Is Small Hotel Business Profitable

Opening a hotel is a challenging but profitable venture. There is intense competition in the hotel industry. Therefore, whether you are planning to open a luxury boutique hotel or a comfortable hotel that offers bed and breakfast services for customers, you need to do a long time of research and planning before taking the risk and getting into this business. Naturally, the risks taken by those who want to start a big business are also great. Making big money in the business world is only possible this way. In this article, altitudementor.com will discuss whether Is small hotel business profitable.

Is Small Hotel Business Profitable

According to 2023 figures, there are 5 thousand hotels with ministerial certificates and nearly 7 thousand hotels with municipality certificates in Turkey. These hotels have a total bed capacity of 1 million 658 thousand as of 2023.

Although billionaire names such as Conrad Hilton or J. Williard Marriott are the first to come to mind when it comes to hotel management, in reality, owning a hotel is as common a business venture as opening a store or market. The only difference is that hotel management requires much more capital – and hotel ventures are much more profitable investments compared to other small businesses.

Even in today’s world, where almost anyone can become a hotel operator by uploading their home or spare room to Airbnb, this sector, which has lost nothing of its charm, is gaining a new breath every day. However, the pandemic that has left its mark in recent years has required fresh hoteliers who have just begun their entrepreneurial journey to be more diligent and strategic than ever. Despite all these difficulties, operating a hotel is not an impossible dream to achieve.

Let’s talk about how you can make this dream come true…

As Airbnb has grown and become so widespread, an extremely competitive environment has been created in the accommodation industry that requires a well-thought-out and complete approach. There is a long way to go for those who see hotel management as a business rather than a hobby. It can take quite a while to even save enough money to scale your business. You see, as a hotel entrepreneur, you need to take bigger risks than you think in order to grow your wealth quickly. And you need to take concrete steps to plan the best approach to launch your business.

In this article, we have prepared a high-level guide that will make it easier for you to start a hotel business – we also touch upon the risks of starting a new hotel business in today’s hyper-competitive market and how to reduce these risks.

Remember that you can turn your hotel business idea from a dream into reality with a carefully prepared plan, the right strategy, and the right technology that will strengthen your operation.

So let’s start.

How To Open A Hotel?

The options for opening a hotel are overwhelming, so first decide what type of hotel accommodation you will offer. For example, the service you provide may be top quality, affordable, or quite cheap. Will you only provide room service or will you open a hotel that offers additional facilities such as a restaurant, conference hall, swimming pool, spa room, or gym? You also need to decide on the location of your hotel.

Write a business plan. Most hotel businesses need external financial support in the initial stages. It’s a good idea to work with a professional advisor when preparing your business plan. Your business plan should include your business offerings, market analysis, a basic framework of operating practices, explanations of your long-term goals, and financial investment applications. If you have visited competing hotels, include in your business plan a summary of what similarities and differences there are between your rooms, restaurant services, or different services.

Contact the relevant government agencies for licenses and permits.

Renovation and renovation: Once you have secured the location of your hotel, you can make renovations and innovations to make it different from its previous state. Make sure electrical, plumbing, and wiring systems are working smoothly. You may consider working with an interior designer to help you choose colors for carpets, walls, rooms, and the lobby.

Advertising and marketing: Register with travel agencies, agency websites, international reservation systems, and tour leaders. Graciously invite travel professionals to your hotel for their stay. In this way, they have the opportunity to see the services you offer closely. Create a professional and stylish website with photos, video tours, and an online booking system.

1) Build a hotel from scratch or take over an existing hotel.

The most critical step you will take before starting hotel management is to make the right choice between purchasing/taking over an existing hotel or creating your hotel from scratch. At this stage, you should know that building a hotel from scratch will always be riskier and require a much higher amount of capital.

In hotel purchases, the risk is much lower because the property has a clear, reviewable, or improvable performance history. So, you know from the very beginning what you will get from operating the property in question – because you already have a turnkey hotel business that can generate cash flow. Moreover, in this way, you will be saved from dealing with time-consuming logistics processes such as obtaining permission, designing the area, and building the property. Not to mention the advantages of having a solid database of hotel customers as well as staff who are trained and familiar with the facility.

