In today’s highly competitive marketplace, the importance of internet bookings is uncontestable. OTAs spend billions of dollars optimizing their websites and improving their reach through SEO and SEM and it’s no surprise that they’ve become the preferred booking platform for most travelers today.
In such a scenario, revenue management strategies have played a huge role in helping hotels cover their operating expenses even during the off-peak seasons. Unfortunately, a number of hotels do not track the performance of individual channels – a critical step to ensuring maximum profitability.
This isn’t down to a lack of interest, but a lack of awareness of the various metrics available to revenue managers today. While indexes like Occupancy, ADR and the RevPAR are commonly used in the industry, in today’s highly unpredictable environment they don’t give managers a complete picture of the hotel’s performance.
Let’s take a look at some of the best metrics available for hoteliers today –
1. Revenue per available room (RevPAR):
RevPAR is the most commonly used index in all segments of today’s market. Calculated by dividing the total booking revenue generated by the total number of rooms, the RevPAR gives revenue managers an idea of the hotel’s overall revenue by combining Occupancy and ADR but it’s not the ideal index for properties today. Since it doesn’t account for costs like the CPOR (Cost per occupied room) and additional sources of revenue like the restaurant and bar, it doesn’t effectively track the hotel’s profitability.
2. Gross operating profit per available room (GOPPAR):
The GOPPAR is a better index than RevPAR because it accounts for other sources of revenue as well. Since it also accounts for expenses that may be fixed or variable, this metric gives revenue managers a clear picture of the hotel’s potential for profitability. The metric can also reflect the quality of management, efficiency and the hotel’s value. The GOPPAR may be calculated by dividing the gross operating profit by the total number of rooms available.
3. Market penetration index (MPI):
The MPI helps revenue managers determine their hotel’s share of the market set by comparing the property’s occupancy to that of the competitive set. Through dividing the hotel’s occupancy by the market occupancy expressed in percentages, managers can get an idea of the their establishment’s dominance in the marketplace – although the this does little when it comes to tracking performance as a whole.
4. Average rate index (ARI):
The ARI is similar to the MPI in that it enables hotels to determine their share of the market’s ADR as a whole. Determined by dividing the hotel’s ADR by the market’s ADR, the metric gives revenue managers an idea of how their property’s daily revenue compares to the competitive set. This allows managers to better recognize when prices need to be increased or decreased.
5. Revenue generation index (RGI):
With the revenue generation metric, hoteliers can derive a clear picture of how their property’s RevPAR compares to other hotels in the competitive set. Calculated by dividing the hotel’s RevPAR by the market RevPAR, a figure above 1 is ideal while anything below signifies that competing properties are performing better than the hotel. In combination with the ARI, the metric helps revenue managers decide the ideal rate for the market segment.
6. Adjusted revenue per available room (ARPAR):
Introduced by revenue management expert Ira Vouk, the ARPAR is by far one of the most efficient metrics for hoteliers to track their property’s overall performance. As the ARPAR accounts for CPOR and other sources of revenue, it provides managers with a clear picture of the hotel’s financial performance. ARPAR is calculated by subtracting the CPOR from each room before multiplying with occupancy and adding the total POS revenue.
Although it may sound counter-intuitive, focusing on just increasing occupancy is no guarantee for higher profitability in the future – hotels that slash their rates in order to boost occupancy are likely to suffer from lower profits compared to properties with robust revenue management like dynamic pricing strategies. Once you’ve implemented a revenue management strategy, the next step is to constantly track your hotel’s performance in order to ensure that your strategies are working!
Hotelogix is a unique, cloud-based, end-to-end, hospitality technology solution, built to seamlessly manage hotels, resorts, serviced apartments or multi-location hotel chains, by providing a single window to manage all hotel operations and bookings (online and offline). Hotelogix is currently used by properties in 100+ countries.
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