Which business philosophy will maximize hotel profits?

10 May 2022
A hotel must base the commercial strategy on its business philosophy to maximize productivity and the outcome of all marketing and sales activities. Once the hotel has decided on the business model, it is much easier to create a strategy that will take the hotel to success.
There has been a debate in the industry about which business model would most likely best maximize a hotel's profits. There are two significant models and many in between. One view is that all facilities in the hotel are support functions to increase sales of rooms. Another theory is to maximize profits in every department to maximize the total profit.

Two hotel business models

Every owner that sees the hotel as a business strives to achieve long-term sustainable profitability. The question is which is the fastest and least risky path to financial success for a hotel. Hotels have, over time, tried many strategies to find the easiest and fastest way to succeed.
 
Hotels have used two different business models to reach maximum profitability. The choice of philosophy depends on the hotel's type, size, concept, and facilities.

Room revenue optimization

One way of managing a hotel is to acknowledge that the core business of a hotel is to provide accommodation and maximize the room revenue. A hotel needs other facilities as support to drive the attractiveness of staying at the hotel. The philosophy is that all other facilities are there to maximize room revenue. The hotel believes that this philosophy will maximize total profitability.
 
The independent B&B should focus on room revenue and let additional products and services act as support to maximizing room revenue and total profit.

Outlet profit optimization

Another way of managing a hotel is to optimize revenue in each department in the hotel. The hotel believes that the total revenue will be higher since a department head works on maximizing revenue and profitability. Therefore, the sum of the profits in each department will maximize total profitability.
 
A full-service hotel focusing on several target groups, such as MICE, leisure groups, and individual travelers, with ample meeting space and several F&B outlets, should consider the outlet optimization model to maximize the profits.

Benefits of each model

There are advantages and disadvantages to both philosophies. Focusing only on room revenue might relax the cost control of operating other departments and create unnecessary losses that will offset part of the profits from the highly profitable rooms division.
 
Focusing on optimizing profits in each department often creates suboptimization due to working in isolation and only making decisions that are best for the single department. Furthermore, too much focus on the departmental profits will lead to a loss of opportunities involving several departments since no one would be willing to take a loss for an overall higher profit.

Commercial strategy

The commercial strategy will look very different based on the two models. In the room revenue optimization model, all commercial activities will focus on marketing and selling the hotel and overnight accommodation. In the outlet profit optimization model, commercial activities will also focus on selling overnight accommodation but always encourage spending in other outlets. Hotels also need to market and sell each outlet separately to a local audience without the need for a hotel stay.
 
First, decide your business philosophy, then create the commercial strategy. Without a commercial plan, it will be hard to reach maximum profitability regardless of the business model.