On the other hand, by choosing to build a new hotel, you create the accommodation experience from scratch and control the process first-hand. In the long run, building a new hotel can be a much more profitable venture than buying and developing an existing hotel. At this stage, your income will increase in direct proportion to the amount of risk you take – including the possibility of selling your hotel in case things go wrong, meaning you have the potential to make an unexpected profit in the future. However, despite the profit it promises, this business is quite risky because you may have to spend your cash only on the hotel’s needs for long periods of time without earning any income.

When deciding whether to build a hotel or purchase an existing hotel, you will also need a strong market analysis to confirm the existence of positive market trends that will support new hotel ventures. You also need to make good use of existing properties that will enable you to implement efficiency-enhancing elements, such as streamlining operations or leveraging new technologies to increase profitability. These efficiency boosters allow you to get the most efficiency (highest profit) from an existing hotel – which can turn your hotel into a much stronger investment than it already is.

2) Analyze Data and Conduct a Feasibility Study.

The next step is to determine the numbers. These figures will reveal the amount of capital you will need, as well as your expenses, time to profit, and the potential advantage you will have as an operator/owner/investor.

A feasibility analysis should include the following elements:

• Financial model: Model financial inputs and determine how much capital you need. What will the construction (or purchase) cost? What profit rate or average occupancy rate do you hope to achieve? Will you be able to increase this rate even more when your hotel opens? This section is where you articulate the assumptions that support the rest of your feasibility analysis. Don’t forget to consider the taxation process when creating your model. Many hotel owners choose to operate as an LLC/Limited Liability Company to limit legal risk and gain tax benefits.
• Proforma: Proforma is a method of calculating financial results using certain projections or assumptions. This document, which reveals the predictions of an investment, includes your balance sheet, income statement, and cash flow statement. Pro formas allow you to get an idea about your cash flow, as they include your estimated income and expenses over time. In this way, you can calculate how long it will take to make your business profitable and ultimately see the true potential of your business.
• Capital sources: Before starting a new business, you should determine your capital sources. Will you get support from friends or family in finding capital? Do you need investors or a bank loan? Or will you only benefit from your savings? Perhaps your source of capital is a mix of all three. You need to clearly state your source of capital to ensure you have access to sufficient capital to cover the costs of your business model.

Your final step should be to carefully review your profit forecasts – you should pay particular attention to this step if these forecasts directly affect the cost of capital. Calculate your cost of capital and then make sure your pro forma supports that you will make enough profit to offset the risk.

3) Create a Business Plan.

Now that you’ve made the financial forecasts, it’s time to prepare a business plan. This refers to your plan for how you will start, promote and operate your new business. Without a convincing plan, it’s nearly impossible to secure your investment—especially if you’re dealing with traditional institutions like banks, which impose much more stringent requirements.

So what should you include in your hotel business plan? An effective business plan should highlight and evaluate the strengths, weaknesses, opportunities and threats of different areas of your business (this is also known as SWOT analysis ). You should also make the case for how your hotel business will fit into the local market and broader industry trends. Ultimately, this is your (your startup’s) story, so avoid trying to express everything in an overly formal tone in your business plan.

Your business plan should consist of the following headings:

• Executive summary:  This is a high-level summary of your hotel business plan. Your executive summary should provide a quick, clear overview of the most important elements of your startup.
• Brand positioning: Tell your brand story. What is your concept? What does it mean? Who is the target audience? How will you fill a specific gap in the local market with this concept? You should also include business goals in this section – revenue targets, occupancy rate, profitability history, etc.
• Market research: This analysis should be based on both the local market and the entire industry, and should be carried out in two different dimensions. You should show market journey models and try to put broader industry trends into a common context so that potential investors understand the market volume and future growth potential of the market.
• Competitor analysis: Clearly define your competitors. Be honest about it and never back down. Investors will deal with any noticeable shortcomings. To demonstrate your extensive knowledge of the competition to potential investors, you must have a solid understanding of who your hotel competes directly with.
• Guest segmentation: Expand the demographic targets in the brand positioning section further. Who is this hotel for? At this stage, you should focus on being as specific and detailed as possible. For example, if you’re aiming to host Millennial travelers at your boutique hotel, show how big this segment is. Remember, understanding the customer profile is key to business success – it’s often underappreciated, but it’s true.
• Strategic plan: Articulate your strategies for marketing, distribution, and revenue management. This is the part where you’ll convince your investors that you have a solid plan to connect with customers, manage your inventory, and maximize your revenue.
• Operations plan: Provide a detailed overview of how you will operate your hotel, including the technology you will use, your employment process, what tasks will be performed, your service standards, and other relevant operations information.
• Financial plan: Include your pro forma in your plan to summarize forecasts and profit potential.
• Team: We have come to the part where you will market your management team. Remember, investors pay particular attention to the management team’s ability to implement the business vision.
• Timeline: Include a timeline of your hotel’s milestones, from construction permitting to staff hiring, grand opening, and even final profit.
• Appendices: This is the last section of your plan and is where you will include additional information or supporting documents. You should include everything that seems too complex in this section so that you can focus only on much more critical and strategic events in other sections, and remember that your ultimate goal is to secure the investment – your plan should be organized accordingly.

