The role of total revenue management in a hotel profitability strategy

The global hotel industry is firmly positioned in an era of normalized growth levels. That means to achieve greater profits, hotel owners and operators need to explore every possible revenue stream while also working to manage expenses. 

The starting point is a strategy built on a total performance picture—one that understands both the top and bottom lines as well as the circular relationship between the two. Fortunately, 35 years of historical profitability data presents obvious trends that inform hoteliers working to generate more financial gains.  

Revenue and profit are closely linked 

Understanding the relationship between revenue and profit is a great place to start. Using decades of data, we see with any growth or decline in revenue, gross operating profit tends to move 1.5 to 2.0 times more. That trend has played out consistently in the U.S. over the years. More recently in 2024, we also saw examples in Asia Pacific markets such as New Delhi, Bali, Kuala Lumpur and Bangkok. Those markets represented the trend through increases (12-month moving average), which aligns with a later pandemic recovery. Markets in other parts of the world—Dubai, Amsterdam, Beijing, Hong Kong, San Francisco—displayed the 1.5 to 2.0 times trend with decreases. 

Labor and profit margins show an inverse relationship 

It is no secret that labor costs place significant pressure on profit margins, especially in full-service properties where more staff is required to service more facilities and amenities. That is especially true when looking at resort and convention hotels. 

On the other hand, classes of hotels with more select services tend to show higher profit margins. 

On a global scale, the major markets—Los Angeles, New York City, Hong Kong, Berlin—show the greatest impact of labor on profit margins. 

Hoteliers are getting more creative in deploying technology to help improve profit margins – robot room-service delivery, staffing systems, mobile check-in, food waste tracking, etc. Tech is going to continue to play a powerful role in maximizing profit margins considering the amount of pressure from labor and operating expenses in general.

Finding peak profitability

Because revenue per available room (RevPAR) is a product of occupancy and average daily rate (ADR), and because GOP is based off total revenues and expenses, all of these metrics are connected and demonstrate how the top line impacts the bottom line. 

A long-held theory on flowthrough has been that when ADR growth compromises more than half of a RevPAR gain, flowthrough is improved, whereas GOP growth is assumed to be muted when occupancy is the main driver of RevPAR

Using several years of U.S. data, our analysis shows that as hotels increase occupancies, peak profitability efficiency is realized at a certain point:

GOP margin between $240-$249 = 65%

GOP margin between $250-$259 = 70%

GOP margin between $260-269 = 69%

Beyond those occupancy levels between 65-70%, the data shows diminishing returns where profit margins decrease with additional rooms sold because of the costs associated with servicing additional rooms. At that point, profit margins can only be improved by further increasing ADR. 

Focus just as much on other departments 

On average, a hotel’s rooms department accounts for 68% of total revenues. That means that 32% of revenues come from areas such as food & beverage, parking, spas, etc. While only one-third of the total average, those other departments offer a level of revenue opportunity that should garner just as much focus as rooms. 

F&B is the biggest revenue contributor outside of rooms, and profit levels started to return earlier in 2024. Additionally, miscellaneous income (the category that covers most fees), has continued to be a cash generator in recent years because there are no directly associated costs. Parking revenues have also gained substantially since 2019. 

While being a significant source of revenue, F&B departments also account for the highest expenses, especially with cost increases seen in 2023 and 2024. 

What also stands out about expenses is significant growth in administrative & general departments—due to labor—as well as flattening marketing spend after a significant spike during the pandemic. 

While being a significant source of revenue, F&B departments also account for the highest expenses outside of the rooms department, especially with cost increases seen in 2023 and 2024. Being such a labor-dependent department, that is why F&B presents such tight margins. 

What also stands out about expenses is significant growth in administrative & general departments—due to labor—as well as flattening marketing spend after a significant spike during the pandemic. 

A benchmark for your total profit management

Historically, top-line performance and the rooms department have been the primary benchmarking focus around the industry. What these last several years have magnified is the substantial opportunity that exists when expanding the focus to the entire property and the entire P&L statement. In the past, we looked at optimal occupancy to help maximize profits. Now, we have multiple available data sets that enhance revenue management strategies. 

If you are looking for a starting point to develop your total performance framework, use these averages from the last five years (excluding the lowest points of the pandemic) for the more popular property types. Of course, depending on your location, product type and other factors unique to your property or portfolio, there will be deviations from these percentages. Our P&L-focused team is always available to discuss more detail around percentages of revenue outside of room departments, labor margins, etc.  

• Full-service hotels tend to run lower occupancy at a higher ADR, offer higher-end restaurants, and show lower F&B margins. Properties in this segment typically run a 25-35% GOP margin. 
• Limited-service hotels often feature a free breakfast and little revenue from F&B overall. These properties show a GOP margin of 35-40%. 
• Select-service hotels are also limited in F&B options but maintain higher profitability (40-50%) thanks to a lower labor margin. 
• Extended stay hotels cater to long-term guests at a lower rate. Again, these property types show high GOP margins (40-50%), low labor margins and only a small portion of revenue from beyond rooms. 
• Resorts offer many amenities and generate a high percentage of revenue outside of rooms. Overall, these properties operate on a 35-40% GOP margin. 
• Convention hotels, which obviously feature significant meeting space and higher F&B expenses, generate the most revenue from outside of rooms and show a 35-40% GOP margin.