High Occupancy is King: Change My Mind

In my last post, we talked about the "Sweet Zone"—that magical 85–90% occupancy range where a hotel truly begins to hum. We established that if you’re sitting at 100%, you’re selling too cheap, and if you’re struggling to hit 70%, you’re likely priced too high.

But I often run into an all-too-common scenario: the moment I suggest dropping the price to find that sweet spot, the hotel owner recoils.

"Yohanes," they say, "I can’t drop my price. At my current rates, I’m barely making enough to keep the lights on! If I go any lower, I’ll be out of business in a month."

It sounds logical, right? But here is the cold, hard reality: these same hotels are sitting at 30% or 40% occupancy, white-knuckling the steering wheel while the ship sinks. This is what I call the Hotel Death Spiral. You keep your prices high to "protect" your margins, but because your prices are high, your occupancy stays low. Because your occupancy is low, you don’t have enough total cash to cover your bills. So, you refuse to lower your rates to compensate for the lack of volume. Wash, rinse, repeat until the bank takes the keys.

It’s a tragic irony. They are terrified that lower prices will lose them money, when in fact, the lack of guests is exactly what’s killing them.

The math is counterintuitive but undeniable: The higher your occupancy, the "cheaper" your hotel actually becomes to run. By filling those empty beds, you aren’t just bringing in more cash; you are spreading your crushing overhead across more rooms, making that mountain much easier to climb.

Right? Well, not exactly.

To understand why "high occupancy is king," we have to stop looking at the Top Line for a second and take an Eagle Eye view of what’s happening beneath the surface. We need to talk about the relationship between your costs and that 85–90% Sweet Zone.

The Boogeyman in the Basement: Fixed vs. Variable Costs

Before we go deeper, let’s quickly refresh the basics. Every dollar that leaves your bank account falls into one of two categories: Variable Costs (VC) or Fixed Costs (FC). Together, they make up your Total Cost (TC).

Most of you already know this, but here is a quick refresher:

• Variable Costs are the "breathing" costs. They go up when you have guests and disappear when you don’t (think laundry, guest amenities, and OTA commissions).

• Fixed Costs are the "frozen" costs. They don’t care if your hotel is bustling or a ghost town. Whether you’re at 0% occupancy or 100% occupancy, you still have to pay.

In the hotel world, the Fixed Cost is the ultimate Boogeyman. It’s the mortgage, the insurance, the property taxes, and the base salaries of your core staff. It’s the cost that haunts every hotel owner’s sleep: the fear of not being able to meet payroll or pay the bank.

But here is the secret to defeating the Boogeyman: Fixed Costs are only scary when they have nowhere to go.

Because these costs are "fixed," their total amount stays the same regardless of your occupancy. However, the burden of that cost is spread out among every room you sell. The more rooms you sell, the less weight each individual room has to carry.

Think of it like this: Imagine your hotel has a fixed cost of $100 per day.

• If you only sell 2 rooms, each of those rooms has to carry $50 of that overhead just to break even. That’s a heavy lift.

• But if you sell 8 rooms, that same $100 is now spread thin. Each room only has to carry $12.50 of the burden.

When you are operating in the 85–90% Sweet Zone, each room is only carrying a tiny fraction of your overhead. You haven’t just increased your revenue; you’ve effectively made your hotel "lighter" and more profitable on a per-room basis.

The "Good Problem": When Variable Costs Balloon

When a hotel finally hits that 85–90% Sweet Zone, something interesting happens: your Variable Costs (VC) start to balloon.

Suddenly, your laundry bill is massive. Your water and electricity usage spikes. You’re buying five times as much coffee, shampoo, and toilet paper as you were before. Your problem is no longer finding the money for the GM's salary; your problem is managing the sheer volume of utilities and supplies.

But here is the secret: This is a fantastic problem to have.

Why? Because Variable Costs are manageable. Unlike those "Frozen" Fixed Costs, these expenses only exist because you have guests paying you money. If your VC is high because your occupancy is high, you are in a position of power. You just need to nudge your price up gradually—as we discussed last month—and that extra revenue will swallow those variable costs while leaving you with a much fatter profit margin.

