Profit Boosting Techniques for a Hotel

Profit Boosting

Techniques for a Hotel

By: Hussain Zahid

30th

March 2015

Profit Boosting Techniques for a Hotel Hussain Zahid, BHRM, MNU BS

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Contents

INTRODUCTION .................................................................................................................................................. 2

METHODOLOGY 1: FOCUSING ON INCREASING DEMAND .................................................................................. 3

FACTOR 1: ADVERTISING AND MARKETING ..................................................................................................................... 3

FACTOR 2: ADDING VALUE TO THE GOODS AND SERVICES ................................................................................................... 3

FACTOR 3: FLEXIBLE PRICING ........................................................................................................................................ 3

FACTOR 4: MAKE THE GUESTS FEEL AT HOME ................................................................................................................... 4

METHODOLOGY 2: COST REDUCTION ................................................................................................................ 4

FACTOR 1: INVEST IN A MORE EFFICIENT HEATING, VENTILATING AND AIR CONDITIONING (HVAC) SYSTEM ................................ 4

FACTOR 2: SWITCH FROM HALOGEN LIGHTING TO LED ...................................................................................................... 4

FACTOR 3: GO PAPERLESS AND GREEN .......................................................................................................................... 4

FACTOR 4: USE TECHNOLOGY ...................................................................................................................................... 5

METHODOLOGY 3: REDUCING COST AND INCREASING DEMAND....................................................................... 5

FACTOR 1: DIFFERENTIATE YOUR HOTEL FROM YOUR COMPETITORS ..................................................................................... 5

FACTOR 2: ENCOURAGE ALL EMPLOYEES TO BE “SALESMEN” .............................................................................................. 5

FACTOR 3: OFFER A FEW SELECT ‘HOLIDAY’ PRODUCTS ...................................................................................................... 5

METHODOLOGY 4: MANAGING THE ELASTICITY OF DEMAND ............................................................................ 6

FACTOR 1: PEAK / HIGH SEASON ................................................................................................................................... 6

FACTOR 2: OFF-PEAK / LOW SEASON............................................................................................................................. 6

FACTOR 3: HIGH INCOME CUSTOMERS PERSPECTIVE ......................................................................................................... 6

FACTOR 4: TYPES OF CUSTOMERS ................................................................................................................................. 7

JUSTIFYING THE CHOICES ................................................................................................................................... 7

CONCLUSION...................................................................................................................................................... 8

REFERENCES ....................................................................................................................................................... 9


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Introduction

The hotel industry of Maldives has been expanding throughout out the years, since its

establishment. It is solely believed that supply and demand is the fundamental concept behind

any industry in the economy. It is purely arguable that level of demand changes due to changes

in price of goods and services, availability of substitutes, advertising and seasonal factors. It is

argued that most of these factors are mutually related to the income level of customers.

In Male’, the capital city of Maldives alone, there are many hotels providing related room

offers and services. In this competitive industry, the Candies Hotel established in Male’ has

secured many achievements and improvements to their services during the recent years.

Meanwhile, the hotel has managed to secure a four star hotel rating throughout the years.

As the Manager of the Candies Hotel, I do not want to deny that even though we have plans to

tackle the issues of fall in demand, we have been going through a fall in demand for the past

few months. We have merely managed to secure 45% of our hotel rooms to be occupied on an

average night. Therefore, I have come up with new ideas, if implemented could bring about

tremendous and successful changes, which could benefit the hotel in increasing occupancy and

boosting profit.

I would rather accept to conjure up the hotel industry as a seasonal fruit bearing tree. Since, the

preparation for the fruit bearing season and making the most out of it, is the most important

part of making it a success throughout the season. Also, these are the most fundamental days to

maximize profit and cover the debt encountered in the off-season. So, it cannot be

compromised in any means. Further, if you managed to keep the tree blooming during the off-

season, then you could be named a genius.

Keeping this philosophy in mind, as a Manager of a hotel, in order to maximize profit it would

be essential to study the spending behavior of customers, demand and monopolistic market

impacts during the peak and off-seasons. Similarly, the cost effective ways to manage the hotel

and attract more customers should not be overlooked.

Therefore, in this report I have discussed some of the possible methodologies that the Candies

Hotel management could take in to consideration for booming the occupancy rate and

maximizing the profit.


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Methodology 1: Focusing on increasing Demand

The naturalistic paradigm explains that demand and supply should be taken in to consideration;

in the hotel industry “…the main focus is on demand, since that is what ultimately propels the

industry. Both factors are relevant, however, because they determine profitability, which is the

universal goal of capitalism”. (Runyan & Dr. Vandegrift, 2004).

Factor 1: Advertising and Marketing

Successful advertising can increase demand for

products and services. While advertising, it is very

effective when you reach out to the past guests and

encourage them to stay for extended periods and

offer them attractive packages. Also, make use of

the electronic media such as internet (social media

sites, smart phones etc.) to reach the past and future

guests. (BSP, 2013).