4) Create Your Digital Presence and Determine Your Marketing Strategy.

Now that you have reached this stage, you have secured your financing and are moving step by step towards developing a unique service strategy. Exciting but also scary, right?

To get started, you must set up a website for your hotel. Your website will be your door to the world. This should be a modern website that can work on all devices, has its own booking engine, and is designed and optimized for e-commerce. Since your website will also be the center of your direct booking strategy, it should work properly and provide your hotel with as many commission-free bookings as possible.

You can also list your hotel on Booking.com, Expedia, Tripadvisor, etc. You should make sure that it is also listed on third-party sites. At this stage, it is also important to create an interesting profile with your brand story and fascinating images of your hotel. Perfectly prepared profiles have been proven to significantly increase the number of bookings, so give it enough time and don’t rush it.

Create a social media account for your hotel on Facebook, Twitter and Instagram. Even if you do not plan to use all these platforms, be sure to secure your business name on different platforms to prevent invading audiences who will share using your hotel’s name.

Finally, you should also meet with different public relations agencies to promote your property. In the initial phase, focus on raising awareness about your upcoming opening by contacting relevant travel agencies and media outlets. This will be an early digital word-of-mouth marketing activity that could ultimately lead to a successful launch. After setting up your website and opening your social media accounts, you can hire your PR agency and ask them to manage your marketing activities.

5) Prepare for the Opening.

Considering that you will be participating in a market that is already crowded – and getting crowded day by day – it is inevitable that experience will make a difference in hotel management. You must deliver a five-star guest experience that gets excellent reviews and will help your new property stand out from the crowd.

If you want to organize its operations from the very beginning of the business and manage the process correctly, you should use the pre-opening time wisely. The three main issues you need to consider before opening are your plans regarding personnel employment, operations, and technology.

Your staff employment plan helps you find answers to the following questions: Which positions will be recruited for, how will you fill these positions, how will the timeline for the staffing process be prepared, and how will you train your staff before the opening? Given the unpredictability of starting a new business, employing key roles such as guest manager or sales and marketing director is also critical. The best employment time for these personnel is stated below:

• Guest manager: Should be hired approximately 12 months before opening to begin planning the hotel’s operational framework, identify other critical hires, and create a training program and a launch plan.
• Sales/Marketing and Finance Directors: They should be employed approximately 8 months before opening to determine the route to profit.
• Engineers/Facility Supervisors: They should start work approximately 10 months before opening – so they have enough time to become familiar with the building and equipment.

Your second step should be to create an operations plan specific to your hotel. This is where you will plan how each element works together, including the standard operating procedures that will structure your hotel to ensure consistency and predictability, and you will need to work on the following topics:

• Brand standards: Set standards for how your brand is presented to the public, including housekeeping, staff/guest interactions, service development, and communication guidelines.
• Checklists: Focus on making each task an operational process linked to the checklist it belongs to. In this way, you can provide consistent service and train your staff much more easily. You can also get useful input for your software tools.
• Legal processes: Have you legally secured your investment? Do you have employment contracts that are correctly prepared and whose legality is beyond doubt? What about your contracts for purchasing, preventive maintenance, or other business relationships? Make sure you find the answers to each question and take care of the legal procedures.
• HR policy: Your processes for hiring, firing, and retaining your employees say a lot about your business. You’ll also need job descriptions, a standard interview process, and a solid plan for managing interpersonal conflicts that can arise from being outnumbered. For this, you must have a comprehensive human resources policy.