The "Price Floor" Principle

In the industry, we call this CPOR (Cost Per Occupied Room), but let's keep it simple and just call it your VC-per-room.

The logic is simple: As long as you sell a room for even $1 above its Variable Cost, you are winning. Why? Because that $1 goes toward paying off the Boogeyman (your Fixed Costs). If your laundry and soap cost $15, and you sell the room for $50, you just "found" $35 to pay your mortgage. If you had left that room empty because you were "protecting your price," you’d have $0 to pay toward that mortgage. $35 is always better than $0.

How to Calculate Your "Floor" (The Easy Way)

So, how do you know how low you can go without actually losing money? You need to find your average VC-per-room.

The best way to do this is to sit down with your accountant. But if you're a DIY owner or just want a quick check, here is the simplified formula:

1. Look at last year’s total expenses.

2. Separate them into two piles: Fixed (Rent, Salaries, Insurance) and Variable (Laundry, Amenities, Food, Commissions, Utility spikes).

3. Add up the Variable pile.

4. Divide that total by the total number of rooms sold in that same period.

It’s like calculating your ADR, but for costs instead of revenue.

A quick warning: This is the "napkin math" version. It’s a great starting point to help you see the big picture, but if you have a dedicated accountant, ask them for a formal CPOR breakdown. They can give you a surgical number that accounts for seasonal shifts and "stepped" costs.

Once you have that number—let’s say it’s $20—you now know your absolute floor. As long as you're selling above $20, you're good.

Finding Your Balance: Don't Trade One Boogeyman for Another

The 85–90% Sweet Zone is a powerful place to be, but a word of caution: efficiency is not the same as charity.

While I strongly encourage hotels to drop their prices to find that volume, I am not suggesting you obliterate your rates. If you drop your price blindly, you aren't defeating the Boogeyman—you’re just trading the "Empty Room Boogeyman" for the "Negative Margin Boogeyman." Selling a room for less than it costs to clean it is just as fast a way to bankruptcy as staying empty.

This is why you must check your floor first.

Before you make any drastic moves, do the quick "Napkin Math" we discussed to find your average VC-per-room. This number is your line in the sand. It is your shield. As long as you stay above that floor, every single guest—no matter how much they paid—is contributing to your survival and helping you spread that overhead thin.

Once you know your floor, you can drop your price with confidence, knowing that you are strategically filling your hotel rather than accidentally bleeding it dry.

Suicide by Proxy: The Danger of the "Comp Set"

Now, you might be asking: "What does all this talk of fixed and variable costs have to do with my competitors?"

Everything.

Believe it or not, there are countless hotel owners and GMs out there who ignore their own data and blindly follow their so-called "comp set." They see the hotel down the street drop their price by $10, so they do the same. They see them raise it, so they follow.

Here’s the problem: every single hotel—even one that looks identical and sits right next door to yours—has a completely different cost profile.

• Your neighbor might have finished paying off their mortgage years ago, while you’re still sweating over monthly bank interest.

• They might have a lean team of daily workers, while you’re carrying a heavy load of full-time, fixed-salary staff.

When you price your rooms based on someone else’s strategy, you are assuming they have the same "floor" as you. If they don't, you aren't "competing"—you are committing suicide by proxy. You are following a stranger who knows nothing about your debt or your overhead.

And the truly hilarious part? Imagine if the hotel you’re following is just as lost as you are. Imagine if they are actually following you. It’s the blind leading the blind off a cliff, both wondering why they aren't making any money.

You need to stop looking at them and start looking at your own sales performance and your own cost profile. Don’t let your strategy be dictated by the guy down the road who might be three weeks away from bankruptcy himself.

Buuuttt... there is one specific type of hotel that you can (and should) always copy. In fact, it’s actually a really good idea to do so. But that’s a conversation—and an article—for another time. 😊

---

Disclaimer: All thoughts and insights in this article are my own. I use AI to tidy up the grammar and make it more enjoyable to read.