economy hotel

How to run an economy hotel

Main Street America hotels are still feeling the effects of the Great Recession. Major franchises such as Holiday Inn have contributed to a 5% US supply increase since 2006, with no measurable rise in occupancy/rate. While total US occupancy is 62%, the US economy hotel segment operates at 55.7% occupancy, with an ADR (average daily rate) of $56.00.

The good news is, if you’re running an economy hotel (generally the $40-60 average rate range), you can still make money.

It’s critical that you first understand the precise nature of your business. An economy hotel is a low margin business, no different than a dollar store.  Success requires a consistent product sold at high volume/low cost. Try the dollar store business model and you will be on your way to more money.

When Teresa and Ajay Patel bought the BridgePoint Inn Daly City, they struggled at first. They knew that the market was filled with international travellers, but gained few.  When they first learned that an online search for a room in Daly City showed over 500 competitors, they accepted that it was time to become competitive with Internet reservations.

Teresa Patel stated, “It was the scariest of times. We couldn’t carry the astronomical costs of a Days Inn franchise, but how could we compete with 500 hotels? We were near San Francisco, but we were not San Francisco.”

After some tough years, they decided to use the advice and services of a large central reservation provider.  Their priority became managing costs and being open to new ways of putting heads in beds.

The first step was to open up more inventory for online sale, and to use Expedia promotions targeting international events in the local market. In one year, the revenue from these promotions brought in an extra $160,000.

Here are the keys to running an economy hotel profitably.

  1. Low cost – Manage your costs in areas that don’t add value.  Focus on clean and friendly, and make sure everything in your hotel works, such as lighting and air conditioners.  It’s not mandatory to have a pool, the latest exercise gear or elaborate amenities.
  2. Labour cost–You should have fairly low labour costs (front desk, maintenance, and housekeeping/laundry). The average housekeeper should be able to clean 14.5 rooms in an 8-hour shift. If you push this higher though, your rooms will be less clean and your business will fall.
  3. Spend money where it counts–Good pillows, bedding and towels.  Purchasing high quality towels is the best money you can spend on the room, because the fluffy thick towel is the last thing the guest remembers before they leave your hotel.
  4. Driving Volume–You need to work with a large-scale professional online central reservation system to drive a high volume from all sources of business. You need corporate, government, leisure, family, truckers, educational, groups. When you balance business from many sources you will be independent of economic trends.
  5. Promotions– Try new things as you evolve with demand.  Be aggressive in driving online promotions on Expedia, Booking.com and Priceline. When you are an enthusiastic merchandising partner with the booking channels, you will be placed at the top of the listings. Outsource revenue management to a specialist so you can focus on the hotel. It is the cheapest money you will spend.
  6. Accept discounting–Too many hotel operators are focussed on average daily rate, but you cannot take rate to the bank.  Do whatever it takes to get the right high volume mix of traffic via walk-ins and online distribution.  Remember that occupied rooms only cost the hotel about $18/night. Anything above this is profit margin.

Follow these rules daily and you will soon be a cash machine kingpin rocking a Rolex.

 

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  • Paula K.

    Great information for hotel owners. I enjoyed reading this informative article.

    • http://magnusonworldwide.com Brett F.

      Thank you, Paula. It’s about knowing your guests.