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How Do Hotel Management Companies Make Money?

A hotel management company is a company that helps owners of hotels and investors manage every aspect of the hotel. Hotel management companies are responsible for managing the day-to-day operations of hotels under their care.

A hotel management company manages operations that involve the financial performance of the hotel, maintenance, human resources, guest services, housekeeping, food and beverage services et al. In a nutshell, the success of a hotel depends on how effective the hotel management company is.

Hence most hotel management companies usually go over and above to make sure the hotels under their management operate smoothly and efficiently, while also maintaining high standards of quality and customer satisfaction. The success of a hotel management company is seen in how profitable the hotel is.

3 Ways Hotel Management Companies Make Money

When it comes to how hotel management companies make money, there is no one mold that fits all. This is so because hotel management companies have the options to make money from various sources that revolve around their service offerings. Here are some of the ways a hotel management company can make money:

  1. From Management Fees

One of the major sources of income for a hotel management company is the management fees that they charge the owners of the hotel.

This is how it works, when an agreement is reached between the owners of a hotel and a hotel management company, the hotel management company will be expected to deliver services as stated in the contract agreement, and they will be paid a certain percentage as management fee from the profits declared by the hotel.

The fact that hotel management companies are hired to drive the profitability of hotels means that they are likely not going to be paid if the hotel is running at a loss.

  1. From Bonuses or Incentive Fees

As stated above, hotel management companies are paid management fees from the declared profits made by the hotel, and in most cases, there is a targeted profit that they are expected to make for the hotel before they can earn the management fee.

In some cases, the hotel management company may exceed the target given by the owner of the hotel, and in such cases, the hotel management company can be paid bonuses or what is referred to as incentive fees. Please note that incentive fees are often structured as a percentage of the hotel’s net operating income or profitability.

  1. From Franchise Fees

This might not apply to all hotel management companies, but well-established hotel management companies usually operate a franchise business model. With a franchise model, a hotel management company will be able to make extra income and this income adds up to the total revenue they make in a year as a business.

How Much Do Hotel Management Companies Make Yearly?

Aside from the fact that most private hotel management companies usually don’t disclose their income, it is important to note that the amount a hotel management company is expected to make yearly is not fixed. This is so because there are several factors that can influence this income.

Some of the factors that can influence the income a hotel management company is expected to make yearly are the capacity and size of the hotel management company, the number and types of hotels they are managing, the locations of the hotels they are managing, and of course, the effectiveness of the hotel management companies.

A 2020 report of the largest hotel management companies in the world wrote that Marriott International reported total revenues of approximately $10.6 billion. So also, another leading hotel management company, Hilton Worldwide Holdings, stated that they generated approximately $4.3 billion in revenue in the same year.

Please note that the hotel management companies listed above are exceptional and the revenue they generate annually does not reflect the revenues an average hotel management company generates annually.

As a matter of fact, a hotel management company that is just starting out may not be able to generate up to 1 percent of the total revenue generated by either Marriott International or Hilton Worldwide Holdings especially if they are just managing smaller hotels in and around their city or state.

In conclusion,

It is important to note that there are other sources a hotel management company can leverage to generate revenue. As a matter of fact, some hotel management companies also offer additional products and services to hotels as a means of generating additional income for the business.

Some hotel management companies go as far as owning hotels or hotel booking sites where they generate additional income. That is why we cannot categorically state the amount of revenue a hotel management company is expected to make in a year.