Factor 2: Adding value to the goods and services

Give your guests a little something extra to look forward to with some free or inexpensive

entertainment. (BSP, 2013). For example, the candies hotel can organize a cocktail party at

pool side with three piece band soft music during special occasions. By adding value in this

way will help Candies Hotel to attract more customers to book from them, leading to

increasing demand for the hotel and in return increase the profit. We have keep in mind that

adding value will also add cost.

Factor 3: Flexible pricing

Flexible pricing strategies are not only means to maximize occupancy rate throughout the year,

but also it is an approach to maximize revenue generation. Setting different rates for the rooms

enables different levels of customers to book from the hotel. Having a low room rate will

increase the demand for the hotel because the law of demand says that more will be demanded

at a lower price than a higher price. Hence, this increases the revenue as rooms will not be

vacant which will in return increase the profit. However, setting a low price for the rooms,

some customers might feel that the quality of the hotel is low. In this case demand will

eventually decrease. (Djubo, 2014).


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Factor 4: make the guests feel at home

BSP Marketing Group advices that “Whether your guests are just staying for one night or for

two weeks, you should always do your best to make them feel like your hotel is their home

away from home. Soften the decor by adding comfortable furniture, flowers and pictures on the

wall. Having a lobby and a breakfast area with comfortable seating areas makes your hotel feel

more like a home and less like a sterile hospital room or nondescript office. When your hotel is

warm and welcoming, people want to come back”. (BSP, 2013).

Methodology 2: Cost Reduction

Every hotel focuses on reducing cost by driving the bottom

line operations unaltered. Indeed, if a hotel is ignorant on

reducing and controlling cost they would be impaired to grow

and probably they are dying. Therefore, the hotel should focus

on reducing and controlling its cost. There are many ways a

hotel can reduce cost. (Odland, 2012).

Factor 1: Invest in a more efficient Heating, Ventilating and Air Conditioning

(HVAC) system

It would be odd to tell a guest that they cannot keep their room as cool as they like because you

are try trying to conserve energy. Most of the hotels spend a huge percentage of their

operational budget on air conditioning and heat, the best way to cut those costs is to invest in a

highly efficient HVAC system that uses less energy and fewer kilowatts to cool and heat a

room. (BSP, 2013).

Factor 2: Switch from halogen lighting to LED

LED lighting lasts much longer than halogen lighting and could save you enormous costs in

the long run as well as in the short run. It is better to do an energy audit about all of your LED

options and see which ones work best for the hotel. (Hotelier, 2014).

Factor 3: Go Paperless and Green

The cost of paper, ink, mailing supplies and postage can add up to a large business expense.

Going paperless by not printing unless absolutely necessary, transitioning to a digital invoice

and bill payment system, and filing all important paperwork on your computer instead of a file

cabinet can help you reduce the cost of the hotel. (Gregory, 2015).


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Factor 4: Use Technology

Using advance technology will allow the hotel to save

money in many ways possible. From teleconference services

and online payment services, to open-source software and

remote desktop applications, there are many ways you can

reduce hotel costs with technology. Furthermore, running a

well-managed hotel website would enable online

advertisement and getting customer reviews and ratings

which many of the customers take in to account, while

deciding to book a room from the hotel. (Gregory, 2015).

Methodology 3: Reducing Cost and Increasing Demand

Factor 1: Differentiate your hotel from your competitors

Adopt new ways to attract customers towards your hotel by catchy approaches like going

green. This makes the customer feel that your hotel is eco-friendly. Therefore, customers

would like to experience a stay at the hotel, which increases demand. By having eco-friendly

approaches to conserve energy will reduce the operational cost of the hotel. As a result, this

will differentiate the hotel from competitors and increase demand plus reduce the cost leading

to boost profit. (BSP, 2013).

Factor 2: Encourage all employees to be “salesmen”

It would be beneficial to the hotel if they give training to the employees to be “salesmen” in

every aspect of rendering services to the guests. This will increase the productivity of the

services hence reducing cost in future. Training the employees will enable them to provide a

high quality customer care services to the guests leading them to feel that they are valued. As a

result of this, it increases the demand for the hotel and reduces wastage, due to high

productivity of the employees. (BSP, 2013).

Factor 3: Offer a few select ‘holiday’ products

It is believed that travel customers often want to help themselves to some of the added extras

provided, such as small soaps or shampoo bottles. Therefore, the hotel can provide the

customers with those commodities, thus helping to increase

hotel demand by providing such services. Doing so will

also lead to reduce cost because it will cost less amount of

money to produce or buy these items from suppliers, rather


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than giving the customer a huge pack of toiletries. Thus this reduces the cost of the hotel’s

room service and increases demand.

Methodology 4: Managing the Elasticity of Demand

In the hospitality industry, different pricing strategies are implemented to cope with the

fluctuations in demand. The reason behind this fact is that due to fluidity of demand, hotel

industries mostly forecast their demand cycle on a 24 hour basis. (Wood, 2015)

Therefore, while increasing demand, it is essential to consider the price elasticity of demand

due to changes in room rates in different seasons. According to (Wood, 2015) “As we break

down correlation and causation, a clear line of causation must be established when

understanding how, why, when and where demand has come from”.