Another point you should focus on before opening is to pay attention to using hotel software that will enable much smarter, more practical, and simpler operations within your facility. You should evaluate the software in question for form (is it easy to use?), function (does it do what you need it to do?), and budget (can you afford it?), making sure you are in agreement with the staff filling your key positions. The majority of hotel owners emphasize that the most difficult part of opening a hotel is establishing the right information and technology systems. Take heed of this warning.

No matter how many rooms you have, here are the basic technology supplies that every hotel absolutely needs to run business smoothly and make a profit:

• Property Management System: This is the core operating system of your hotel. This is also where it manages your inventory(rooms) and powers all the other systems you use. Your staff uses this system to check in guests.
• Hotel Website: Many small-scale hotels still prefer to rely on online travel agencies (Booking, Expedia, Tripadvisor, etc.) or agency partners for reservations. This is both a big and very costly mistake. Because having a direct channel is the most profitable method when it comes to reservations, and hotels that do not have their own website can easily lose their credibility. At the very least, you should create a website that will allow potential customers to learn about the property, in other words, act as a digital brochure. If you want to transfer booking revenues directly to your account, you will also need an agency partnership.
• Booking Engine: The booking engine is the “shopping cart” of the hotel industry. Surprisingly, most smaller hotels require guests to request a reservation by phone. Such hotels miss great opportunities and are rarely successful. A booking engine allows people to easily reserve rooms through websites.
• Reputation Management Software: In today’s world, reputation is everything. Fifty years ago, travelers relied solely on travel agencies and specific brands to choose their hotel stays. Today, everyone looks at Tripadvisor, Google, etc. to see what people are saying about hotels. looking at places. Online reputation software will allow you to establish and maintain a strong presence on such sites owned by third-party companies.
• Channel Manager: If you want to list your inventory/rooms on as many channels as possible, but don’t want to spend all day changing prices and managing availability, you should take advantage of channel managers. Channel managers allow you to automate these connections and ensure your property is bookable on third-party sites as well.
• Commercial Wi-Fi: Unless your property is positioned as an “off-the-grid” experience, it’s impossible for guests to choose to stay at a hotel that doesn’t have WiFi.
• Pricing Tool: Your hotel pricing strategies should also change depending on market conditions. At this stage, the signals you receive from regional competition can help you shape your strategy. A pricing tool will eliminate third-party websites and provide you with real-time pricing information. Thus, you can further increase your number of guests.
• Revenue Management Software: Gone are the days of seasonal flat pricing. In fact, it would not be an exaggeration to say that hotels that still price this way will soon be eliminated from the market. In fact, the math of revenue management is extremely simple: If the price is too high, your guests will choose competing hotels, and if the price is too low, you lose revenue. Revenue management tools, on the other hand, use machine learning to help you price your rooms without any guesswork, putting you one step ahead of the competition.
• Operational Software: For small hotels (5 rooms and under) a simple Slack channel or Trello board can work. However, even small hotels may have to deal with a lot of complex tasks when it comes to responding to guest demands and tailoring their services accordingly, maintaining a property, and managing workflows between shifts. Customized hotel operations software is suitable for use by hotels of almost all sizes and is highly functional.

6) Organize a Grand Opening Party.

Finally, it’s time to reap the rewards of your efforts and enjoy your hotel business. How Does? How about a magnificent opening party? This; It is a unique moment that you can celebrate with your friends, family, colleagues, and investors, and if you wish, you can also include influencers who can multiply the impact of your hotel launch.

Another creative idea for an opening is to throw a private “kick-off” party for a limited number of friends or family. This will help you test the space and get a solid idea of ​​the events you’ll be hosting there. Afterward, you can quickly fix any existing glitches and host an “official” launch party that includes influencers, VIPs, or locals.

Choose a theme suitable for this big night – and don’t forget to prepare creative backgrounds worthy of Instagram posts.

