Hospitality business basics can feel like a wall of jargon when you’re new to hotels. The short answer: a hotel sells rooms and services, and tracks success through occupancy, rate and RevPAR.
| Item | Value |
|---|---|
| Largest source of hotel revenue | Lodging (room) revenue |
| Food and beverage share of revenue at many full-service hotels | 20-30% of total revenue |
| Star rating scale | One to five stars |
| Typical boutique hotel size | 20-50 rooms |
| RevPAR formula | ADR × occupancy rate |
| RevPAR index that means a fair share of revenue | 100 |
These figures come from RemNote’s introduction to hotels and EHL Insights on RevPAR. Industry figures can change, so check the source before you rely on them.
How hotels make money
A hotel is a business that sells temporary accommodation to travelers. Most stays range from a single night to several weeks, and the basic product is a bed, a private bathroom and often Wi-Fi, as RemNote’s study deck describes.
The largest source of income is lodging revenue, the money guests pay for their rooms. The more rooms a hotel fills and the higher the rate it charges, the more it earns.
Hotels then add other revenue streams on top of rooms:
- Food and beverage: restaurants, bars, room service, mini-bar purchases and cafes.
- Meetings and events: rented meeting rooms, conference facilities and event spaces for business groups, wedding parties and organizations.
- Ancillary services: spa treatments, parking fees, laundry and dry cleaning, equipment rentals, and telephone or internet fees.
For many hotels, especially full-service properties, food and beverage can account for 20-30% of total revenue, according to RemNote. Meeting and event rentals are a significant stream, especially for larger full-service hotels in business or urban areas.
Each ancillary service earns relatively little alone, but together they add up to meaningful revenue. Hotels also use cross-selling, which means selling extras such as a spa treatment or a car rental alongside a booking, as the Hotelbeds glossary explains.
Types of hotels and who they serve
Hotels are commonly sorted with a star rating system that runs from one star to five stars. It reflects the level of service, the quality and variety of amenities and the overall guest experience, so a one-star hotel is basic and economical while a five-star hotel offers luxury and exceptional service.
The next split is between full-service and limited-service hotels. A full-service hotel typically has multiple restaurants or bars, room service, event spaces and concierge services, and suits guests who want convenience and will pay for it. A limited-service hotel focuses on clean, comfortable rooms at lower prices and usually skips on-site restaurants and extensive amenities.
Other common categories target different travelers:
- Boutique hotels: small, independently designed properties with personalized service. A boutique hotel might have only 20-50 rooms, compared with 200+ rooms in a standard hotel.
- Resort hotels: found in vacation destinations such as beaches, mountains or ski areas, and built for extended leisure stays with pools, spas, golf courses or ski slopes.
- Extended-stay hotels: built for guests who need weeks or months, with kitchenettes or full kitchens, laundry facilities, separate living areas and discounted long-term rates.
The category a hotel falls into shapes almost everything else: its staffing, its revenue mix and the metrics it watches. For a fuller tour of the categories, see the guide to types of hotels. All of the category descriptions above follow RemNote’s introduction to hotels.
How a hotel runs day to day
A hotel works as a coordinated system in which several departments rely on one another. The front office is the main point of contact with guests, and its staff are often the first and last people a guest meets.
- Front office: check-in and check-out, reservations and booking management, guest services and problem-solving, and phone and concierge services.
- Housekeeping: cleaning and sanitizing guest rooms, changing linens, maintaining hallways, lobbies and common areas, and restocking towels and toiletries.
- Food and beverage: restaurant service and kitchen operations, bar service and inventory, and in-room dining.
Housekeeping quality directly affects guest satisfaction, because a dirty room ruins even an expensive stay. These descriptions come from RemNote’s operations overview.
Roles inside each department differ from one property to the next. The guide to hotel departments and jobs goes through them in more detail.
The numbers hotels watch
Hotel teams rely on a short list of metrics. The first is average daily rate (ADR), the average revenue earned per occupied room. As an example from CREOP’s guide to hospitality metrics, selling 56 rooms for $6,500 in room revenue gives an ADR of $116 per room.
The second is occupancy rate, the percentage of available rooms that are actually sold, per CREOP. A deeper look at hotel occupancy rate is available in its own guide.
The third is RevPAR, or revenue per available room. It can be worked out by dividing room revenue by available rooms, or by multiplying ADR by occupancy rate, as EHL Insights notes. A 100-room hotel that earns $10,000 in room revenue in a night has a RevPAR of $100, and an ADR of $200 at 50% occupancy reaches the same figure.
