"You learn something every day if you pay attention." -Ray LeBlond
Today we covered a lot about the financial management aspect of the hotel industry. The topics included operating leverage and restriction/segmentation. Operating leverage is the measurement of how revenue growth turns into earnings growth. For example, the sales from room nights contribute 2/3rds of a full-service hotel (one with food and beverage). The departmental profit of the sale, the money that goes to the bottom line after deducting expenses, is roughly 75% of the original sales revenue. This shows that the word "revenue" can be easily misinterpreted.
The gross revenue is how much money the company makes. The actual profit is calculated after deducting money from the gross revenue that is spent on expenses, taxes, staffing, etc. By understanding this, the hotelies were able to better assess our performance in our second CHESS trial. I will describe two extremas.
- X hotel company has 100% occupancy rate, meaning they have their rooms completely sold out. However, their profit only came out to be around $8,000.
- Y hotel company has 50% occupancy rate, meaning they have their rooms half sold out. However, their profit came out to be a stunning $10,000.
So what does this all mean? X hotel company definitely attracts more customers than Y hotel but Y hotel is more profitable. There are several explanations to why it is like this. 1). X hotel stresses quality more than Y hotel and therefore invests much more money on acquiring the best supplies, employees, services, etc. As a result, much of X hotel's gross revenue goes to paying off the huge expenses spent. 2). X hotel is a economy and caters to customers who are only willing to pay the lowest rates while Y hotel targets more of the upper-end customers.
Even though Y hotel is more profitable right now, it does not mean that Y hotel necessarily has the best business strategy. X hotel's occupancy rate definitely hints customer satisfaction and possibly customer loyalty to the brand. What I enjoy most about the hotel industry and business in general is that there is no right way to be successful. What I am aiming for in my CHESS game is a healthy of the X and Y companies I made up. Market segmentation data from my first trial showed that my virtual hotel catered mostly to business customers. After making some changes in terms of cutting down unnecessary expenses (such as paying 3% or 4% commissions rather than an outrageous 10% as the game preset), I realized that a significant growth in terms of revenue contributed by leisure customers. By cutting down on the quality of the hotel, I lost some of my business customers but I was able to gain a few more leisure customers. I am still trying to work on a better balance that will help my CHESS hotel operate as effectively and efficiently as possible.
I love how everything we learn from the Hotel program ties together in the end, and how the applications do not only apply to the hotel industry, but gives us basic knowledge regarding how business in general is managed and operated. I also love the fact that learning in this program comes from various sources, whether it be published papers by Cornell Hotelies or current news articles from hotelnewsnow.com.
I became even more aware of this as Louisa, Stacy, and I had our pleasant conversation with Ms. Kronenburg and Mr. Crossley. Ms. Kronenburg mentioned a BBC television program called "The Hotel Inspector" that taught viewers the same financial basics we had learned in class. It shows that learning comes from all portals.
As Ray LeBlond said, you really can learn something everyday if you allow yourself to pay attention to them. I also know that whatever I take away with me this summer, I will be able to apply what I learned in the future. And these application will continue to teach me more and more. Learning is truly timeless.
P.S. Speaking of our conversation this afternoon, I was very impressed by a lady who approached us with two copies of the Ithaca Times and insisted that we read an article about saving the deer in Cayuga Heights. Her determination to spread the word about something she felt would benefit the residents in Ithaca showed what this city is about -- a close knit community where everyone becomes involved to improve the quality of life. I am just happy to be a part of this community, even if it is only for 3 weeks!