We can list other elements that are critical for a successful opening party as follows:

• Press: Invite local press. Work with your PR agency to engage other industry members who may be interested in your hotel.
• Influencers: In addition to press, you should also collaborate with your PR agency to invite influencers you believe will contribute to your business. In almost every city, there are lifestyle, food, and travel influencers who will present your hotel to a wide audience with a minimum investment. Try to take advantage of this power.
• Event planners/organizers: Your sales and marketing team should invite event planners/organizers to the opening so they can experience the space themselves. This will also be an excellent opportunity for you to quickly communicate with potential customers.
• Entertainment: Focus on providing the kind of entertainment that will enliven your event and align with your brand promise. Live music etc. Entertainment is one of the factors that will encourage people to share on social media during the party.
• Food and beverage: An event that does not serve delicious food and beverages is far from being a “party”. Does your facility have its own food and beverage service and do you promise to offer full board accommodation? You can promote your offer through your launch party.
• Promotions: Accommodation gifts etc. Thanks to small-scale promotions, you can turn your opening event into a positive experience that will leave a mark on the participants. These are small moves that will make your hotel make an impressive first impression.
• Photographer: Organizing such an event with a professional photographer will be a valuable investment for the brand value and future of your business. You can publish these photos on your social media accounts and announce your name to a wide audience.
• Photo booth: Having a photo booth connected to social media would also be an attractive idea. In this way, it encourages participants to take funny photos and share them through online platforms, and as a business owner, you can enjoy free advertising.

To make your launch event more visible, you can launch a paid advertising campaign or consider including launch-specific, limited-time promotions. Thus, you can attract people to your business and let them experience your hotel first-hand, and ultimately increase your brand value with the power of word-of-mouth marketing.

Advice for Those Thinking of Opening a Hotel

In this section, we will touch upon a few critical issues regarding hotel management and give some advice to those who are considering opening a hotel.

1) Focus on developing a great marketing plan and revenue management strategy so you can continue to grow your business and improve it over time. Marketing in hospitality is often overlooked, but it’s exactly what sets you apart from the competition. Have a well-thought-out business plan, connect with other hotel owners, and learn from your mistakes.

2) If you don’t want to have regrets later, make sure you choose the right property or restaurant management systems. Do your market research well. Add a 30 percent plus option to each cost item in your business plan, so you won’t be surprised when you encounter additional costs.

3) Be knowledgeable about revenue management and dynamic pricing systems. If you start with fixed or seasonal pricing, you are doomed to fail. Most business owners choose hotel locations based on passion (places they love) or opportunity (anywhere they can afford). However, before you start looking for the right location, make a thorough analysis of the location and the local real estate market. Remember, if there is too much supply or too little demand, your path will be quite rocky, no matter how good your product is.

4) Be prepared to start from scratch. For your first hotel, you may choose to renovate and develop an existing property. Design and quality will also be important at this stage. Things like management styles and operational efficiency can be learned or improved over time. Even your interior design, decoration style, and menu can be updated when necessary. However, it is not possible to say the same for the design and location of your space. These are irreversible issues that must be handled with great care. In addition, you should benefit from as many experts as possible, as this will make the process much easier, and most importantly, you should make them feel that you belong to the community you are in and respect them.

5) Know how important it is to have an “innovative” perspective in hotel management. It is difficult to manage a hotel without effective operations software. Therefore, in order to increase efficiency that will easily slip through your fingers and offer your guests a five-star accommodation experience, you should be open-minded, take care to be a pioneer of innovation and benefit from the blessings of technology. After all, hospitality is one of the fastest-changing industries. In today’s world, where digital solutions have taken over almost every industry, many opportunities to simplify operations should also be taken into consideration by the hotel industry. In summary, hotel owners must be the pioneers of innovation and change in their businesses and must avoid falling behind the times.

6) The most critical skill a hotelier must have is communication – you need to know how to connect with different groups and people, understand the needs of customers and employees, and most importantly, be open-minded. To be successful in managing hotel staff, which is large in number and whose skills are completely different from each other, you must benefit from the power of communication and have a common touch. For this, you need to be able to get along well with people from all walks of life, because it is impossible for your team to consist only of people who are similar to you in economic, social, and cultural aspects. In fact, having a uniform mindset at this stage may even be counterproductive – diversity always yields the best results, right? This means that hotel owners who provide excellent service to their guests are never afraid to work with people who are more talented than themselves or with minds that are free of stereotypes. They are looking for differences. Best of all, they know how to handle constructive criticism. After all, those who blindly follow the rules or advocate an accepting approach instead of questioning cannot be the pioneers of innovations or revolutionary developments.

