Measuring success isn’t always easy. Occupancy fluctuates with the seasons, economies shift, and customers change. With so many variables to consider, determining whether your hotel is profitable isn’t always easy. However, no matter the season, analyzing hotel ROI is a clear-cut way to determine whether hotel efforts and investments are going to the right place. Whether you’re new to the hospitality industry and revenue management or looking for ways to increase your property’s current return, we can help.
In this guide, we examine what hotel ROI is, what it measures, how it’s calculated, how to improve it, and more. As you unlock automated tools, helpful tips, and a new, property-wide ROI perspective, look for opportunities to change how you approach one of the hospitality industry’s most powerful key performance indicators (KPIs).
What is hotel ROI?
ROI is an acronym for “return on investment,” a performance metric almost every industry uses. It measures how much money an investment generates compared to the capital invested. In any business venture, from purchasing property to marketing a new service, the goal is to make more money than you spend, and tracking ROI is the easiest method of measuring the yield of hotel investments.
What does hotel ROI really measure?
Hotels, like other businesses, use ROI as a profitability ratio—to weigh gains and losses—as it measures how much the company makes compared to how much it spends. Hotel ROI measures the property’s overall performance, the success of specific efforts, and operational efficiency. Because hotels spend on many things, including property improvements, training, software, and more, they must track the return on a broad spectrum of investments.
How is hotel ROI calculated?
To determine hotel ROI, you must first calculate the net profit for an investment. To do so, subtract the amount spent from the amount earned. If you invested $100 and made $125, your net profit would be $25. Next, divide the net profit by spend and multiply the product by 100 to see the return on your investment as a percentage.
Amount Earned – Amount Invested = Net Profit
(Net Profit / Amount Invested) X 100 = Hotel ROI
If you spend $10,000 on a promotional campaign that generates $15,000 in revenue, the hotel’s ROI for that marketing campaign would be 50%. The hotel made 50% more than it invested. The same formula may be used to calculate the return on a single investment, like purchasing a new CRM or upgrading guest bedding, or to gauge the hotel’s general profitability.
What factors influence hotel ROI?
Your tools, resources, and budget are critical in determining hotel ROI. How much revenue your property brings in is affected by just about everything: where it’s located, which flag it flies, how it’s managed, and so much more. Service level, size, and many other factors can influence how much return the hotel generates, including:
- Destination
- Branding
- Budget goals
- Operating costs
- Marketing efforts
- Booking channels
- Time efficiency
- Market mix
- Amenities
- Guest experience
- Human error rates
- Hotel technology
- Rate strategies
- Facilities
- Staffing
- Management
Efficiently managing hotel ROI requires knowing your property and market, inside and out. From guest demographics and nearby competitors to staffing expenses and software costs, every part of hotel operations can impact the strength of your returns.
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Who is responsible for hotel ROI?
Versatile and valuable, this informative hotel KPI may be used to measure the profitability of various investments, from ad campaigns and third-party booking fees to renovation and asset acquisition costs. Because every employee and department plays a part in hotel success, consistent revenue growth requires optimizing hotel spending everywhere. In addition to tracking general ROI, drill down and review each department’s performance.
- Sales and marketing ROI
Sales and marketing efforts require a sizable portion of the hotel's budget and are its primary source of driving business. As a result, tracking marketing ROI is critical to ensure that your advertising strategies generate substantial results.
The sales team may track the ROI of specific marketing campaigns, how much they spend on particular lead generators, or whether the cost of an individual booking channel is worth it. For example, recent research shows that the return per dollar spent on Expedia and Booking.com is approximately $16. However, the industry return from OTAs has decreased by 15% in the last decade, illustrating their diminishing return potential. So, while investing in third-party channels may help drive bookings in the short term, it could harm hotel ROI in the long run.
Strategizing room rates, establishing caps for group blocks, and assessing event efforts can also affect hotel ROI. What is the maximum discount offered to groups? Will increased occupancy from a group block generate more revenue than selling those rooms at the hotel rack rate? What's the return for meetings and events after the cost of staffing, setup, and additional inventory needs?
- Housekeeping ROI
Consistent, quality housekeeping matters to hotel ROI more than how spacious or luxurious your guestrooms are. Investing in adequate staffing, thorough training, and high-quality tools can help maximize departmental ROI by boosting efficiency and lowering costs.
Carefully monitor cost per occupied room (CPOR) and cost per available (CPAR) room to identify fixed and variable expenses. Reducing these costs allows the hotel to spend less on operations, maximizing revenue per available room (RevPAR) and hotel ROI. If you spend $60 to prepare a room (e.g., cleaning, restocking, staffing) and the room sells for $130, the ROI is 116.66%, resulting in a $70 gain for the hotel, more than the total invested.
- Front desk/guest service ROI
How well your team is prepared to serve customers directly impacts guest service scores. Do front desk employees have the resources to manage check-ins, oversee checkouts, and respond to guest requests? How much are you spending on guest service software (e.g., CRM) or communication tools like chatbots? Has investing in additional training or technology improved front desk performance? Monitor how well hotel spending on front desk training increases satisfaction levels.
