What is hotel ROI?
Hotel ROI means return on investment, which evaluates how much money you are getting out compared to what you put in. The aim is to generate a positive ROI, which you can then use to grow and improve the business or take out as profit. Generally recorded as a percentage, it’s a vital financial metric for hoteliers to track if they want to make sure their objectives are being met.
What is a good return on investment for a hotel?
There is no single answer to what constitutes a ‘good’ return on investment for a hotel, since it will vary significantly depending on the size and scope of the property, where it’s located, the goals of the management team, marketing efforts, features of the hotel and more.
A good ROI at your hotel will be relative to what you’re trying to achieve, what part of the business you’re measuring, and also what other opportunities are available to you. For instance, you may be focusing solely on your housekeeping for one calculation and your food and beverage department for another.
Average return on hotel investment
It’s agreed upon within the industry that 6-12% is a reasonable return on hotel investment. However, the average ROI will also depend on the factors we discussed above, including the economic conditions in different parts of the world. As long as you can improve your average return on investment each year, then your business will be on track to be comfortably profitable.
In this blog, we’ll cover what it means to build a strong ROI at your hotel and the tools you can use to maximise it.
Why is hotel return on investment important?
Hotel return on investment is important because it’s both a simple and effective metric to measure the general health of your hotel overall, or individual aspects of the business that you have invested in.
Here are some ways that using ROI at your hotel can help:
- Investment decisions: Helps you decide when to invest and what to invest in.
- Performance analysis: Allows you to understand the effectiveness of strategies and overall operational efficiency.  Â
- Industry benchmarking: See how you compare to local industry standards and competitors.  Â
- Financial planning: Gives you insights for future investment decisions and budgeting.
- Operational success: ROI will help you discover which parts of your business are thriving and which departments need to improve. To succeed overall, you can’t afford too many areas to be falling behind.
For example, if you have invested in technology to help you attract and acquire more guests, calculating ROI will let you know if the solution is performing to expectations or not. This will then influence decisions you make, such as investigating whether you are using it to its full potential or if you need to switch to a different provider.
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How to calculate ROI at your hotel
To calculate ROI at your hotel you need to identify your:
- Net profit: Calculate your hotel’s net profit by subtracting your total expenses from your total revenue.  Â
- Investment cost: Determine the total amount of money invested in your hotel or a specific function. For example, monthly subscription to a hotel software service.
After this, you can divide the net profit by the investment cost and multiply by 100 to get the ROI as a percentage.  Â
Return on investment formula
As we mentioned above, the return on investment formula is ROI = (Net Profit / Amount Invested) x 100.
An example of the ROI equation for hotels looks like this:
- A hotel generates a net profit of $100,000 on an investment of $500,000.
- ROI = (100,000 / 500,000) x 100 = 20%
This means that the hotel is generating a 20% return on the investment.
Hotel ROI strategies: How to maximise your hotel investment
All the talk is about how AI can help hotels improve profitability, but the good news is that there are also a lot of other ways to impact your ROI so you can achieve a positive outcome for your hotel. Here are five of the best ways to maximise it:
1. Invest in hotel software
Spending money to make money is an often employed strategy, and in the case of hotels it’s certainly necessary. However, one of the most efficient ways to do it is by using technology to support the operations and revenue management of your hotel.Â
When you choose a quality provider, all parts of your business can benefit and contribute towards profitability. For example, a hotel platform like SiteMinder will help you find more guests, boost revenue, optimise pricing, enhance the guest experience, improve cash flow, analyse performance, and more.
2. Optimise revenue management
Look at how you can make more money up-front, boost revenue from each individual booking, and minimise expenses.Â
Some strategies you should think about include using dynamic pricing, prioritising direct bookings, offering upsells and extras, and connecting more booking channels.
3. Enhance the guest experience
When guests are happier, they’ll spend more and also be more inclined to return to your hotel. Ultimately your profit margins and ROI will improve with satisfied guests. Work on streamlining your booking and check-in processes, providing quality communication, and implementing a rewarding loyalty program.
4. Create operational efficiency
Whether it’s through a property management system or a whole hotel tech stack, becoming efficient on both the backend and frontend of your business will have a flow-on effect on your bottom line. With more spare time on your hands, you’ll be able to focus more strongly on strategies, investments, and analysis to unlock better decision making.
5. Make informed, strategic, decisions
Use any and all data at your hotel to inform your decision making. This includes sales and marketing performance, revenue management metrics, distribution mix, direct booking metrics, staff efficiency, promotion uptake, and more.
Your hotel is a hive of data, which can often be gleaned easily from your software solution reports or senior staff, and you can use data to ensure each plan you make is more successful than the last.Â
For example, by using solutions such as a channel manager and booking engine, you’ll be able to see which third-party booking sites are bringing you the most revenue and what percentage of your business is coming to you directly from your own website or other direct channels such as social media or metasearch.
New hotel return on investment key factors
If you’re looking to open a new hotel and want to achieve a positive ROI quickly, there are a few factors that are crucial.
- Location: Where is the hotel (or where do you plan to build it)? Is this area typically popular with tourists and how much competition is surrounding your site? Try to choose somewhere that has high demand but isn’t overly saturated with accommodation options.
- Target market: You need to have a firm vision and understanding of who your hotel is for and how you plan to attract them.
- Staff: Hiring, building, and managing a team of staff can get expensive quickly if you don’t get it right. You need people who see hospitality as a career and have high standards when it comes to service.
- Operations: Plan ahead and see how you can create efficiency – including in energy usage, water usage, waste management, administration and more.
- Profit generators: What extras can you offer at the time of purchase? Which amenities do you plan to install and monetise? How can you attract revenue from people who aren’t guests at the hotel?
- Guest relationships: You need to wow guests from the very start, to build loyalty and create word-of-mouth marketing so your business can get a foothold in the market.
- Partnerships: As a new player, it won’t pay to be isolated. Try to form partnerships with other local businesses that will mutually benefit you.
- USPs: Unique selling points are things that make your property unique. Make sure you have a couple and market them strongly to encourage additional bookings and maybe even some local media coverage.
- Budgeting and forecasting: Understand how much cash you have and how much you need to make to keep the business running long-term. Set and accomplish goals that give you extra breathing room.
- Technology: This will make all the other factors easier to manage and ultimately deliver a positive ROI to your hotel. From automating distribution, bookings, and payments to simplifying revenue management and reporting, there are specialised providers which allow you to do everything at the click of a button.
With industry leading tech support, you can be sure your ROI will thrive and your hotel will remain successful longterm.