Conversion (Flow-Through): The Secret Behind Hotel Profitability Explained Simply

In hotels, everyone talks about revenue—room sales, restaurant income, or event business. However, the real question successful hotel leaders ask is:

?? "How much of that revenue actually becomes profit?"

That’s the essence of conversion, often called flow-through in the hospitality industry.

?? What Is Conversion (Flow-Through)?

Conversion measures how much profit you retain from every additional euro of revenue earned after covering your operational costs.

Example 1 (Revenue Higher Than Plan): Your hotel earns €100,000 more revenue than planned. After additional labour, supplies, and operating costs, you're left with €50,000 in profit. ?? Your conversion rate is 50%.

But what if the situation isn't as ideal?

Example 2 (Revenue Below Plan): You planned for €100,000 extra revenue, but only achieved €80,000. To keep your original profit target (€50,000), you'd have to reduce or manage expenses carefully—adjusting staffing levels, reducing operational costs, or delaying certain expenses. ?? If you maintain €40,000 profit from that lower revenue, you’ve managed a strong 50% flow-through, even under challenging conditions.

?? Why Conversion Matters for Hotel Profitability

Hotels usually have a significant portion of expenses that are fixed, such as salaries, administration, sales, marketing, maintenance, and more. These fixed expenses remain mostly constant even if fewer guests come through your doors.

This is why:

• Positive flow-through: Occurs when revenue grows faster than your costs, leading to higher profitability.
• Negative flow-through: Happens if costs grow faster than your revenue, reducing profitability.

?? Industry Benchmark Assumptions for Flow-Through

Based on typical industry benchmarks:

Rooms Department:

• Occupancy: 70%
• ADR (Average Daily Rate): 85% (ADR generally provides higher flow-through than occupancy alone.)

Rooms generally offer the highest flow-through because additional revenue from higher ADR or selling extra rooms has minimal associated incremental cost. Once fixed expenses like housekeeping staff and utilities are covered, nearly every extra euro earned from selling more rooms flows directly to profit.

Food & Beverage (F&B):

• Positive Conversion: 50%
• Negative Conversion: 50%

F&B profitability often fluctuates. Banquet and catering revenue typically converts well, whereas restaurant and bar operations can be challenging due to higher variable costs.

Other Operated Departments (OOD):

• Positive Conversion: 50%
• Negative Conversion: 50%

Departments like spa, parking, or retail have varying results—some generate good margins, while others struggle with cost efficiencies.

Undistributed Operating Expenses (excluding Utilities):

• Variable: 0%
• Fixed: 100%

However, it's important to note that not all expenses are strictly fixed. Certain costs, like credit card commissions (which rise directly with increased revenue), utilities (which often increase with higher occupancy), and other fees based on revenues, typically vary with changes in business volume.

Admin, sales & marketing, and property operations usually remain constant. Managing these effectively is crucial, especially when revenue is below expectations.

?? Key Takeaway

Understanding and managing conversion (flow-through) directly impacts your hotel's profitability. It’s not about earning revenue alone—it's about keeping more profit from every revenue euro earned.

Acknowledgments and References

For further insights into flow-through and detailed strategies on managing hotel profits, I recommend reading this excellent article by Jorge Gomes, which provides an in-depth explanation of the concept and its application.

Thank you, Alexey Makarov for the inspiration behind this brief article!

Note: Parts of this article were developed with the support of AI to help organize ideas and enhance clarity. All insights and final edits reflect my personal perspective and expertise.

BP#10