How to Start a Hotel: 5 Keys to Success
How to Start a Hotel
How to Start a Hotel Business
If you’re looking to start a hotel business, you’ve come to the right place. Since we’re going to show you exactly how to do it.
We’ll start with key hotel industry fundamentals like how big the market is, what the key segments are, and how revenues and profits are generated.
Then we’ll discuss keys to not only starting a hotel business, but succeeding in it!
How big is the hotel market?
According to IbisWorld, there are 74,372 hotels, and the hotel industry generated $166.5 billion in revenue in the United States alone last year. This represents an annual growth rate of 4.7% over the past 5 years.
Industry profits were $26.0 billion, and wages paid to hotel employees totaled $42.7 billion.
What are the key segments of the hotel market?
A hotel is an establishment that provides lodging and, often times, meals and other services for travelers and other paying guests. A motel, on the other hand, provides lodging for motorists in rooms usually having direct access to an open parking area.
A particular hotel or motel can be classified by a number of characteristics, including whether it provides full or limited service, whether or not it is located in a metropolitan area, the state or region in which it is located, its price or rate level, the number of rooms, and whether it is independent or part of a chain operation.
Hotels and motels can also be segmented by room price rates. The establishments with room rates in the highest 30 percentile that are located in local or metropolitan markets are classified as upscale or luxury. The middle 30 percentile is classified as mid-priced, and the lowest 40 percentile as either economy or budget.
Overall, sales from hotels account for 87.4% of industry revenue and 82.0% of industry employment, though they account for only 44.0% of industry establishments.
Hotels that consist of 25 or more rooms provide 83.6% of industry revenue (with 62.7% of industry revenue coming from guest room rentals, 12.5% coming from food and alcohol sales, 4.2% coming from conference and meeting rooms and 4.2% coming from other charges), while hotels that offer fewer than 25 rooms only constitute 3.8% of industry revenue.
Motels provide about 12.6% of industry revenue. The relative proportion of revenue from each of these segments has been relatively stable over the past five years, although motels experienced some growth at the expense of higher-priced hotels during the recession.
Introduction to Hotel Revenue Management
How do hotels generate revenues and profits?
Clearly hotels generate revenues and profits from selling out their rooms.
However, as specified above, other key sources of revenue to consider are food and alcohol sales, and selling conference and meeting rooms.
What external factors affect the hotel market?
A number of factors affect the performance of the hotel industry. These drivers include:
- Domestic trips by US residents: Trends in domestic travel, especially business travel, and the total nights spent away from home directly affect demand for accommodation. As the number of trips made by US citizens rises, demand for hotels and motels to house them increases.
- Consumer Confidence index: Changes in consumer confidence influence decisions that individuals make concerning expenditure on entertainment and traveling, particularly during a recession.
- Consumer spending: Consumer spending levels have a direct effect on travel demand. When consumers are spending more overall, they are more likely to spend some of their money on travel and accommodations.
- Inbound trips by non-US residents: Trends in international visitor arrivals and their lengths of stay influence demand for accommodation. A rise in inbound trips positively affects demand for hotels and motels.
Who are the key competitors in the hotel market?
As specified above, there are 74,372 hotels in the United States.
The market leaders (in terms of market share) include Hilton Worldwide Holdings Inc. (13.7%), Marriott
International Inc. (13.5%) and InterContinental Hotels Group PLC (7.5%).
The rest of the market is comprised of many smaller players.
Online Hotel Marketing Strategies
- Domestic leisure travelers: 48.5%
- Business travelers: 24.0%
- International leisure travelers: 14.0%
- Meetings, events and incentive travelers: 13.5%
What are the key financial metrics and costs in the hotel market?
The key financial metrics in the hotel market are as follows:
Industry profit is measured as earnings before interest and taxes. Industry profit have averaged 15.5% of sales in recent years.
The industry's major expenses are purchases and cost of sales, such as bedding and room supplies. Many hotels also provide meals and liquor, either in individual rooms or in separate restaurants or dining areas.
Last year, purchases were estimated to account for 29.9% of an average operator's revenue.
Labor is required in many aspects of hotel management, from front-of-house activities, such as front desk, concierge and related activities, to all back-of-house activities, including general management, accounting, marketing, room cleaning and servicing the kitchens, bars and restaurants.
Many hotel jobs have a low skill and training requirement, and employees can be hired on a part-time or casual basis. Because of this practice, many hotels have high staff turnover.
Therefore, there is a constant need for recruitment and training, which can be costly. Some operators have outsourced part of their staff services to specialist staff-recruitment agencies to lower recruitment costs.
Last year, industry wages accounted for approximately 25.7% of total industry revenue.
Rent and Utilities
Rent and utilities on average comprise 7.6% of hotel revenue.
Marketing costs and royalty fees are another significant cost for those industry participants that operate on a franchise basis. Franchisees typically pay an annual fee of 4.0% to 6.0% of total revenue.
Other major costs include repairs and maintenance, promotional costs, commission paid to agents, bookings and internet fees, accounting and legal costs, motor vehicle expenses, stationery and printing, insurance and other administrative and overhead costs.
What are the keys to launching a new hotel?
- Determine the Best Location
Location has traditionally been the most important critical success factor. In the right location, where competitors are not fulfilling all customer needs, a hotel can thrive. However, in a neighborhood that has heavy competition from existing hotels, success may not be so forthcoming.
- Plan for Capital
Whether you buy an existing hotel, build one from scratch, or renovate a building into a hotel, you will need millions of dollars to invest. Assuming you do not have this money, you will need to seek bank loans and/or angel investment in your hotel.
- Have a Business Plan
A simple, clear, but persuasive hotel business plan is necessary not only for you to think through how you will take on the opportunity, but for you to convince any investor or lender that you have the ability to do so. No savvy investor will be attracted by a lack of planning.