- Maintenance ROI
What is the hotel spending on maintenance, upkeep, and improvements? How much revenue is coming in as a result? Have you increased room rates or limited the discounts available for updated rooms? Maintaining and renovating hotel facilities is expensive, and owners expect to see considerable investment returns quickly.
- Food and beverage (F&B) ROI
Whether through a to-go sundry shop or in-house restaurant, hotel F&B can significantly impact the property’s profitability. Hotels can maximize departmental efficiency and generate more F&B profits by monitoring product and service quality, controlling inventory, maintaining facilities, and matching staffing levels to sales projections. Drive more revenue from hotel dining to generate returns that exceed your competitors.
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How to enhance hotel ROI
Whether you operate a massive, branded property or a small roadside motel, ROI matters. Meet with departmental leaders to identify areas of improvement and strategize new ways to grow your returns. Make the most of what your property has to offer and maximize returns where possible with these tips.
- Identify your target market. If your area draws budget-friendly travelers, your target audience member’s average spending will be less than that of guests booking in luxury markets. To maximize ROI, your advertising budget should be proportionate to the type of hotel guest you’re targeting. For example, hotels in low-cost markets must allocate advertising spending accordingly, appealing to a larger market of cost-conscious travelers.
- Incorporate experiential marketing. Generate interest with experiential and virtual marketing, like 360 virtual tours and live event diagramming tools that can show consumers what visiting your hotel is actually like. Promote a virtual tour on the hotel’s website, social media pages, through email, online directories, and other profitable places. Although creating a photorealistic 3-D tour of your property may require a sizeable investment upfront, the hotel will continue to generate returns on the investment for years to come.
- Invest in technology. High-end revenue management software and other digital tools can improve operational efficiency, reduce the risk of manual entry errors, free up employees, and more, all of which can impact hotel profitability. Technology ROI identifies the profitability ratio between the revenue newly implemented hotel technology brings and the cost of implementation.
- Reduce reliance on third-party services. Third-party booking agents, or OTAs, are powerful booking generators that help your hotel fill rooms during the slow season and minimize lost revenue from late cancellations. However, their assistance isn’t free. Hotels pay a flat fee or commission rate for every third-party booking they receive, which can add up. Reducing your reliance on third-party distribution services helps the property earn more for every room it sells.
- Optimize conversion points. Reducing OTA reliance means you’re probably paying less to third-party booking agents, but failing to utilize your remaining booking channels effectively could cancel out those savings. Update your hotel website to ensure it accurately and effectively highlights the property’s value. Boost online conversion rates and drive direct bookings, which yield a greater return than third-party reservations. Create an online brand experience that matches what your hotel offers in the real world—a warm, welcoming, and immersive environment.
- Get creative with upselling strategies. Through upselling, hotels encourage customers to spend more, which can drive up ROI. Whether booking online or directly with the property, you can connect with customers and highlight additional amenities, promote add-on services, explain booking packages, or encourage room upgrades. Identify touchpoints during the booking process where your hotel can implement upselling opportunities. Implement effective upselling techniques to make the most out of every customer interaction, capture additional revenue, and increase hotel ROI.
- Continuously engage with customers. Keep the lines of hotel communication open and buzzing—both online and off. Regularly contact individual guests, group contacts, travel agents, and corporate clients to build credibility and trust. Monitor your online presence to see how audience members respond to various marketing efforts and engage on particular booking channels. Track online performance metrics like page views, session time, and clickthrough rates to determine how well guest engagement investments pay off.
- Optimize group bookings. Identify blackout dates, establish group rate goals, and set group block caps to make your group business as profitable as possible. What dates would benefit from the increased occupancy a group block brings? Review future demand forecasts to identify hotel need dates. How much are you spending to promote those dates? How many groups have sent requests for proposals as a result? Automate the RFP process to speed up group negotiations and help the sales team spend more time where it matters most—booking the best pieces of business for the hotel.
- Strategically restrict rates. Identify the hotel’s peak season and other high-demand dates throughout the year when you can raise room rates while remaining competitive with nearby hotels. Enhance ROI by closing peak travel dates off to group rates. Restrict standard discounts, such as corporate rate codes and rewards promotions, and establish cancellation policies that protect against late cancellations without turning away customers.
- Create a loyalty program. Although keeping a customer is cheaper than converting a new one, the hospitality and travel industries need help in this area, reporting lower-than-average retention rates (55%). Increasing customer retention by just a few percentage points can significantly impact your hotel’s bottom line, so ramp up customer service efforts and product offerings to keep guests coming back for more. Build a guest loyalty program that incentivizes repeat visits with perks your target audience finds valuable.
Put your knowledge of hotel ROI to use and get more for your money
Now that you know the ins and outs of hotel ROI and its impact on your success, let’s look at another vital performance metric: Revenue Per Available Room (RevPAR). While ROI measures how much revenue hotel investments generate, RevPAR digs even deeper. Learn more about how occupancy and room rates factor into hotel RevPAR.
