As the saying goes “What gets measured gets improved”. When it comes to Revenue Management measurements are extremely important as past performance analysis provides the base for future strategies. It is essential to understand that not all indicators are the same, some offer more surface-level information, while others deep dive into the business, but they all have their own use. The different indications combined tell the whole story of the business, which is vital for developing strategies and forecasts for the future.
- Occupancy rate: Number of rooms sold divided by number of rooms available. It measures the percentage of hotel bedrooms sold each day/week/month/year/day of week. This metric is useful to identify peak and troth periods, and booking patterns, and help with future pricing
- ADR (Average daily rate): The total room revenue divided by number of rooms sold. As the bedrooms sold for different prices on different dates, and different bedroom types have different pricing, ADR is a good metric to look at when analysing pricing patterns. Looking at the changes in the ARD helps with future pricing strategy development.
- RevPAR (Revenue per available room): Calculated by dividing the total room revenue by the total number of available rooms or by multiplying the occupancy rate with the ADR. This is the metric used to evaluate the success of the pricing strategy and room revenue management. Looking at occupancy or ADR alone can lead to false conclusions. If all rooms are sold, but the rate is low, or a high rate is achieved, but many rooms are unsold, the strategy is incorrect, but can appeal as success. On the other hand, RevPAR takes into account both of these metrics and gives a true picture of how successful the strategy was. It allows examination of the pricing strategy in place for the day/month or can even be broken down to room type, if the hotel has many different room type pricing in place that it warrants further examination.
- TrevPAR (RevPAR + ancillaries): It is calculated by dividing the total revenue by the number of available rooms. This metric is important as it looks at the complete income generated by the hotel. It helps to identify how other departments’ production compares to the hotel’s room revenue and RevPAR. It also helps with deciding which business to take and how it will affect the overall income. A bedroom rate which is £2 cheaper but has a £10 extra spend will lead to lower RevPAR, but higher TrevPAR and will provide more income to the business.
- GOPPAR (Gross operating profit (GOP) per available room): Dividing GOP by the available rooms gives a deeper picture of the state of the hotel’s financials. The profitability differs for each income channel, which means looking at only the income generated can lead to a lower profit generation. For example, a bedroom sold through an OTA (online travel agent) for £200 will lead to higher RevPAR, higher TrevPAR, but lower GOPPAR compared to the same bedroom being sold direct for £190. This is due to the commission paid to the OTA, which is taken into account when GOPPAR is analysed.
Bonus Metric:
- RevPASH (Revenue per available seat hour): This metric is used for hotels with restaurants. Calculated by dividing the revenue for each hour by the total seats available. This helps to identify key revenue-producing hours and allows restaurant managers to make informed decisions on which business to take at what time. Here is Boston University’s RevPASH Calculator which makes it easy to calculate it for your business.
Understanding what these metrics indicate and being able to use the information to derive underlying booking patterns, trends and opportunities are vital parts of revenue management. This deep knowledge of past performance allows the revenue manager to compare the hotel’s performance with the competitors. This is used to further analyse past strategies and identify successful tactics to incorporate into the current strategy/forecast/budget. It also allows the revenue manager to identify missed opportunities to take advantage of in future.
A great Revenue Management Strategy requires analysis of past patterns, critical evaluation of tactics used/missed and forecast of future trends. These KPIs shown here only provide the starting point for revenue management. Next week we will look at Benchmarking tools.
