Does your Wellness Operation need a profit massage?

Why Wellness?

Are you making the mistake of considering rooms and food and beverage as the only major sources of revenue.

If you are a resort hotel, this is even more of a survival question.

In this post pandemic era, wellness is not a "good to have" - it is a must.

I will lay out a case for wellness as a powerful catalyst (pun intended!) in two critical areas:

• Additional revenue generation in wellness
• Additional rooms and food and beverage revenue generation as well

This Blog post will cover:

Wellness or spa (as it is more commonly known) is the popular panacea for the modern day busy, stressed out business executive.

It literally massages the individual back to a state of detox. However, how well does wellness as a project and investment measure up?

Before we consider profitability and justify return on investment on a spa project in a hotel, let us briefly look at why a spa as an investment is to be considered.

A spa in a hotel is an alternate source of revenue not just from its own operation but also as a facility, which generates major rooms and convention business.

This is not the same model as a standalone spa that has to rely entirely on revenue generated through its operation. This by itself makes a spa within a hotel unique.

As a facility that generates additional revenue for the rooms and catering departments, the spa contributes to the bottom line of the hotel or resort where it is located.

Moreover, having a spa in the premises is considered a good positional strategy.

Guests patronizing the hotel or resort would rather have a spa within the premises than go looking for a standalone facility. In most instances, price is not a factor determining this decision but convenience and proximity are.

Factors affecting Wellness Operation / Spa Performance 

A spa within a hotel as a revenue and profit center depends on some key factors for success in its performance.

First, whether the property is a city hotel or a resort matters.

Resorts by nature cater to the leisure market segment.  Thus a spa is almost a necessity amongst other health, fitness and recreation facilities on offer.

Second, the dominant revenue market segment plays a huge part, in particular for a city hotel.

In a primarily corporate business driven hotel, a spa is a huge opportunity to augment revenue.

This is because there is captive demand from business executives who will want to detoxify themselves with a spa treatment after their business day or meeting is completed.

As business executives moreover, spending capability is also ensured.

Third, convention space available in the hotel or resort matters.

Convention space refers to the size of meeting rooms, existence of a grand ballroom able to seat more than 500 or even 1000 and so forth. 

In particular, the size of the grand ballroom may well drive rooms business also. This is because more and more businesses are having their retreats for brainstorming and strategizing in convention driven hotels or resorts where the spa is one of the key places to unwind.

Fourth, average length of stay of guests in the hotel or resort will determine volume.

The longer the hotel average length of stays the higher the chances of guests going for a spa treatment.

Wellness Operation Project Investment

Before embarking on the construction of a Spa in the hotel premises a feasibility study will need to be undertaken. This is to gauge the demand for spa and wellness treatments amongst the hotel's customers.

Factors stated in the earlier paragraph will play a key role as will others like profile of the customers (demographics, gender, age), spending capability, existence of standalone spas in the area, extent of non-resident demand for the spa and so forth.

A good spa facility is built on the foundation of its treatment rooms.

These are the primary sources of revenue for the spa.

The capacity of the spa in terms of number of treatment rooms is key to the generation of revenue.

At peak occupancy in the hotel or resort, the spa should be able to optimize its capacity.

From the point of view of a return on investment, 10 to 12% can be deemed to be an acceptable percentage.

This basically means that the Net Operating Income is 10% to 12% of the Investment cost of the spa project. This is at the higher end.

Many spas operate at much lower returns.

However, one must remember that a spa built inside a hotel generates revenues in other areas as well.

In fact, there are hotels whose occupancies are literally driven by the presence of the spa facility within the premises.

If we considered the number of rooms occupied and the resultant revenue or take into account the meetings or conventions booked, the return on investment will definitely be much greater.

This actually emphasizes the attraction factor of a spa inside a hotel as a multi dimensional revenue source.

That is definitely a project worth considering.

Wellness Operation Metrics to Watch

Two critical wellness / spa metrics to watch are:

1. Treatment Room Utilization % and
2. Revenue/Profit per Treatment Room.

Treatment Room Utilization % is like the occupancy factor of a hotel rooms business. It determines how many treatment rooms were sold compared to the capacity.

Most hotel spas, according to a recent report published by STR Global run at a 33% treatment room utilization rate. At such a utilization factor (just one third of capacity), margins will be very low and sometimes take the spa into the red.

But Spa Treatment Rooms are unique compared to hotel rooms. 

Treatment rooms can be occupied multiple times per day unlike a hotel room that can only be occupied once.

So, the turnover factor of treatment rooms is extremely important. Most massage treatments range between 1 and 1.5 hours although there are ones, which go up to three or four hours.

