Today I read an article in The Scotsman with the headline, ” Donald Trump’s Turnberry firm paid £50,000 by US Government for weekend visit.” It quoted a certain George Sorial, executive vice president and chief compliance counsel for the Trump Organization, as saying, “For United States government patronage, our hotels charge room rates only at cost and we do not profit from these stays.”
That perplexed me. How do you calculate the “cost” of a hotel room? I understand that a retailer who decides to sell you a watch for the price that retailer paid a wholesaler is selling you a watch “at cost.” As for a hotel room, I don’t get it.
I’m sure one could devise a formula that would take in all sorts of things: the cost of building the hotel, the cost of running the hotel (although you’d have to determine a definition of just what that means), and then somehow distribute that cost over all hotel rooms over, what? The supposed life of the hotel?
I was sharing my thoughts with my wife and she said, “It’s the rack rate that you see on the back of the door, which is always more than anyone ever seems to pay.” As always, she’s got a point.
I also thought of the concept of “sunk costs.” You’ve got that hotel room and if you can get any amount of money for it, that’s better than having it sit empty, which is what, I believe, often happens to the most expensive rooms and suites in a hotel (I know on occasion I’ve been upgraded to an “executive suite” for the cost of my “superior” room). From what I understand from the article, this particular golf resort has been operating in the red, so I would assume it has not been full all the time—at least not with people paying rates that support the operation.
So just what does it mean when someone says, “We only charge those rooms ‘at cost’?”