Profit tree: what it is and what to do instead

The idea worth keeping

Not as boxes to fill, but as questions that fall out of the maths of the goal:

• Did revenue or cost move, and by how much?
• What is the unit this business sells (a room night, a seat, a member), and what is its price and volume?
• Which costs grow with volume and which do not?
• What measure do managers in this industry watch every week?

Why reaching for it fails in an interview

• It is generic. "Revenue is price times volume, costs are fixed and variable" is the same for a hotel and a steel mill, so it shows no grasp of either.
• It misses the driver that matters. The generic tree has no branch for the thing that often moves profit in a specific business, such as booking commissions in hotels.
• It sounds rehearsed. Reciting all branches before looking at the numbers sounds like a checklist and wastes the first minutes.

What to do instead: a worked case

1. 1

   Pin the question

   Find what cut profit by a fifth when rooms sold and room prices stayed the same.

2. 2

   Write the maths of the goal

   • Room revenue = rooms x 365 x occupancy x average daily rate
   • Profit = room revenue + other revenue minus booking commissions minus staff, energy and property costs
3. 3

   Use what you know about the business

   • Hotels watch revenue per available room (RevPAR), which is occupancy x average daily rate. Here both held, so room revenue did not move.
   • Rooms booked through online travel agents carry a commission on every booking; rooms booked direct do not.
   • Most hotel costs are fixed in the short run, so a profit fall with flat revenue usually comes from a cost that grows with bookings, such as commissions.

   The structure that falls out of it

   • Room revenue (flat: check quickly)
     • Occupancy
     • Average daily rate
   • Cost of getting the booking
     • Share of rooms booked through travel agents
     • Commission rate
   • Cost of running the hotel
     • Staff
     • Energy
     • Property

   Hypothesis: With revenue flat, I expect the cost of getting bookings has grown, because that is the cost that moves with how guests book.

4. 4

   Find the facts that decide it

   • Room revenue: 10 hotels x 200 rooms = 2,000 rooms; 80% occupancy is 1,600 rooms a night, x 365 = 584,000 room nights, at 100 a night = 58.4 million, the same as last year.
   • The share booked through travel agents rose from 30% to 50% at an 18% commission: 0.3 x 58.4 x 0.18 is about 3.15 million last year, and 0.5 x 58.4 x 0.18 is about 5.26 million this year, an extra 2.1 million. Profit fell from 10.5 million to 8.4 million, also 2.1 million.
5. 5

   Say so what

   The whole 2.1 million fall in profit comes from more guests booking through travel agents. Win back direct bookings with member rates and a better booking site, aiming to return to a 30% agent share. The risk is losing guests who only find the hotels through agents, so cut agent reliance in the busiest weeks first.

Build the acumen behind it

The worked case used two things a list cannot give you: the five moves, and knowing how this kind of business makes money. These pages teach both.