Covering the costs

AccomNews Sunday, December 15, 2013

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One of the first steps in offering a product or service to a market is to know what it costs a business to sell the product – the breakeven point.

The addition of a mark-up in order to make a profit and still be competitive then determines the price the product/service will be offered at. Simple economics and the motel industry is no different. The product of the motel room and associated services costs the operator to rent the room in wages, cleaning products, laundry/linen, electricity, insurance, wear and tear, etc. A combination of fixed and variable costs.

If the total cost including these expenses and others are unknown, then how can the price be set to ensure the business is not losing money on the sale?

Accurate costs to rent a motel room offer very useful tools of measurement or key performance indicators so a motel operator can know how much they can afford to rent a motel unit for to breakeven and then to make a profit. Each different accommodation facility will have different cost bases. The reasons why can be due to several factors that affect this figure – property features, operation and utilities.

Property features

• Size of units – the square meter area that the unit occupies. A standard studio unit costs less to occupy than a two-bedroom unit.

• Self-contained – the cleaning costs alone to rent a self-contained unit can be substantially higher

• Age of property – how old the property is may determine how much upkeep is required to the buildings?

• Standard of property – if a motel is in disrepair it will require more expense to maintain

• Location – sea air may increase corrosion of buildings such as metal staircase hand rails, roofing, etc. Building movement in some areas may create brickwork cracking and other issues.

• Unit fit out – what condition is the furniture and fittings in? Does the high level of humidity require tiles rather than carpet? Are blinds or block out curtains required?

• Restaurant – a restaurant will substantially increase many costs, however this is a separate income department where the same considerations on what it costs to produce that product are relevant

• General services/facilities – a lift on site, trees and gardens, swimming pool, spa or sauna are all services/facilities that contribute to the cost base

Operation

• Lease/freehold – Is the tenure leasehold with a rental to be paid each month, or is it freehold where mortgage repayments are due? Interest rates will rise and fall changing repayment amounts. Interest payments will be applicable with leasing as well however the level of borrowing will be generally lower than a freehold purchase.

• Type of clientele – the motel’s business could be corporate customers, tourists, families, contractors, etc

• Laundry – is the linen cleaned onsite or offsite at a commercial laundry?

• Staff Levels – are staffing levels correct or is the business over or under staffed?

• Owner/Operator or Under Management – the cost of management wages will increase the cost to rent a motel unit. This can be a moot point as the owner should expect to pay themselves a wage for their time anyway

• Consumables – what type of soaps, tissues, shampoos, etc are included within the unit?

• Cleaning – are the cleaning products the most cost effective? How long are the cleaners allocated to clean each room, eg 20 minutes, 30 minutes, or unlimited?

• Eftpos/credit card fees – the fees charged by some credit card operators are higher than others

• Marketing – is the motel a member of a chain? The fees paid to a motel chain form part of the cost to rent a motel room, as does the commissions for booking sites and any other marketing initiatives.

Utilities

• Property rates – coastal motels may include much higher property rates than an inland motel where the land value is not as high as a beachfront property

• Electricity/gas – the costs of electricity have risen substantially in the past three years

• Telephone – What type of phone system does the motel have? Is it reliable in its charging of customers?

• Land tax – Is land tax paid by the property owner, Lessee or not applicable?

• Insurance – the cost to insure properties has more than doubled in some areas over recent years

Costs easily add up and can “blow out” if not contained. Knowing what the costs are is the first step in containment and an operator can then be confident in their sales position.

A recent example where the costs are known (however other factors are at play) was upon the notice that Holden was leaving Australia. A news report stated “not one Holden Commodore sold in 2013 was sold at a profit”. A sobering thought!