fall in order not to affect income, revenues on the other hand are potentially unlimited.

The variable room cost generally remain constant after the rationalization of the data that compose it, such as services, magnetic cards, hospitality products, laundry, stationery, breakfast food cost etc. … The variable costs, although they remain substantially fixed while the occupancy increases, can in fact be rationalized afterwards thanks to the increase of theaverage length of stay and also thanks to the typology of clientele, since we know well that the business customer will tend to consume less than the leisure customer.

But what if it was decided to outsource some services, thus turning usually fixed costs into variable?

The practice of making variable some fixed costs is becoming more and more popular, in order to limit administrative burdens – and often related to the management – of daily operations in each structure individually: for example, staff’s payroll, illnesses and holiday. The choice of outsourcing must be subjected to the analysis of certain variables that I quote you below:

– Incidence of the value of brand reputation on the incomes: I mean that small, exclusive structures, for example, bet their survival on a high Average Revenue per Room due to brand reputation; in this case outsourcing could result extremely dangerous and detrimental

– Occupancy fluctuations: structures with very different occupancy between high and low season (which we therefore assume little “revenue”) can gain by outsourcing services

– Capacity: hotels with high number of rooms have more advantages to outsource

Can we outsource all services?

We advise you to evaluate the possible outsourcing of Housekeeping and restaurant and to avoid outsourcing Front desk and breakfast services.

If we decide to outsource services, how do we calculate the variable cost?

Of course, the variable cost must take into account the impact of outsourcing. However, precisely because it replaces the fixed cost, it is necessary to bring some common sense into the analysis: in the case of an outsourced Housekeeping service, for example, it must be added to the variable cost and serve as the basis for the bottom rate. But if there was another one, for example the breakfast service, to be outsourced, the total variable costs could prove to be excessive. This is why we recommend not to outsource more than one service to calculate the variable cost used to define the bottom rate.

In the era of Revenue Management, income-related costs must be the accelerator of commercial action, not the brake. The knowledge of these charges can help the hotelier to face them more serenely.

The Otas

OTA commissions, for example, which are so difficult to accept, must be a cost to be faced with confidence, knowing that it will fuel the room turnover, and improve visibility on off-line channels. When the volume of OTA increases (measurable in terms of turnover but also in terms of increased reviews), it is accompanied by an increase in brand reputation, which leads to the abolition of intermediaries …

Disintermediation necessarily presupposes a prior stage of intermediation. Therefore, the use of an intermediary in the first phase is a necessary evil. Let us resign ourselves and do it at best, bravely and without worrying about continuously closing sales …. Let’s INCREASE THE RATES instead.

Can we outsource all services?

We advise you to evaluate the possible outsourcing of Housekeeping and restaurant and to avoid outsourcing Front desk and breakfast services.

Without worrying about continuously closing sales …. Let’s INCREASE THE RATES instead.

The hidden costs

There are also hidden costs. One of them is the deadline for payment. How much does it cost to a hotel to have cash flow 30/60 days after the customer leaves?

Cash flow is important, and OTAs and online reservations guarantee a payment upon departure. Having payments in pending represents a hidden burden that must be limited as much as possible.

I invite you to consider each cost with the right perspective, try to rationalize them and harmonize them for each structure individually, according to its commercial characteristics … And then concentrate on the incomes because there relies the key to the success of a company.

Write to us. For any information or request a cognitive consultation

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