How to estimate the impact of actions

26 April 2022
Over the years, I have interviewed many top management hoteliers asking questions about revenue and actions that can increase revenue. The typical response to my questions is that they do not know exactly but have a pretty good understanding of the situation. Maybe I am the person with the wrong idea here, but I have a hard time understanding why people do not want to know the facts.
What would happen to the hotel industry if leaders had the facts and could assess the impact of their actions? I believe that profitability would increase significantly and help the industry become financially sustainable long-term. A thriving industry attracts talents, produces happy customers, and expands. Estimating the impact of actions is not difficult.

What is the impact?

First, we need a definition of the impact. The answer to the question, "How much would the revenue or profit change if I take this action"? Hotels are not short of taking action, but it would be better if hotels first could focus on the activities that have the highest positive impact on revenue and profits and then, if time permits, act on things with lower impact.

Four types of action and impacts

The hotel in this example has a GOP of 50 %, fixed costs of 40 %, costs of goods sold of 20 %, expenses of 30 %, and a net profit of 10 %

Save 1 % of fixed costs

If the hotel can save 1 % of the fixed costs, 40 % of total sales, the profit will increase from 10 % to 10,4 %. The profit increases by 4 %. It is tough to save on fixed costs. The name fixed means that you cannot do anything about them, so focusing on this will take a lot of effort without any meaningful results.

Save 1 % of variable costs

If the hotel can save 1 % of the variable costs (cost of goods sold + expenses), 50 % of total sales, the profit will increase from 10 % to 10,5. The profit increases by 5 %.

Increase volume by 1 %

Selling more will increase the profit with the gross margin, which in the example hotel is 80 %. The profit will increase from 10 % to 10,8 %. The profit increases by 8 %.

Increase rate by 1 %

Selling at a higher rate has no costs attached, and everything is profit. The profit will increase from 10 % to 11 %. The profit increases by 10 %.

Conclusion

The two actions with the highest impact are focusing on revenue. The two least impactful actions focus on cost-cutting, where one of the actions is almost impossible. It is easy to think about costs since it is apparent and shows up in the P&L every time you look. Hotels focusing on revenue will be much more successful since the reward is higher and the effort is probably the same.