Costs that make or break your hostel business!

3 storey hostel

Once you have your hostel all set up and running. Its time to sit down, assess and document down your costs. This is when you identify your Fixed Costs, Variable Costs and any other hidden costs that you might have missed.

Identifying your Hostels Fixed Cost and Variable Cost

Total cost of an operation is divided into 2 types.
Fixed Cost : Compulsory Commitments regardless of any fluctuation of sales. No significant changes to costs when sales increase or decrease.

Examples of Fixed costs are:

  • Staff wages
  • Land/ Building taxes
  • Building Maintenance fees
  • Premise Rental (This should be negotiated prior to any renovation. The fixed rental should be stated in the term lease)
  • Permits
  • Yearly auditing fees
  • Accounting fees
  • Company Secretary Fees
  • Outsourced services – i.e Security, Food and Beverage, Laundry
  • Fixed internet and phone bill (This does not include cases, when your internet quota is exceeded, and there is a need to top up credit to restore internet and phone services)
  • Fixed TV cable entertainment fees
  • Monthly/ Yearly Subscriptions
  • Other fixed costs

Variable Cost: Variable costs are clearly related to hotel occupancy and business volume. As business volume or occupancy increases, variable costs will increase; as hotel occupancy decreases, variable costs should decrease as well.

Examples of variable costs are:

  • OTA (Online Travel Agent) booking fees. i.e, Agoda, Hostel world Fees (Comparing OTA effectiveness and commissions)
  • Government levies on services. **Recently the Malaysian Government imposed additional tourist tax**
    The cost will be set at a fixed rate and will depend on the level of accommodation.
    Tourists staying in non-rated accommodation will be charged an extra RM2.50 ($0.80) per room per night; tourists booking stays in one, two and three star hotels will have to pay an extra RM5 ($1.55) per room per night; four star hotel guests will be charged RM10 ($3.10) and those booking five-star accommodation will have to pay an extra RM20 ($6.20) per room per night.
    This is on top of a 6 per cent GST.
    Read more on (Tourists to pay more for accommodation in Malaysia with new tourism tax). It is advisable to double check and stay updated with the country’s tax and regulations. Also beware that Local State or Provincial Tax might defer from National Tax.
  • Fuel expenses to run generators for remote locations
  • Maintenance of machinery
  • Guest room amenities and consumables
  • Breakfast costs
  • Any beverage or snacks at the common area
  • Stationary used in front desk
  • Washing liquids/ Softeners and misc for laundry
  •  Petrol and subsidies for staff
  • Telephone usage
  • Sales and Marketing
  • Flowers and decorations

Both types of costs will contribute to the total cost of the operation. Reducing any costs without affecting the quality of the service or rooms will be your ultimate challenge. Generally before doing any purchasing, or signing any contract with a supply company, it is best to do a market survey to compare prices, quality and reliability of the company. With this comparison chart, you can compare and make a decision. Bear in mind, that the final decision will not only be based on costs, but the overall rating.

Take note: Non operating expenses include loan payments, depreciation, and income taxes. (Read: Should i pay personal tax or company tax)

Here is a real case scenario from a hostel owner

James owns a hostel in a busy and strategic beach front location. His survey around the vicinity found that his competition was providing similar quality rooms for  a much lower price during the low season.
At this junction, he has a few options. Among the most likely would be

  1. Lower the rates to compete with his competition
  2. Figure out how to increase value to differentiate  his hostel from competition. One of the ways was to include quality breakfast into the room as the rest of the hostels were either not providing breakfast or just providing the normal breakfast.

When you have stayed in enough hostels and managed NOT to get a hangover from partying the night before and take advantage of the Free Breakfast, you will start to notice that most hostels that offers dorms/rooms inclusive of breakfast  will offer a very similar breakfast menu. Toasts with a selection of jam/margarine (real butter is expensive) and eggs. 3 in 1 coffee or tea and if they are generous, a selection of locally available fruits.

A survey recently conducted by Online Travel Agents found that customers voiced out the 3 main factors to giving a good rating online are

  1. Room cleanliness
  2. Toilet cleanliness
  3. Quality of Breakfast

Highlighting the importance of a Hearty Breakfast, we will discuss this in detail.
You would want to be able to provide quality breakfast, fast and hot to the customer with the least hassle. What Breakfast To Serve?

(Cover photo is from FB COVERSDIRECT.COM)