There are several metrics that hotel owners and operators should know about as they attempt to break down their hotel’s performance. In this article, we will discuss RevPAR, one of these metrics.
RevPAR is shorthand for revenue per available room. Analyzing it goes one step further than calculating average daily rate and occupancy rate. RevPAR is one of the main KPIs in the hotel industry, and probably one of the most interesting ones.
What it reflects is a hotel’s ability to fill available rooms at an average rate. Don’t be under the impression, though, that a hotel’s RevPAR increasing always means greater profit for the hotel. That is not always the case. If a hotel’s RevPAR goes up, that means the ADR or Occ is increasing.
If you have better RevPAR, that means your hotel is performing better. That doesn’t mean it is performing perfectly, though. To fully assess how your hotel is doing, you’ll need to compare your results with your Competitive Set.
RevPAR is one of the best KPIs for hotel owners to study. The size of the hotel plays against the RevPAR because the Occupancy penalizes it. This means that smaller hotels can get better RevPAR easily
Let’s say that a hotel has a lower RevPAR. It still has more rooms that earn higher revenues, though. You may also have rooms in the building, like penthouse suites, that compensate for what you’re losing by not booking lower-quality rooms or having ones unavailable for rent.
In this scenario, your RevPAR is lower, but it doesn’t mean your hotel’s overall performance is poorer than you would like. Like many other financial metrics in the hospitality industry, RevPAR works best if you consider it a comparison tool.
As a hotel owner, you can look at the building’s RevPAR stats over time to see if they change. You can observe those deviations through the perspective of evolving consumer preferences, seasonal changes, or whatever else you determine is causing them.
There’s one other way you might use RevPAR, though. You can look at your building’s RevPAR and put it up against other nearby hotels that are your closest competitors. These can be indicators of how one hotel is performing against another. Be mindful, though, that the financial performance of your hotel revealed by RevPAR is limited to revenue. It does not take your expenses into account. Those can change your hotel’s financial outlook significantly in some cases.
At this point, you’re probably wondering how to calculate RevPAR. There are actually two ways to do it, and there are formulas for each of them.
The first way to calculate RevPAR is to take the total amount of revenue you’re making through room rent and divide it by the total number of rooms that your hotel has available to be rented.
For this formula, your RevPAR = total room revenue ÷ number of rooms available.
The second way to get your hotel’s RevPAR is to take your revenue’s average daily rate and multiply it by the occupancy rate. The result of doing so will be exactly the same, regardless of which formula you use.
In this case, you get RevPAR this way: occupancy rate x average daily rate.
In either case, you will get a dollar amount as the answer. This amount will be theoretically lower than the average daily rate. This is because a hotel can’t be occupied by more than 100%.
Now, let’s look at an example of RevPAR in action to make sure you know how to do it. We’ll say that your hotel has 120 rooms in total. The average occupancy rate is 88%. The average room rate is $100 per nightly stay. As the hotel’s owner, you want to know its RevPAR. Once you have this information, you can accurately assess how your business is performing.
The formula will be $100 per night x 88%. That equals $88. Your hotel’s RevPAR is $88 per day.
It would also be possible in this scenario to assess your hotel’s monthly or quarterly RevPAR.
If you look at RevPAR as a hotel owner, it can be a useful metric, but it has its limitations. There are four main ones, which we’ll list right now.
RevPAR only considers the revenue of the room, not the rest of the income.
RevPAR only focuses on revenue, not considering the rest of the costs.
RevPAR does not take into account any distribution costs.
Finally, the size of the hotel plays against the RevPAR. This is because the occupancy penalizes it. This allows smaller hotels to more easily get better RevPAR than larger ones.
There are ways around these limitations, though. The best way of solving these four problems is to look at additional metrics that are known to hotel industry experts. These include Net RevPAR, TrevPAR, and GOPPar.
Knowing about some additional metrics is always useful to you as a hotel owner. They can give you a more complete picture of your building’s performance. Let’s look at a few of the other ones you can potentially calculate.
GOPPAR
Your hotel’s GOPPAR is an industry metric that measures your hotel’s overall financial performance. It stands for gross operating profit per available room.
If you are looking for a general picture of your hotel’s performance, you’ll want to make this calculation. You can use the outcome to evaluate a hotel’s revenue-generating potential. This is a vital indicator of your hotel’s financial health.
The formula for getting it is:
Revenue from rooms - operating expenses ÷ number of available rooms in a period
GOPPAR can vary dramatically across different hotels when various factors come into play. For instance, you’ll often see luxury hotels have a higher GOPPAR because of higher occupancy levels and higher average daily rates. Hotels in major cities may have a higher GOPPAR than ones in more rural areas. You can attribute this to higher average daily rates and higher demand.
Net RevPAR
Net RevPAR is the net revenue per available room in your hotel. You can calculate it by subtracting direct customer acquisition costs, like loyalty expenses, transaction fees, and commissions, from room revenue.