RevPAR matters because it combines rate and volume. EHL gives a hotel with an ADR of $250 and occupancy of 40% as an example: it may look strong on rate alone, yet its RevPAR is only $100. For a longer walk-through, see what is RevPAR.
Several related metrics round out the picture:
| Metric | What it shows |
|---|---|
| ADR | Average revenue per occupied room |
| Occupancy rate | Share of available rooms sold |
| RevPAR | Room revenue per available room |
| RGI (RevPAR index) | Own RevPAR compared with the competitive set |
| TRevPAR | Total revenue from all sources per available room |
| GOPPAR | Gross operating profit per available room |
RevPAR counts only room revenue, not food, beverage or other ancillary income, according to CREOP. TRevPAR fills that gap by including every revenue stream, and CREOP’s example of $26,000 in total revenue across 240 rooms gives $108.33 per available room.
GOPPAR goes one step further. It shows profitability per room after operating expenses such as labor, utilities, supplies and maintenance, as CREOP describes.
A raw figure means more when compared with competitors. The RevPAR index, also called the Revenue Generation Index, scores a hotel against its competitive set, and a score of 100 means it captures exactly its fair share. If a hotel records a RevPAR of $120 against a competitive set average of $100, the index is 120, meaning 20% more than its fair share of market revenue, per EHL Insights.
How rooms get sold: distribution and pricing
A hotel can sell a room through several routes, called distribution channels. The Hotelbeds glossary and the Canary Technologies glossary define the main ones:
- Direct channel: bookings made through the hotel’s own website, point-of-sale system or mobile app. There are no intermediaries and so no commissions, though generating website traffic can carry significant costs.
- Online travel agents (OTAs): third-party platforms where travelers research, compare and book travel.
- Global distribution systems (GDS): networks connecting hotels, airlines, car rental companies and travel agencies on a single platform.
- Bedbanks: B2B wholesalers that give hotels access to travel agents, tour operators, airlines and affiliate programs.
A channel manager works as a digital control panel for these channels. It synchronizes inventory and rates across them, which helps avoid overbookings and rate disparity, per Hotelbeds.
Pricing is the other half of selling. Yield management is a dynamic pricing strategy that aims to sell the right room to the right guest at the right time and price, according to Canary Technologies. An unsold room is called distressed inventory, since a room left empty on a given night cannot be sold again.
Revenue teams lean on a few planning terms from the Hotelbeds glossary:
- Forecasting: gathering and analyzing data to predict demand, which informs pricing and distribution.
- Booking pace: the speed at which bookings arrive for a specific date or period.
- Lead time: the gap between a booking and the check-in date.
- Competitive set: the group of hotels seen as direct competitors, used to benchmark rates.
- Best available rate: a pricing mechanism offering the best rate for bookings in a given period.
The discipline that ties these together has its own guide on hotel revenue management. Guests who book again and again are part of the picture too, and how hotel loyalty programs work is a topic of its own.
Who owns and runs a hotel?
Behind every hotel is a decision about brand and operation. A franchise contract outlines the fees, brand standards and operational support a franchisee can expect, as the Canary Technologies glossary puts it. If you are wondering how does hotel franchising work, that contract is the place to start.
Owners who want a brand weigh it against going alone. The trade-offs in a hotel franchise vs independent hotel decision are covered in a separate comparison.
Some owners also hand daily operations to a specialist. A useful next read is the guide to the hotel management company model.
If you are on the guest side of the front desk, the hotel travel tips section covers practical advice for your own stays.
Frequently asked questions
What is the simplest way to understand how a hotel makes money?
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Start with room revenue, the largest source of income, then add food and beverage, meeting and event rentals and ancillary services such as spa treatments and parking.
What is the difference between ADR and RevPAR?
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ADR is the average revenue per occupied room, while RevPAR spreads room revenue across all available rooms, sold or not. That is why RevPAR reflects both pricing and occupancy.
What does a RevPAR index above 100 mean?
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It means a hotel is capturing more than its fair share of revenue within its competitive set. A score below 100 means it is trailing competitors, and what counts as good depends on the market and segment.
How do full-service and limited-service hotels differ?
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Full-service hotels typically offer restaurants or bars, room service, event spaces and concierge services. Limited-service hotels focus on clean, comfortable rooms at lower prices and usually skip on-site restaurants.
Why do hotels use several distribution channels?
Show answer
Each channel reaches different buyers, from direct website guests to travel agents and wholesalers. A channel manager keeps inventory and rates consistent across them.
