Are hostels profitable?

are hostel profitable

An easy guide to making a hostel business plan

Before venturing off to start any business, you should do your math and find out if it’s worth your while. So, are hostels profitable? The answer to this question depends on many variables. Let’s say you’re in a well established or growing destination, and you want to open a hotel, hostel, guesthouse or bed and breakfast.

HOSTEL BUSINESS PLAN

If you’re just starting to toy with the idea of a career in hostel management, start with a simple basic profitability calculation. The next thing you’ll want to do is make a hostel (hotel/guesthouse/bed&breakfast) business plan.

To help you out, we’ll try to explain the basic elements such a calculation should take into account. And in order to predict whether your hostel business has the potential to be profitable or not, we’ve designed a simple calculator to make things easier. Try it here.

To get an idea if hostels in your area are profitable or not, the first step is to calculate costs and revenue. These are the two key categories in hostel management. If you want to have a smile on your face answering the question how much do hostel owners make, you know that your primary goal is to increase revenue on the one hand and reduce costs on the other.

COSTS

What are the main costs of managing a hostel? We can divide them into fixed and variable. Fixed costs are not dependant on the number of overnights in a given period. Variable costs directly depend on the number of overnights achieved during the observed period. Costs can also be relatively fixed, but to keep the calculation simple, we’ll skip defining them, and in turn, treat them as fixed or variable – whichever is more appropriate for the given cost.

Fixed costs

  • Salaries. This is a fixed compensation amount paid to employees, irrespective of their hours worked.
  • Rent. This is a periodic charge for the use of real estate owned by a landlord. Even if you own the space and don’t pay rent, calculate this cost in, so you have a clear picture of how much money your hostel is making.
  • Utilities. This is the cost of electricity, gas, phones, and so forth. This cost has a variable element but is largely fixed. This is one of the examples of relatively fixed costs. For the sake of simplicity,  we’ll treat it like a fixed cost.
  • Marketing and sales costs: advertising, sales materials, travel, special promotions, travel agency fees, etc.
    There is no doubt that other costs will occur in the process of managing a hostel. Use the OTHER FIXED COSTS option in our calculator to input all other fixed costs, such as insurance,  legal fees, repair costs, interest rates, etc.

Variable costs

As mentioned earlier, variable costs directly depend on the number of overnights achieved in your property, i.e., a variable cost is a cost that varies in relation to the number of overnights. If there are no overnights, then there should be no variable costs.

To calculate total variable costs, the formula is:

Total quantity of overnights x Variable cost per unit = Total variable cost

Cleaning and bedding replacement are an example of variable costs. When you don’t have guests, you don’t have these costs. To be able to correctly predict these costs, it’s necessary to predict the average duration of guest’s stay. [The calculator measures this value per guest per night]. This means that – if the average duration of guest’s stay is 2 nights, and replacing a set of sheets costs EUR 2, then the cost per guest per night for cleaning the sheets is EUR 1.

As with fixed costs, use the option OTHER to input additional costs that fall into this category.

REVENUE

To calculate the total revenue, you need to input the number of beds in the calculator. Follow this by choosing average daily rate and occupancy in the simulator. The formula that will give us the total yearly revenue is:

Number of beds x Average daily rate x Occupancy x 365 (number of days in a year)

Moving the slider will change one of the two key categories that influence the revenue – ADR and Occupancy rate.  Aside from the revenue, these two categories also influence the total variable costs.

Profit is calculated by subtracting the total costs (fixed + variable) from the total revenue.

TRY THE CALCULATOR

 

What other costs can occur? If you’re an experienced hostel manager or owner, leave a comment and help your future colleagues.

2 Comments
  • We studied tourism before we opening our hostal and picked up some critical pointers. Opening a hostal is the chicken or egg concept – which came first? Guests want to go where there are other travellers, they want to see reviews but you have to have guests stay to get reviews. You will over estimate your number of guests actually arriving during the early years! Buying into a front page listing on the OTA’s will help offset this. Hostels are a great cashflow business money comes in with your guests to pay the bills but there are also high and low seasons. Try making your business profitable while borrowing 50% of the capital you will need to set up. It is unlikely to be profitable! You need to be established at least 3 years before borrowing to purchase property!

  • Weak sellers cut the price thinking they are being competative – an approach fostered by one of the big OTA’s. Being competative is to target your market sector, surfies, star gazers, trekkers and think of their needs, provide the local knowledge and service plus, go the extra mile and set your price. You will build a reputation and guests will arrive at your door.

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