Factor 1: Peak / High season

During the peak season the demand of the hotel will increase because

in peak season more number of customers will be arriving to spend

holidays. Even though there are many substitutes, as the overall

demand of the hotel industry increases, demand will be inelastic. So,

the hotel can increase the price of the rooms in order to maximize the

profit.

Factor 2: Off-Peak / Low season

During the off-peak season demand for the hotel will decrease due to

few arrivals of tourists. So, the hotel could reduce the rates of the rooms

to increase demand. It would be beneficial for the hotel to lower the room

rates to attract more customers so that they could at least cover the operational

cost by making the rooms occupied.

Factor 3: High Income customers perspective

It is often argued that the demand for necessities is inelastic

because we cannot live without them. Likewise, the high income

customers may not choose the hotels which have lower room rates

as it could be a necessity in his or her perspective. So, there will be

an inelastic demand. (Moynihan & Titley, 2000, p. 176)


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Factor 4: Types of Customers

While categorizing customers in to different categories, it is very important to understand the

customers’ needs and wants. This could enable the hotel to target particular categories of

customers with particular room types, rates and services. Doing so would make the customer

feel that their expectations are being addressed better and develop loyalty to the business.

(Hall, Jones, Raffo, & Anderton, 2008).

For example for business executives, leisure tourists etc. the elasticity of demand might differ

depending on their needs.

Justifying the choices

Profit cannot be only boosted by increasing the demand because demand increasing attempts

will lead to increase the expenses, which might even reduce the profit. Also, taking in to

account that the only way of increasing demand and maximizing profit could be achieved

through increasing occupancy is a controversial issue in the hotel industry. Here is a simple

example which could give an explanation to this argument: (Vouk, 2014).

Scenario 1: A 100 room hotel sells 90 units at a $100 rate, obtaining $9000 in Revenue.

Scenario 2: The manager sets a goal to achieve 100% occupancy and drops the rate. The hotel

sells 100 units at an $85 rate, making only $8500. (Vouk, 2014).

Moreover, only attempting to reduce cost would not be beneficial because it might decrease the

goodwill of the hotel, because high income customers may feel that quality of the hotel is low

and availability of quality services might not be provided. This eventually leads to decrease

profit in the long run.

According to Vouk (2014), “In an elastic market (such as hospitality) increase in one

parameter (number of rented units) always leads to decrease in the other (average rate), and

vice versa. The goal is to find the right balance between these 2 indexes in order to achieve

highest potential profits”.

However, applying both the methods (increasing demand and reducing cost) would help the

hotel to increase occupancy rate and boost profit. Similarly, the hotel also needs to consider the

factors which affect the elasticity, when making these choices.


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Conclusion

In contrast of the discussed issues, I would rather say that for a hotel it is important to forecast

the trends of customer spending and changes to demand during different periods of the year.

Taking this matter in to consideration, hotels should come up with new ideas and

methodologies to overcome the decrease in demand thus reducing its cost. Also, the hotel

should formulate methodologies to cope the factors affecting the demand elasticity.

As there are no universal approaches which fits to all the hotels in the industry in increasing

demand to boost profitability and reducing cost, strategies to overcome these issues could only

be formulated by carefully addressing the key issues of the individual hotel and its brand.


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References

BSP, M. (2013, November 5). 30 Ways Hotels Can Increase Revenues, Decrease Costs and

Boost Booking. Retrieved March 29, 2015, from Hotel Managers Group Blog:

http://hmghotelsblog.com/2013/11/05/30-ways-hotels-can-increase-revenues-decrease-

costs-and-boost-their-bottom-line/

Djubo. (2014, October 10). Top 5 Hacks To Boost Room Sales For Small Hotels. Retrieved

from The Djubo Blog : http://djubo.com

Gregory, A. (2015). 10 Ways to Reduce Small Business Costs. Retrieved from about money:

http://sbinformation.about.com/

Hall, D., Jones, R., Raffo, C., & Anderton, A. (2008). BUSINESS STUDIES. Great Britain:

Pearson Education.

Hotelier, L. (2014, September 17). 10 effortless ways for small hotels or bed & breakfasts to

boost revenue. Retrieved from Hello World: http://www.littlehotelier.com/

Moynihan, D., & Titley, B. (2000). ECONOMICS A Complete Course. New York: OXFORD

UNIVERSITY PRESS.

Odland, S. (2012, February 15). 5 Ways To Control Costs. Retrieved from Forbes:

http://www.forbes.com

Runyan, J., & Dr. Vandegrift. (2004, April 15). Supply & Demand in the Lodging Industry: A

Simultaneous Equation Model of the Center City Philadelphia Hotel Industry .

Retrieved March 29, 2015, from http://business.pages.tcnj.edu:

http://business.pages.tcnj.edu/files/2011/07/runyan.tcnj_.pdf

Vouk, I. (2014, June 11). Revenue Management series: 3 Biggest Myths About Occupancy.

Retrieved March 30, 2015, from RoomKey: http://roomkeypms.com/

Wood, P. (2015). Price Elasticity and Demand Change Indicators. Retrieved from Hotel

Business Review: http://hotelexecutive.com/

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Profit Boosting Techniques for a Hotel