Determining the hotel franchise cost is a major step in learning how to manage a hotel. Every business owner of a hotel franchise incurs expenses, but it can also turn a major profit. From hospitality software to tools that help nurture customer retention strategies, there are many variables that result in the total figure.
If you're learning how to own a hotel franchise, you're in the right place. Read on to learn all there is to know about the startup hotel franchise cost and recurring expenses.
What Is a Hotel Franchise?
A hotel franchise is another term for a hotel chain. It comprises numerous units, or individual hotels, under the same brand. Due to being under such a large brand, most hotel franchises are full-service hotels.
A full-service hotel is one that offers numerous guest services and amenities. Such services and amenities include restaurants, in room dining, pools, fitness centers, and more.
Hotel Franchise Cost Breakdown
Despite the large hotel franchise cost, such business models can be quite profitable ventures. In fact, hotel chains are some of the most lucrative businesses in the hospitality space. Read below for brief recaps of each hotel franchise cost and a rough estimate.
Initial Franchise Fee
When opening a franchise, there is a fee that must be paid. The hotel franchise cost will include this flat rate, in addition to variable fees based on the number of hotel rooms. The formula for the initial hotel franchise cost looks like this:
Total = Initial Fee + $/Room x Additional Rooms
For example, suppose you’re opening a franchise hotel unit with 500 guest rooms. The franchisor might charge you a flat fee of $50,000 and an additional $500 for each room over 250. In this example, the initial fee would be:
$175,000 = $50,000 + 500*250
Hotel Technology Expenses
Hospitality software companies make it easy for hotel franchises to streamline operations. And when tasks are easier for the staff to handle, they end up providing guests with a better experience. So, onboard solutions that make sense for your franchise.
Generally speaking, there's a standard list of tech solutions that are valuable for every hotel franchise. This variety includes:
- Hotel POS integrations
- Reservation and booking system
- Event and venue platform
- Online catering system
- In-room tablets
- Off-premise ordering solutions
- Hotel management software
- Customer rewards program
These tools can make up a large portion of the hotel franchise cost. Ensure that you get the best price possible. Want a pro-tip? Onboard all-inclusive solutions. Not only will you have fewer platforms to manage, but this tactic will let you lessen the overall cost.
Most franchisors charge royalty fees. Franchisees pay these royalties for the right to use things like the brand logo, name, and other related factors. One of the best parts about operating a franchise is that they're already established brands. However, franchisees have to pay a pretty penny for such recognition.
Franchise royalty fees can range anywhere from 4 percent to 12 percent or more of total revenue. It's the price franchisees pay for a loyal customer profile.
The labor costs are major factors to consider when calculating the hotel franchise cost. The number of employees in each entity will vary depending on the franchise and unit.
Full-service hotels with various amenities will incur a much higher labor cost. However, such amenities should generate enough revenue to reach a balance. The employees that each full-service hotel franchise must hire include:
- General managers
- Front desk agents
- Valet drivers
- Maintenance and housekeeping crew
- Wait staff
- Pastry chef
- Sous chef
- Catering manager
- Restaurant manager
- Event coordinator
- Marketing manager
Hiring and Training Costs
A huge portion of the hotel franchise cost is growing the team. Turnover within the hospitality industry is high, which causes this expense to consistently soar.
Training costs a lot of money. Plus, this is a time period when hotels can experience work overload. Owners will be paying new hires while they’re learning about their role. Current employees will likely be less efficient during this time, as they'll be training their new coworkers.
It's also common for an enterprise hotel to invest in training programs and software. Management software is a vital part of keeping tabs on the team. In turn, it can also help streamline the hiring and training processes.
Advertising and Marketing Fees
Franchisors supply tools and resources to market the hotel. However, advertising and marketing fees also cover the cost for franchisors to promote the hotels within the chain. In turn, the franchisee helps promote the entire region.
