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How fixed cost “scientists” always end up leaving hotel rooms empty

Let’s answer to the third and last of the questions we have asked ourselves to neutralize the Revenue enemies: Do fixed costs always have to influence selling rates? For some hoteliers, the answer is certainly ‘yes’.

However, things change with Revenue Management: in order to achieve a great performance, it is necessary to deeply analyze both fixed and variable costs.

At the same time, it is important to have clear in mind that an unsold room is not only an unsold room, but also a loss, since some fixed costs have to be born anyway.

The first thing some hoteliers should give an explanation to is why they assess their incomes as a unit, whereas they look at them globally when they talk about expenses. Weren’t they explained that apples cannot be added to pears?

I have seen with my eyes – unbelievable, but true – people rejecting the opportunity to have all the hotel rooms occupied for an entire year – when they didn’t usually go beyond the 70% room occupancy – just because their potential customers had asked them for a price that was slightly lower compared to the hotel manager’s expectations.

This is because they had (not) done a preliminary analysis of the fixed, variable and possible costs. Moreover, those rooms remained unsold, hence causing a loss. Cases like this occur more often than one may think, as people don’t fully understand the relation between costs and selling rates.

In order to make things clearer, I’ll give you a numerical example. Let’s say we have a hotel with 100 rooms, fixed costs of € 1,000,000 and variable costs per room of € 15. Now, let’s divide the million by 365 (days), and then by 100 (the number of the rooms): we will get € 27.50.

Well, this is the amount to spend for every room, being it occupied or not. It’s what we can define as “unit fixed cost”. Let’s now say we sell a room for “just” 50 euros: What happens? If we deduct the variable costs (€ 15), we’ll have € 35. If we, then, deduct the unit fixed cost (€ 27.50), we’ll have € 7.60.

This is the money we can easily keep or use to amortize the costs of the unsold rooms. Nevertheless, there is another significant element to keep in mind: if the customer likes the facility and the quality of its service, he will put in a good word for our hotel through word of mouth.

As we have seen, this has a huge resonance on the web. So here are some good reasons to strongly restate this concept: an empty room is a missed opportunity.
Everything else is just empty words.