Another critical skill that will elevate hotel owners and their businesses above average is courtesy. It’s nice to be polite, but simply being a kind host is not enough for the success of your hotel business. A competent hotel owner must be a well-rounded person who is familiar with many concepts, including marketing, sales, revenue management, design, or innovation management.

7) Master crisis management. Covid etc. You must find a way to overcome crisis periods with the least damage. In such situations, from the first day of the crisis, you should make decisions to continue employing personnel, keep the business open, renovate or improve facilities, focus on being a greener and environmentally friendly business, and look for ways to turn the crisis into an opportunity and improve your service standards even under the most difficult conditions. You must create a solid buffer plan to withstand a possible crisis. Like having a healthy cash flow balance and probably having more cash in the bank than most bankers or financiers would normally recommend. Do not be hasty in terms of growth and expansion. While there may be times when you will reach the peak of profit, it is also possible that you will experience financially challenging days. Be prepared for such economic fluctuations.

8) Put social, environmental, and financial concerns aside and focus on the end goal. We are talking about the human dimension of the matter here. As in every new venture, honesty, integrity, care, compassion, etc. are as important as making money in hotel management. Human values ​​are very important. Don’t forget.

Hotel Opening Conditions

a) A Fire escape will be built.

b) It will meet the hygienic conditions.

c) A technical person to draw a detailed workplace layout sketch.

d) This settlement cannot be changed without permission.

e) Grease traps will be installed in the kitchens of hotels.

f)An industrial-type dishwasher will be installed.

g) WCs will be arranged so that they can be used by physically disabled people.

Documents Required To Open A Hotel

1- Application form,

2- Address document,

3- Photocopy of title deed,

4- Building occupancy permit of the building,

5- Rental agreement to be written by a notary,

6- Fire report,

7- Chamber activity certificate,

8- Registry certification,

9- You must apply to the municipality for a hotel license by preparing documents such as a criminal record, a photocopy of your identity card. You also need to obtain a tourism certificate. You must apply to the relevant ministry by preparing documents such as a petition, facility introduction report, signature declaration, name registration certificate, and documents to be obtained depending on the installation location of the facility. If you are going to sell alcoholic beverages, you will need to obtain permits. You can find detailed information about permits and licenses on the websites of municipalities and ministries. Don’t forget to have liability insurance.

Cost of Opening A Hotel

The cost of opening a hotel can depend on tons of variables:

Location: For example, Istanbul, Paris, etc. Large metropolises such as are much more costly than less touristic cities.

Quality: A five-star resort will cost much more than a roadside motel.

Size: The number of rooms, restaurants, meeting spaces, etc. facilities have a strong effect on cost.

Although hotel start-up costs vary greatly according to these criteria, the cost for a “typical” hotel should be evaluated under the following five main headings:

Land (10%): This includes the cost of real estate.

Building/Construction (66%): Construction is the largest budget item. Owners often use construction loans to finance the project.

Soft Costs (12%): These include designers, architects, lawyers, insurance, permits and taxes, etc. It covers all non-construction costs.

Furniture, Fixtures, and Equipment (9%): From tables to computers, electronic equipment, bedroom cabinets, bedside tables, etc. Expense items for all kinds of goods are collected under this heading.

Start-up Capital/Working Capital (3%): You need to have hired your staff before opening, so your start-up capital will also be used to cover staff salaries before business picks up and your revenue starts to fund you day-to-day.

Since opening a hotel is a very complex task, it would not be right to give an exact cost. If you inform us about the hotel you plan to open, we can make a more realistic cost calculation for you.

Tips and Warnings

You can start your hotel business by getting a franchise under a well-known brand. It will cost slightly less than building a hotel from scratch. They will also receive an annual franchise fee.

Hotel owners may not receive a return on their significant investments for several years or during periods of a weak economy. Make promotional plans to generate customer traffic from the very beginning and set aside money to insure yourself for the first few years.

We will continue to share with you the most profitable business start-up ideas. Stay healthy and money.