Effective and high-quality marketing campaigns can cost a fortune. From marketing automation software to developing targeted ads, there are many related expenses. With this said, high marketing fees make sense. Typically, these fees are about 2 percent of monthly revenue.
Maintaining a hotel will be essential for the customer experience. Maintenance fees are a major component of the hotel's overhead expenses. After all, they're large spaces that require consistent upkeep.
A clean and modern hotel will leave a positive impression on guests. Ensure that the hotel staff never neglects maintenance, as it's essential to guest retention. Plus, many maintenance protocols abide by health and safety standards.
If hotels let maintenance issues go without fixing them, it can lead to much larger issues and expenses. This idea is especially true for utilities.
Landscaping expenses also fall within the maintenance category. Though you may not keep the most formal floral arrangements outside, it's important to keep the grass cut and the greenery trimmed. Keeping a neat and tidy outdoor space is helpful for attracting guests, too.
Maintenance expenses can be a hefty portion of the total hotel franchise cost. There are many variables that will impact this figure, such as the hotel's size, number of rooms, amenities, and so on.
For hotel franchises, the reservation system must integrate with mobile apps and an eCommerce website. This is because it need to accommodate all the ways that guests may book their stay.
Maintaining a high-quality and user-friendly website can cost a lot of money each month. However, this platform will serve as the central location of all important information and hotel details. Without it, a hotel wouldn't even appear as credible. Plus, guests rarely call the hotel to book reservations anymore.
Website and reservation analytics can tell you a lot about your customer base. Consumer data in these categories will help make important business decisions and plan strategic campaigns. Consequently, such insight removes a lot of guesswork.
Loyalty Program Costs
Not only will the platform in which you host a loyalty program cost money, but the rewards themselves are an expense. You see, loyalty perks are given after guests spend a certain amount of money. And even though the hotel franchise is making a profit from all of those purchases, rewards are in fact free items.
This is why it's so important to carefully organize a rewards program. Franchisors need to ensure that they're not giving away too many rewards that are expensive to produce. For example, if a hotel unit earns most of its revenue from the rooms, try not to make it super easy to earn a free night. The same rule applies to all other amenities, too.
Like any other brick and mortar business, utilities are a major expense. As dozens of guests stay in the hotel each week, the monthly bill will be quite steep.
Electrical and water bills will be some of the highest recurring expenses. In fact, hotels spend roughly 3 percent or more of their revenue on utilities.
Here's a comforting idea to keep in mind--the higher the utility bills, the more guests you’re accommodating. Occupancy levels drastically impact these fees. If you're new to the hotel franchise industry, consider these expenses from other units to grasp an idea of what you'll likely pay each month hereafter.
Frequently Asked Questions About the Hotel Franchise Cost
There are many factors to consider when learning how to own a hotel franchise. If you’d like to discover additional details about this business sector, see below.
What Is the Cost of a Hotel Franchise?
The hotel franchise cost can range from hundreds of thousands to millions of dollars. Remember that this figure can vary depending on the brand, size of the hotel, and the location.
How Long Is a Typical Franchise Agreement?
Franchise agreements can last anywhere from five to twenty years. However, there are options to renew when the term is up.
What Are the Benefits of Owning a Hotel Franchise?
Owning a hotel franchise comes with many benefits, including:
- Operating a well-known and established brand
- Having access to the franchise manual
- Marketing and advertising resources
- Ongoing training and support
What Are Ongoing Royalties and Fees?
Ongoing royalties and fees are payments made by the franchisee to the franchisor. These fees come from a percentage of the total revenue.
What Does the Initial Hotel Franchise Cost Cover?
The initial franchise fee covers the right to use the following:
- Brand's name
- Access to the brand's systems
- Ongoing assistance and support
- The franchise’s operations manual
As you own and operate a hotel franchise, closely monitor these costs. If there are sustainable ways to cut expenses and maximize revenue, implement such tactics if possible. Though hotels are profitable business models, they're very expensive. Finding ways to maintain the business' financial health is vital.