Net RevPAR is the evolution of RevPAR, where distribution costs are considered. That means hotel owners would deduct the costs of bringing business (room sales) to their hotel.
Net RevPAR= (Room revenue-distribution costs)/ nº rooms available
It’s important because it is not the same as a direct sale through an intermediate. This metric has become very relevant in the hotel industry.
The issue is that many hotels don't have distribution costs under control.
Types of distribution costs can include:
1. Imposed costs: taxes
2. Direct costs: all the ones related to the customers' bookings: commissions (OTAs, TOs, TAs, etc), booking fees from the GDS and channel manager, and commissions from the credit card companies.
3. Indirect costs: these are the costs that can't be linked directly to any specific reservation. These are more general costs: digital marketing costs, bids in metasearch, salaries of the commercial team of the hotel, and technological costs (monthly fee for the use of tech tools, etc).
The tendency nowadays is to go for The Total Revenue. For that purpose, Net RevPAR, TrevPAR and GOPPAR are key.
TrevPAR
TrevPAR means total revenue per available room. It calculates the property’s total revenue across all outlets. Those will include things like any onsite restaurants, your hotel’s pool, or your onsite spa. The formula to get it is:
Total revenue ÷ Number of available rooms
The best time to use TrevPAR is if you’re a hotel owner, accountant, or general manager who wants to get a high-level view of your property’s performance. Take care when you use this metric, though. You are not able to isolate revenue streams if you utilize this formula, so you are only getting part of the picture.
Although we’ve spoken about RevPAR’s limitations as a metric showing how your hotel is doing, it’s still generally a good idea as a hotel owner to try to drive this number higher. To that end, you should know about some techniques that might help you.
Decrease Your Hotel’s Cancellation Rate
One thing you can do to improve your hotel’s RevPAR is to try to drive down your room cancellation rate. If this rate is high, it negatively impacts your hotel’s RevPAR.
To keep cancellation rates lower, add some more non-refundable rates to your existing ones. You can do this instead of changing your cancellation policies. This measure drives up your occupancy. In turn, this causes your RevPAR to rise.
Deliver an Excellent Customer Experience
This may sound obvious, but enhancing the customer experience however you can is a sure way to raise your RevPAR. That often means doing things like installing more comfortable mattresses in the rooms, improving the quality of your Wi-Fi, or allowing your guests access to premium movie channels.
You might also make rooms available for corporate meetings. Partnering with a company like Surf Office is a way you can do that. If you make your hotel more attractive to business travelers, you can potentially tap into an underserved market.
Make Sure to Emphasize Direct Bookings
Hotels get a lot of their guests through OTAs. This is useful, but OTAs also charge a commission. This reduces the total revenue the hotel receives.
If you can focus more on hotel website sales, that should always be a goal. You need to figure out how to get website visitors to become your hotel’s guests. Any way you can make site navigation easier and your website copy more compelling, do so.
If you can gradually increase the number of your direct bookings through your website, you will depend less on the indirect sales that come your way through OTAs.
Balance the Occupancy Rate and ADR
Some hotels decide to lower rates to reach their full occupancy. Maintaining a constant ADR is not as efficient as having a flexible one. Let’s say there are 10 rooms available in your hotel, and you decide to sell them for $100 each.
If your ADR is constant, you would have 100% occupancy. You would have a constant ADR of $100. You would have a profit of $1,000 in this scenario.
If you implement a flexible ADR, though, you would still have 100% occupancy. You might have five rooms priced at $100 each, while you could price the other five at $150 each. In this situation, your total profit would be $1,250.
Looking at it this way, it’s easy to see why you should at least consider having a flexible ADR in place as a way of changing your hotel’s RevPAR.
If your ADR is higher, then your RevPAR is as well. That doesn’t mean you should raise your hotel’s room rates until your potential customers can no longer afford them, though.
Adjusting your hotel’s room rates accounting for demand can help you in this area. If you change your rates depending on factors like what season it is or what day of the week it is, that can help your RevPAR.
What you will want to do is analyze market changes. You can find tools these days that will create the analytics you need to change your daily prices in a way that your customers will still find acceptable.
You can also offer different rates to various customer segments, such as business travelers and families. Again, you will need to study the analytics to determine the right price point for different travelers who might like to stay at your hotel.
One additional thing you can do is to analyze competing price strategies. Presumably, you will have nearby hotels with which you are competing. The right analytic tools will let you monitor all competing prices in the same place. Then, you can figure out the right price for each room category.
RevPAR is a formula that has its limitations, but it also has several legitimate uses. Once you understand how to calculate it using one of the methods we showed, you can use it as one of the metrics that help you implement your hotel’s policies moving forward.
With that in mind, let’s talk about dynamic hotel pricing. As a hotel owner, you should know about this strategy and when to employ it.
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