How to Optimize Hotel Operating Cost? [10 Proven Strategies]

I come from a middle-class family. And I was one careless kid, growing up. I would never turn off the lights of my room when I go out. I would even sleep with the TV on.

My parents were tired, scolding me. This was my father’s go-to dialogue — “You always keep the lights on. Who will pay for the bills? We have a money tree in the backyard?”

But guess what, I was least bothered.

However, things changed when I started working and living alone all by myself. I realized it’s really important to manage my expenses (which also includes the electricity bill, obviously).

Well, that was my story.

But do you know, this is also relatable to the hotel industry. Just like parents, hoteliers also need to manage their hotel operating expenses.

So, I thought let’s talk about this much-anticipated topic of optimising hotel operating cost.

(And, don’t worry! I won’t bring up another story to continue the blog)

Hotel Operating Expenses & Its Types

If you’re new to the domain and don’t know what operating cost in hotel industry is, then it is an expense a hotel incurs through its normal business operations.

Simply put, these expenses are the ones essential to run a hotel. It could be the costs of food and beverage, commissions, utility costs, marketing, payroll, insurance, etc.

Let’s look at the types. Here’s the hotel operating cost breakdown:

Fixed costs

Hotel fixed costs are expenses that are not dependent on or affected by changes in occupancy or sales volume. However, this does not mean the fixed costs are unchangeable. It’s just that its changes are not volume-related.

Here are some of the examples of fixed costs:

• Taxes
• Rent
• Employee salaries
• Outsourced services (contracted for a fixed amount)
• Utility expenses
• Legal expense etc.

Variable costs

In general, variable cost is the amount a business spends to produce and sell its products or services. And hotel variable costs is related to occupancy and business volume. Meaning, if the occupancy goes up, the variable cost will also increase and vice-versa.

Here are some of the variable expenses of a hotel:

• Hourly labour
• Supplies for different departments
• Hotel amenities
• Travel agent commissions
• Sales & marketing expenses
• Management fees etc.

How Hotel Operating Cost Affects the Bottom Line

To run a successful business, PROFIT matters a lot. The better the profit margin, the better you can scale your business. And it’s not only about hotels; it’s the same for almost every business.

But to arrive at that point, there is one more thing you must consider — expense.  

Let me give you an example:

Hotel XYZ has an in-house restaurant that is very popular. However; the hotel doesn’t make a significant profit from it. They have a huge amount of food wastages, their inventory has got a lot of stale food, they are paying out a lot on the electricity bills (especially for the ones they are using for the ambience), it also hosts musical events on Fridays which is also an expense, and there were few other things. And all of it is affecting the restaurant’s profit margin heavily. They were literally battling with their bottom line.

So, what basically happens is when expenses are not perfectly aligned with demand, the chances of losing out on profit increase. That’s not all, when operating expenses are not kept under control, efficiency with guest experience also gets affected. Many hotels even fail to provide the level of service expected by guests.

Tips to Optimize Hotel Operating Costs

Now that we know what operating expense is, its types and how it impacts business, it’s time to focus on how to optimise operating expenses in hotels (or reduce hotel operating costs).

Following are some of the things to consider if you want to smooth the edges of your expense optimization strategy and witness major results.

I know it’s easier said than done but with a little extra effort, you can drive that much-anticipated balance.

#1 Have an effective framework around your staff

Labour accounts for a significant proportion of a hotel’s operating expenses. So, when you’re going about optimising your hotel operating cost, ensure that you start from this.

Here are a few things to consider:

Scheduling: It is essential not to overschedule your hotel staff. However, at the same time, you don’t want to be caught short-staffed.

What can you do? Come up with careful balancing strategies such as forecast staffing needs for different occasions and tasks. And according to that, form a schedule.

#ProTip: Incorporate a labour management system (LMS) for scheduling. Not to mention, it also helps in monitoring employee hours, attendance, and more to control labour costs.

Cross-training: It’s not just setting a schedule for employees, but you must cross-train them too. Like I said in the beginning,  you don’t want to be short-staffed. And there are times when manpower requirements are more (for e.g. when someone is on leave). So your staff must be able to lend a hand to other departments during any downtime they may have.

Employee onboarding: If you’re wondering, why are we talking about employee onboarding, it’s because we want to make sure that you’re not stuck in a vicious loop of hiring.

The hotel staff turnover rate is quite huge and it does impact a hotel’s bottom line.  

• First, ensure you aren’t hiring the wrong candidate. It is your job to make sure the one you’re hiring is the right fit. Have a certain number of rounds before you make the final call.
• Second, you must ensure that you’re starting off with your new employees on the right foot. Incorporate a standard process that makes the employees feel welcome.

#2 Reduce energy usage

Hotels all around the world are large consumers of energy to provide high-quality services to guests. However, many hoteliers fail to understand that this affects their bottom line.

According to a report, hotels spend about 6 percent of operating expenses on energy each year. That’s not all. The same report also suggests that lighting alone consumes about 35 percent of the electricity used in a hotel.

