Is this a good business model?

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So I was hanging out with Scott, trying to soak up his business knowledge. Remember that he’s got that fancy diploma from Wharton. It’s so nice that he is willing to make time for me, a simple BananaMan. I tested him with a hypothetical, “if I were to become an entrepreneur, should I open a hostel or a hotel?” I expected him to answer that a hotel would be the better choice, but Scott rarely gives simple answers. Here is what he said…

“That’s an interesting question, but the answer truly is ‘it depends.’ You might think that a hotel would be a more profitable business venture than a hostel, and it certainly can be. Everything at a hotel is priced higher than a hostel, so why would you even consider opening or acquiring a hostel? You are likely to make less money, while essentially operating the same business, right? But this would be grossly over-simplifying the analysis.

“There are many other factors to consider, in fact, besides the average price per room or even revenue per guest. For example, a hostel will have far fewer amenities to maintain or services to offer than a well-appointed hotel. Property to build a hotel may simply cost more, particularly when you include the need for parking. Furnishings and fixtures are typically more expensive as well. You may have more management and staff with a hotel. In other words, once you consider the fully loaded Capex and operating cost of a hotel, higher room rates may not seem like such an advantage. Moreover, your occupancy rates will largely determine your profitability, given the high fixed costs of any lodging business model, so if you can figure out how to maintain high occupancy of either a hotel or hostel, you should have a profitable business.”

Ok, Mr. Smarty Pants. I can’t argue with any of that, but you still haven’t answered my question. (Actually, I didn’t say that to him, because that would be rude, so instead I said, “please, do go on, Scott.”)

“There are so many factors such as an available location, capital constraints, management experience, and local competition that would impact your choice of hotel versus hostel, and frankly I’m not sure how often an entrepreneur has been faced with such a choice; however, if you are looking for my personal opinion, humor me to answer your question another way. All other things being equal and with the knowledge that occupancy rates will determine your success or failure, would you rather try to fill expensive beds or more reasonably priced beds?”

So I guess what Scott was telling me that the business model for hostels of serving a community of travelers with shared accommodations at affordable prices can, in fact, not only be a profitable venture but also, under the right circumstances, a more successful business model than a hotel. Well that’s an interesting perspective.

Happy hostelling!