Average Daily Rate (ADR) and Occupancy Rate are two important key performance indicators for hoteliers. But the KPI that many consider being the most important of all is RevPAR (Revenue Per Available Room). A well-known metric throughout the hotel industry, RevPAR helps hoteliers measure a hotel’s performance.
There’s a problem with RevPAR though. As helpful as it is in illustrating growth, RevPAR doesn’t account for profit — and while growth and profit sometimes go hand in hand, this is not always the case. However, there are alternatives to RevPAR that can help hoteliers better measure profitability AND growth by taking into account several other factors — namely costs and occupancy rates.
Still, no matter which metric is used, the goal stays the same: to increase revenue and profits. In this post, we will discuss the alternatives to RevPAR and offer strategies for increasing RevPAR — or GoPAR or ARPAR or whichever metric is ultimately preferred!
Two ways to calculate RevPAR:
- Rooms Revenue / Rooms Available
- Average Daily Rate x Occupancy Rate
RevPAR represents the revenue generated per available room (whether they are occupied or not). RevPAR not only helps hotels measure their own revenue generating performance and accurately price rooms, but since it is such a widely used metric, it can help hotels measure themselves against other properties or brands.
The Problem with RevPAR
As helpful as RevPAR can be in calculating revenue, there are several pitfalls to this key metric. For one, RevPAR does not take into account CPOR (costs per occupied room). Moreover, RevPAR does not account for any additional income the hotel generates from other departments such as catering, parking or the spa. Because RevPAR does not account for CPOR, it can’t be used as a key metric in measuring profitability – arguably the number one goal of most hotels.
While RevPAR’s industry popularity makes it easy to compare revenue figures across properties and brands, RevPAR misses the mark for hoteliers looking at profit, not just revenue. As a result, alternative metrics have emerged to help hoteliers measure their performance in terms of growth, profits and revenue.
TrevPAR Calculation: Total Revenue / Total Number of Rooms
TrevPAR stands for the total revenue per available room. TrevPAR takes into account total revenue of the property across all outlets (for example, the spa, the pool, restaurants, etc.). But, like RevPAR, TrevPAR fails to account for cost factors and occupancy rate. Similarly, while TrevPAR is a great measurement for accountants, hotel owners and general managers seeking a high-level view of profitability, TrevPAR is less beneficial for revenue managers because it does not enable them to isolate revenue streams.
Calculation: (ADR – variable costs per occupied room + additional revenue per occupied room) x Occupancy
ARPAR is adjusted revenue per available room. It is a great metric to measure the performance of revenue management and the overall effectiveness of the hotel’s pricing policy. ARPAR is similar to RevPAR, except that ARPAR takes into account revenue and costs per occupied room. Costs per occupied room that greatly influence ARPAR and hence profitability include cleaning, energy usage, water usage, internet and TV, supplies such as toiletries, etc. There are several costs that can be subtracted from the revenue generated by each occupied room, as reflected in the ARPAR formula.
Calculation: Gross operating profit / (per) available room
GOPPAR is gross operating profit per available room and is a helpful measurement for hotel owners looking for a general picture of their properties’ performance as it looks at all rooms regardless of if they are occupied or not. While GOPPAR is a strong indicator of performance across all revenue streams, it includes room variables, such as internet bills and hotel furniture costs, that hotel managers have little control over.
Improving RevPAR, GOPPAR, TrevPAR and ARPAR
Goals and job role will help hoteliers determine which metric (or combination of metrics) makes sense for them. Whatever the case, the goal remains the same: increase revenue and profits while decreasing costs.
- Understand demand patterns. Since hotel demand is essentially inelastic, it is important for hoteliers to thoroughly understand customer consumption patterns. By understanding demand patterns, hoteliers can then implement strategic pricing policies that allow them to charge more than their competitors and still fill rooms. Understanding demand also means that hoteliers don’t have to aggressively discount rooms during slow demand months (potentially eating into profits if costs outweigh revenue), since they will be covered by revenue brought
in during peak season.
- Deliver an exceptional customer experience. Charging more than the competitor might sound obvious, but the reality of it is something more elusive. Or maybe it’s not. Today, everything comes down to the customer experience. In a highly competitive market, customers expect a lot — so hotels that want to charge a premium must be skilled at service delivery. This means they must be able to offer a better hotel experience consistently and sustainably. Otherwise, the only other option is to build a better product, which means fancier spas, nicer furnishings, etc. — physical attributes that are static once implemented. To increase the average daily rate, hoteliers need to deliver consistent service across every outlet of the property. Demand, after all, drives ADR and that demand is generated though consistently meeting guest expectations because this triggers word-of-mouth referrals and repeat visits, maybe even loyal customers!
- Implement a length of stay requirement. For hoteliers that can implement it effectively, length of stay requirements can be such a successful tactic that entire revenue management strategies are created around it. There are several ways by which a hotelier can choose to implement a length of stay requirement. For example, a hotel may implement this requirement for any rooms sold through a certain channel such as Expedia. Or a hotel may choose to implement a length of stay requirement for certain promotional packages it is marketing or during a certain week in June when they know there is a large event in town. The applications are numerous, but the point is the same: Hoteliers can help control costs by limiting guest turnover, hence helping to drive profit.
- Consider predictive intelligence. An emerging trend in the hotel industry is the ability to leverage predictive intelligence technology to better understand guest behavior. Predictive intelligence gathers guest data — including behavior and activity — then creates aggregate models that help hoteliers deliver better, more personalized customer service.
- Implement a chat-enabled web collaboration tool. Guests today don’t like to pick up the phone, which poses a problem for hotels looking to deliver an exceptional guest experience. With a chat-enabled web app, however, hoteliers can engage with guests digitally and in real time. It’s a win for the consumer and for the hotelier, who is able to provide an instant answer or complete an instant booking all online, without having to pick up the phone.
- Be proactive, not reactive. It all goes back to the customer experience. Most hotels are reactive, which doesn’t help them create that “magic moment” when a customer is so delighted with the level of service they’ve received, that they go and tell all of their friends — and then come back time and time again. For instance, if it is raining out and a hotel staff member notices a guest headed to the door without an umbrella, the staff member may offer an umbrella to the unprepared guest. This is only possible, however, if the hotel is prepared and proactive about anticipating guests’ needs.
- Utilize automation software. Automation software such as property management systems, sales and catering software, customer relationship management and central reservation systems can all help hoteliers drastically improve efficiencies and deliver a better, more personalized experience.
Competition today is fierce and consumer demands can be hard to keep up with. With hotel automation software, however, hotels of every size and budget can improve RevPAR, ARPAR, or whichever metric they choose to measure their success! Similarly, automation software and the strategies discussed in this post can help increase gross operating profits and gross revenues, two important KPIs for measuring a management company’s success.
While delivering the level of service offered by the luxury hotels of the world may seem impossible, technology is the ultimate equalizer; offering even the smallest, most budget-conscious hotels the ability to deliver a level of customer service once only afforded by luxury budgets.
Hoteliers looking for ways to improve customer service and profits should consider the benefits of today’s cloud-based technology, most of which is able to integrate with other key hotel operating systems and provide a holistic property view.
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Topics: Property Management Systems (PMS)