Being involved in revenue management for your hotel is forever balancing the revenue and expenses while ensuring your operation remains profitable. Given that hotels record an 8.3% year-over-year decrease in RevPAR, it’s important to talk about money, especially if you want to reopen for the new season, manage daily hotel room rates, or grow and expand.
Understanding how much each room in your hotel costs is key to ensuring your hotel is profitable. One of the failsafe strategies to do is doing a break-even analysis. Below you can find everything you need to know about this concept, including what it is and how to calculate and improve it, followed by a couple of examples to ensure you get everything right.
What is the break-even occupancy rate for hotels?
Break-even occupancy rate is a unique approach to hotel revenue management. The break-even occupancy rate is, in fact, the hotel occupancy rate for which the total costs and total revenue are the same.
Simply put, the break-even occupancy rate is the minimal hotel occupancy rate you have to maintain in order to cover all operational costs. A quick reminder — occupancy rate is a percentage of occupied rooms in your hotel at a given time.
The break-even occupancy rate provides you with insight into the break-even point or BEP. According to Elie Younes, the BEP definition goes along the following lines:
“The operating break-even point is defined as the threshold where total operating costs are equal to total revenues.”
You can put it this way, too — once you reach BEP, every future sale generates 100% profit.
How to improve it?
There are a couple of ways for you to improve the break-even occupancy rate. Let’s name the few noteworthy ones.
First, you need to assess your costs, including variable and fixed costs. Keeping the costs to a minimum will help you improve your break-even occupancy rates. Here are a couple of things you can do:
- Avoid high salary costs;
- Optimize F&B expenses with solutions such as pre-ordered systems;
- Minimize room expenses while not sacrificing the guest experience;
- Stay on top of supplier payments;
- Bring a number of contracts to an operational minimum.
You should also consider increasing sales volume during the season and adjusting prices accordingly in the off-season. It will help you improve the contribution margin.
Finally, you can focus on selling services and rooms with a higher contribution margin. Solutions such as UpStay can help you streamline this initiative. With UpStay, you will be able to generate a new stream of ancillary revenue, converting up to 20% of your guests to buy pre-arrival room upgrades and a variety of ancillaries.
What’s a normal break-even occupancy rate in the hotel industry?
In order to assess the performance of your hotel, you need to take a look at the average break-even occupancy rate in the hospitality industry. A normal break-even occupancy rate is a fluctuating thing because there are many factors subject to change, such as variable operating costs, for example.
For instance, in the US, the average operation break-even point was 37.3%. Here is BEP for different assets in the US:
- Luxury assets – 34.4%
- Full-service assets – 39%
- Extended-stay assets – 39.2%
- Select-service assets – 39.4%
In Europe, the average BEP was 34.5%, with different assets recording:
- Luxury assets – 35.7%
- Full-service assets – 36.3%
- Extended-stay assets – 36.4%
- Select-service assets – 36.4%
How do you calculate it?
Calculating the break-even occupancy rate is straightforward. You need to establish two metrics beforehand — BEP in the room and Annal Room Available.
The formula for break-even occupancy rate is:
Break-even Occupancy Rate = (BEP in room/Annual Room Available)*100
BEP in room = Fixed costs / Contribution margin per room
Annual Room Available = Hotel inventory * Day of operation
Samples of break-even occupancy rate calculation
When you have the formula, all you have to do is establish the variables you need to complete the calculation. Here is a sample of break-even occupancy rate calculations.
Let’s say a hotel has a BEP in room of 4,852 and an annual room available number at 27,375.
(4,852/27,375)*100=17.72%; It means that the hotel needs to maintain at least a 17.72% occupancy rate to satisfy all-expense obligations.
How do you do a break-even analysis in a hotel?
Break-even analysis in a hotel is so much more than calculating break-even occupancy rate. It is based on three things — cost, volume, and profit. The cost implies things such as fixed costs, including salary expenses and various variable costs, volume implies sale volume fluctuations, and profit implies the bottom line of your hotel.
The goal is to calculate the BEP, and the formula is:
BEP in rooms = Fixed Costs / Contribution margin per room
Here is a 3-step process to follow to do it in your establishment:
- Determine operating costs (fixed and variable) — the best way to do it is to take a look at your Profit & Loss Statement for an entire year;
- Analyze your inventory — you need to calculate Annual Room Available, which you can do by multiplying the number of available rooms by the number of operational days and average room rate by dividing total room revenue by the number of available rooms;
- Identify contribution margin per room — every room has variable costs attached to it, and you can calculate it by dividing total annual variable costs by the number of rooms sold. To calculate the contribution margin per room, you need to subtract the variable cost per room from the selling price per room.
Let’s see how it looks in practice.
Sample of break-even analysis
Let’s say a hotel has 75 rooms sold at $85. The hotel works 365 days per year with 60% annual occupancy rates. The annual fixed costs are at $250,000 and annual variable costs are at $550,000.
Let’s calculate the total number of potentially night rooms per year:
Annual Room Available = Hotel inventory * Day of operation - 75*365=27,375
Now we need to do some inventory analysis and calculate the average room rate:
Total Room Revenue = Annual Room Available * Price Per Room - 27,375*$85=$2,326,875
Average Room Rate = Total revenue Available / Annual Room Available - $2,326,875/27,375=$85
Let’s calculate the number of rooms sold this year so that we can calculate variable costs per room.
Given that the occupancy rate is 60%, the number of rooms sold this year is 60% of 27,375, which is 16,425.
Variable costs per room = Total Annual Variable costs / Number of rooms sold - $550,000/16,425=$33.48
Now we can calculate the contribution margin per room.
Contribution margin per room = Selling price per room – Variable cost per room - $85-$33.48=$51.52
Finally, we can calculate the BEP in room.
BEP in room = Fixed costs / Contribution margin per room - $250,000/$51.52=4,852 rooms
To reach the break-even point, the hotel in our example would need to sell 4.852 room nights over the course of one year. Now that we have BEP in room, we can calculate the break-even occupancy rate too:
BEP occupancy rate = (BEP in-room / Annual Room available) * 100 – (4,852/27,375)*100=17.72%
It means that the hotel needs to have an average occupancy rate of 17.72% over the course of one year to reach the break-even point.
Here is a break-even analysis template Excel file that you can use to streamline your calculations.
Break-even analysis is a really important metric to know for your hotel. It can help you assess the profitability of your operation. More importantly, if you do it on a monthly level, you can spot trouble in time and optimize operating costs and pricing policy to prevent having to shut the doors of your hotel or let some of your staff go. Hopefully, you will find the formulas and examples we’ve shared with you useful when calculating the break-even occupancy rate and point for your hotel.
Maína is the Head of Business Development Americas at UpStay. She graduated in Hotel Management and in German language and completed an MBA in Digital Marketing and E-commerce. She is a professional from the hospitality industry with experience as Distribution Director of a Brazilian group of 30 hotels and the Americas Director of an international Sales & Marketing representation company.
Maína considers herself an excellent communicator. She is a native speaker of Portuguese and speaks 4 other languages: English, Spanish, French, and German.