However, this can be managed inexpensively for hotel operational cost control.

Before jumping right into the methods, always start with analysis. Ensure that the accurate objectives are set, efficiency targets are determined, energy assessments are properly done, and the right people are assigned to implement the plan.

Here are a few things you can consider when you optimise energy usage to reduce hotel operating costs:

• Switching to compact fluorescent or LED bulbs
• Install new thermostats with occupancy sensors
• Brief your staff to turn off all the electrical appliances in empty rooms
• If possible, try installing timers on bathroom heat lamps
• Install a green roofing system to absorb heat
• Coat the windows with a material that reduces energy leakage
• Turn to solar-based heaters for pools 
• Encourage guests to reuse their towels to reduce the number of loads of laundry

#3 Keep your maintenance game high

Maintenance should always be there on the priority list of every hotel. Why? Nobody likes sudden breakdowns of equipment or any amenity as it costs a lot. And the best way to cope with this and other malfunctions is to create a maintenance schedule.

Further, in every schedule, make sure the inspections are thorough to not miss out on any cracks and holes. Also, do not limit this to only rooms and common areas; allot maintenance tasks to every department.

As the saying goes —“prevention is always better than cure.”

#4 Streamline F&B to reduce food waste

In your hotel, if plates are often coming back with leftover food, then it’s time to check your F&B to determine what’s wrong.

Whether it’s the quality or the quantity or whatever is the reason, it not only impacts the hotel’s bottom line but also the environment.

Here are a few tips to reduce food wastage:

• Track how much food is being wasted and how many people are visiting a restaurant daily.
• Audit the inventory to determine how long a certain ingredient stays in the kitchen to avoid the over-ordering of stock.
• Work in collaboration with the chef to curate effective strategies.
• Train your staff to suggest guests how much they would need for a certain number of folks.
•  If it’s an in-house restaurant, you can encourage guests to also opt for take-home if they ordered more than required.
• Work with composting partners to recycle waste food.

#5 Reconsider your spending on marketing

I know marketing is important for your hotel, but that doesn’t mean you’ll go all out and spend on every single platform.

Lately, if you have been spending a lot on marketing, I would recommend taking a step back and audit.

• Check and analyse every single platform you have invested in
• Determine the results those platforms have delivered
• If a certain avenue isn’t delivering optimum result, it’s advised to eliminate it
• Also, consider the amount you have been investing in different campaigns.
• Try to look for methods that are less expensive and more effective.

For example: I don't think investing in LinkedIn ads is effective for hotels. So, instead of that, try turning to Facebook ads or Instagram ads.

#6 Bet on technology that streamlines and automates operations

This goes without saying — technology has transformed the hotel industry for the good. It helps hotels extensively in boosting their revenue. And it has become more important than ever for hoteliers to make the most out of it.

When you are optimizing hotel operating expenses, one of the most important things to invest in is a system that streamlines and automates your end-to-end operations.

This is where a hotel PMS comes into the picture. However, it depends on whether you would want to opt for a cloud system or on-premises.

To help to make a better decision, here’s a blog for you.

Cloud vs On-Premise PMS for Hotels: Which is Preferable?

#7 Effectively manage your ancillary services

If you don’t know what ancillary services are, they are the offerings a hotel sells in addition to its core experience.

Here are some of the examples:

• Minibar
• Event tickets
• Guided tours
• Day trips
• Room upgradations
• Access to special VIP lounges etc.

And many don’t know this, but even ancillary offerings impact a hotel’s overall revenue. So, you must optimize it along with other aspects.

One of the best ways to go about adding or optimizing ancillary services is by understanding your guest base, your locality, and your competition. When you analyse these you get to know which ancillaries are most popular or will work for your hotel.

Simply put, the idea is to eliminate unnecessary ancillary expenses.

#8 Negotiate with vendors

Several areas in a hotel require outsourcing. But there are times when the prices go really high and take a toll on the hotel’s ROI. 

This is where negotiating plays a crucial role in optimising operational costs. Make sure, you negotiate with your vendors for their products/services. However, I am not saying that you bid the lowest price possible, but pitch something legit.

If you’re inexperienced or lack confidence when negotiating a vendor, don’t worry, with a little bit of confidence and a good rapport with your vendors, you’ll ace it.

#9 Turn to crisis management

Crisis management is a process used by businesses to identify and deal with threats or unexpected events.

It can also be used to better manage operating expenses in hotel industry. Hotels can determine the loopholes and cracks in their expenses. Meaning, you can recognise the early ‘warning signals’ of loss and take appropriate action.

So, when you’re optimizing your operational costs, it is advised to turn to crisis management.

#10 Take help from professionals

While I have mentioned all the important things to consider for operational cost optimization, it is not certain that every hotel can do it perfectly.

If you think, it’s overwhelming for you, do not shy away to seek help from professionals.

There are several companies and agencies out there that guide hotels to optimize and cut operational costs. Do consider reaching out to the ones that best fit your requirements.