Fixed vs Variable Costs: Why a Full Hotel Can Still Lose Money
Beginner8 min readFor students & players
A hotel can be 100% booked and still lose money every single day. That sounds impossible until you split its costs into two groups: the ones that are there whether guests come or not, and the ones that grow with every guest.
What are fixed costs?
Fixed costs stay the same no matter how much you sell. In a hotel that means staff wages, building upkeep, insurance and property tax. You pay them on a quiet Tuesday in winter exactly as you do on a full Saturday in summer.
Fixed does not mean "forever". If you hire another receptionist, your fixed costs go up. It means they do not change with the number of guests tonight.
What are variable costs?
Variable costs rise and fall with sales. Every meal a restaurant serves needs ingredients; every guest uses a little electricity, soap and laundry. No guests, no variable cost.
The money left from a sale after its variable cost is called the contribution: it is what that sale contributes towards paying the fixed costs. Once the fixed costs are covered, contribution becomes profit.
A worked example: a small hotel
Here is the starting hotel in PlayLobbyboss, a free hotel tycoon game, with its real daily numbers:
| Item | Per day | Type |
|---|---|---|
| 4 Standard rooms at $80, all booked | +$320 | Revenue |
| Receptionist wage | −$150 | Fixed |
| Lobby upkeep | −$30 | Fixed |
| Room upkeep (4 × $12) | −$48 | Fixed |
| Property tax (0.1% of a $47,000 hotel) | −$47 | Fixed |
| Profit | +$45 |
Almost every cost is fixed, so profit depends on filling rooms and on price. Earlier versions of the game started with only 2 rooms and a $220 receptionist: revenue of $160 against costs of $345 — a loss of $185 a day while fully booked. Same idea, wrong balance.
Why businesses with high fixed costs are risky — and rewarding
When most costs are fixed, every extra sale goes almost entirely to profit. That is good when business is strong. But when sales fall — a slow season, a new competitor — the costs do not fall with them. Economists call this operating leverage: high fixed costs magnify both gains and losses.
Hotels, airlines and software companies all have high operating leverage. A restaurant buying fresh ingredients every day has more variable costs, so it is hurt less by a quiet night.
- High fixed costs → big profits when full, big losses when empty.
- High variable costs → smaller swings, smaller margins.
- Cutting the wrong fixed cost (for example your only receptionist) can destroy revenue faster than it saves money.
🏨 Try it in the game
- Start a free hotel and open the Finance tab.
- Write down each cost and mark it fixed or variable.
- Open a restaurant later in the game and watch the "Facility ingredients" line: it moves with the number of visitors.
- Question: in winter fewer guests come. Which lines on your Finance tab change, and which do not?
Questions to check your understanding
- Name three fixed costs and two variable costs for a cinema.
- Why can cutting staff reduce profit instead of increasing it?
- A hotel’s fixed costs are $275 a day and each booked room brings $80. How many rooms must be booked each night to cover them?
FAQ
- Is rent a fixed or variable cost?
- Fixed: it is the same each month however much you sell.
- Are wages always fixed?
- Salaried staff are usually fixed costs. Hourly staff who only work when it is busy behave more like variable costs.
The game is a simplified model of running a hotel: it shows cause and effect, not real industry benchmarks.