Assuming an average of one hour for treatments, if a spa is open for 10 hours in a day, potentially a turnover of about 8 times (removing time for preparing the treatment room for a new guest) is possible. This is why the treatment room utilization % is such a key metric.

If the spa can turnover as many times close to capacity, revenue becomes incremental.

The other metric that is very important is the Revenue per Treatment Room. 

This basically measures the averaged out revenue from the various treatments carried out in the spa according to the number of treatment rooms.

This is the result of the sales mix in a manner of speaking.

Pricing of the various treatments is very critical.

A spa could be turning over its treatment rooms many times, however, if the pricing of its treatments is done incorrectly (for instance, treatments are under priced), Revenue per Treatment Room will suffer.

This is where Profit per Treatment Room (the alter ego of Revenue per Treatment Room) becomes such an important index of performance for a spa.

This takes into account all the expenses of the spa operation that includes cost of goods sold, labor and other operation costs.

 A spa operation is very labor intensive and margins are low.

Profit is driven by volume and capacity utilization.

As a result Treatment Rooms Utilization % as well as Profit per Treatment Room are key performance indicators (KPIs) for the spa operation.

Wellness Operation Profitability

The spa operation is a high volume low margin operation.

Once fixed costs are taken care of, increased turnover of the treatment rooms will result in incremental revenues and profitability.

Thus keeping volumes above the critical mass is paramount.

Spa treatment offerings are generally planned over a range of plain vanilla massages on the one hand all the way to elaborate, ritual oriented treatments on the other. These latter treatments many times can be spread over a full day with morning and afternoon sessions. 

These are the treatments which, when priced right enhance the bottom line of the spa operation.

These are niched segments even within the regular spa revenue sources.

Spa treatment prices can average around $75 for an hour and can climb up to $100 to $150 if the elaborate treatments are sold in enough volume.

This amounts to anything between 50% and 75% of an Average Daily Rate for a room occupied for a full day (assuming an Average Daily Rate of $200). That definitely is a good proposition.

But again, pricing is key and very closely linked to the value perceived from the treatments.

Labor Costs play a very important role in the spa operation and profitability. This is because these are the costs, which actually provide the service.

Therapist salaries and related costs are factors that have to be considered while pricing the treatments.

Many spas do operate with outsourced therapists who are paid on a commission basis. This is obviously to avoid the benefits and related costs of hiring an employee.

However, this is a tricky thing since getting an outsourced therapist to buy into the culture of the spa and the overall hotel or resort within which it is located is not a easy thing to achieve.

At the end of the day, the perception in the mind of the guest will be about the entire experience. 

An outsourced therapist embracing the culture wholeheartedly will play a huge part.

Wellness Operation Retail - A Way Out?

Retail merchandising of spa products like oils, creams, fragrances and so forth actually used in spa treatments (and many unused ones added to that list) has become big business owing to its "premium value" connotations.

This however depends a lot on how the spa is positioned in the market.

If it is considered a high value spa, its retail products will draw more patronage and boost overall profitability. This is because spa retail products have a much greater margin than treatments (there are no processing costs, these are finished products).

Here again pricing is key.

Moreover, the retail offerings promote the spa per se through word of mouth.

The Verdict on Wellness Operation

A spa facility within a hotel or resort is indeed a good addition to the facilities that the property offers.

It can enhance rooms and catering revenue apart from its own operation.

However, this will depend upon the quality of the facility itself and how well the spa is positioned in the market it operates in.

Repeat clientele is paramount in a spa business. Measures to confirm future bookings before the end of the current treatment session will drive incremental revenues and profits.

The wellness of the project can be ensured through a well thought out and executed spa project within the hotel or resort which creates synergies with the facilities that the property has to offer.

This is the ultimate strategy that will massage the profit.

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Strategies you can apply right now

Go back to your hotel Spa Profit and Loss Statement. 

See how Treatment Room Utilization % and Revenue/Profit per Treatment Room for a current period compares to the previous period. 

Use the Treatment Room Utilization % to find out how well you are utilizing the spa treatment room capacity asset.

Select treatment sessions where you think you can push up sales quantity to boost revenue and profit margin.

Be aware of price resistance challenges when you embark on increasing prices. As a general rule, price changes should only be made when actual and/or perceived value has become better for the customer. When value (even perceived value) falls below price, you may lose the customer forever.

What is your strategy going forward?

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Your Takeaways

What were the takeaways for you from the blog post? 

Are you leveraging the Revenue/Profit per Treatment Room in your spa Profit and Loss Statement?

What topics would you like to see as future blog posts?

Tell us in the comments section below.

This article by the author was first published for www.hotelexecutive.com. It is published here with permission from them.

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