- Provide Exceptional Service
Hotels achieve this critical success factor by ensuring the staff is knowledgeable, courteous and capable of resolving any conflicts that arise. Providing quality service also entails remembering the names and preferences of repeat visitors and giving advice about attractions and surroundings.
- Implement a Smart E-commerce Strategy
A successful e-commerce strategy maximizes the economic value of your website and relies on three key factors:
- Your website's visibility
- Your website's sales focus
- The bookable offers you promote on your website
- Structure a Smart Pricing Strategy
Set a smart pricing strategy that increases hotel occupancy. Determine room rates based on costs and market research. Pricing factors include:
- Staffing costs
- Room category
- Time and length of stay
- Maintenance costs
- Competitor pricing
- Be Flexible
Customers can have completely different expectations of a hotel, so your team needs to be given the authority to make decisions to accommodate them when possible.
A manager with the authority to make exceptions can turn a situation around and earn a good reputation for quality customer service.
There are two fundamental ways to differentiate and gain a competitive edge: be better and be different:
- Be significantly better at something that everyone provides by doing the underlying activities differently.
- Create a meaningful product attribute that the competition doesn’t offer.
- Focus on Quality Management
Quality management includes employee satisfaction and involvement.
By concentrating on employee satisfaction as well as customer service, a hotel can increase the likelihood that employees are happy and, in turn, provide excellent customer service.
- Invest in a Strategic Marketing Plan
The goal of a hotel’s marketing plan is to ensure long-term success. Employ an integrated strategy that will reach your target market segments. Utilize marketing, public relations, advertising and sales efforts to gain brand recognition and ultimately drive revenue.
What are the typical startup costs for a new hotel?
The typical startup costs for a new hotel include:
- Building or buying the hotel
- Working capital for staffing, marketing and other operational expenses
The percentages of sale for expenses are detailed above. With regards to the cost of building or buying a hotel, this varies tremendously based on the type (e.g., budget vs luxury) and size (e.g., 5 rooms vs 500 rooms) of the hotel.
How much do hotel operators make?
Hotel operators and executives receive varied pay amounts based on the success of their hotel. According to Glassdoor, the typical Starwood Hotels & Resorts Vice President salary is $244,472, which is 45% above the national average.
Steps to Starting a Hotel
If you want to start a hotel, follow these steps:
- Determine the type of hotel you would like to start (e.g., how many rooms, luxury vs affordable, etc.)
- Determine the ideal location(s) for your hotel
- Determine whether you will build your hotel from scratch or renovate an existing structure
- Speak with architects and others who will be involved in building/renovating your hotel to determine costs
- Speak with local government to understand zoning and permit issues and associated costs
- Develop your hotel business plan that details your strategy, plans and financial projections
- Present your plan to investors and lenders to raise the required funding
- Build/renovate your hotel
- Recruit and train your hotel staff
- Purchase the required systems (e.g., reservation system, accounting software, etc.) to effectively manage your hotel
- Launch your pre-opening hotel marketing plan
- Open your hotel to the public
Hotel Design & Décor Ideas
Below are some hotel design and décor ideas to consider:
Top 10 Hotel Management Tips for Managers in the Hospitality Industry
The Four Pillars of Hotel Marketing - How to increase your direct booking?
Hotel Sales Coaching: Positioning
Additional resources in the hotel market
For additional information on the hotel market, consider these industry resources:
- American Hotel & Lodging Association: ahla.com
- Hospitality Net: hospitalitynet.org
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How to Start a Hotel: 5 Keys to SuccessStarting a hotel requires careful choice of a location and strategy, a business plan, access to considerable financial resources, and a customer service mindset.
1) Location and Opportunity
The location for your hotel is highly linked with the opportunity that you feel there is for your hotel. In the right location, where competitors are not fulfilling all customer needs, a hotel can thrive. However, in a beautiful neighborhood that happens to have heavy competition from existing hotels, success may not be so forthcoming. Likewise, if the neighborhood leaves too much to be desired, you may not be able to price the rooms low enough to encourage travelers to stay at your hotel, even if you are within walking distance of key attractions.
The next step is to know how customers will answer the question "why my hotel?" How will you tailor your services to the customers you want to attract, whether they are families with kids, couples on romantic vacations, businesspeople, or international tourists? Consider the combination of amenities, atmosphere, location, and services that will be right for your customers. Always keep in mind that strategy means making tradeoffs - it is almost impossible to be everything to everyone and succeed. You might have to forgo certain customer target markets in order to make your service offering perfect for your most desired customers.
A simple, clear, but persuasive hotel business plan will be necessary not only for you to think through how you will take on the opportunity, but for you to convince any investor or lender that you have the ability to do so. No savvy investor will be attracted by a lack of planning. There is no excuse to not create a plan with the wealth of information available on writing business plans and even business plan templates tailored to the hotel business sector.
Whether you buy an existing hotel, build one from scratch, or renovate a building into a hotel, you will need millions of dollars to invest. Assuming you do not have this money, you will need to seek bank loans and/or angel investment in your hotel. As you will be working with considerable assets, dependable and experienced legal and accounting help is a must as you create deals with investors.
5) Hospitality Mindset
Finally, you must have an ingrained sense of how you want your guests to be treated so that you can instill this mindset in your top management and they can, in turn, teach this to the staff. Staying at a hotel can be stressful and uncomfortable, and guests demand the highest attention to their needs or they will have no problem complaining loudly and publicly. If employees sense you have higher motives than customer satisfaction, customer service may fall by the wayside and your hotel business may fail or never take off in the first place.
The first step to starting a hotel is to develop your hotel business plan. Growthink provides products and services to help you develop a professional business plan and turn your dream into reality.
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