What is RevPAR in Hotel Industry?

RevPAR, or Revenue Per Available Room, is a hotel industry metric that measures a property's ability to generate revenue from available rooms. Calculated by multiplying the average daily room rate by the occupancy rate, RevPAR helps assess profitability and room utilization efficiency.

Why is RevPAR So Important?

RevPAR is important because it measures a hotel’s revenue efficiency by combining occupancy and average room rates into a single metric. This helps hotels optimize pricing strategies, assess performance relative to competitors, and make data-driven decisions for revenue growth and investment opportunities.

Here’s why RevAR is important for hotels:

1. Measures Revenue Efficiency: RevPAR helps hotels assess their ability to generate revenue from available rooms, highlighting whether they are optimizing their pricing and occupancy strategies.

2. Guides Pricing Strategies: By tracking RevPAR trends, hotels can make informed decisions about pricing adjustments based on demand, seasonality, and market competition, aiming to boost revenue.

3. Enables Benchmarking: Hotels can use RevPAR to compare their performance with competitors and industry standards, providing insights into market position and areas for improvement.

Informs Investment Decisions: Investors and stakeholders often look at RevPAR when evaluating a property’s profitability and potential for growth, as it demonstrates the effectiveness of revenue management strategies.

How to Calculate RevPAR in Hotel

For a given period, you can calculate hotel RevPar by multiplying the hotel’s average daily rate (ADR) by its occupancy rate, or by dividing total room revenue by the number of available rooms.:

The RevPAR calculation formula is:

RevPAR = ADR x Occupancy Rate

OR

RevPAR = Total Rooms Revenue /  Total Rooms Available During Period

To influence RevPAR, you can increase ADR and/or occupancy. In general, a higher ADR and occupancy rate means more revenue per available room. There’s a limit, however. At some point, the higher rate will reduce demand and push occupancy down. 

The way consumers respond to pricing is known as the price elasticity of demand. Hotel prices are fairly elastic, which means there are other factors that influence hotel demand curves: Income, geography, macro employment levels and hotel category also shape how rate changes occupancy rate (and thus RevPar). 

In other words, it's complicated. Sometimes, a higher ADR results in more bookings and a higher RevPAR. Like during periods of high demand, when inventory is constrained in the local market and consumers are far less price-sensitive. Luxury hotels also have more pricing power than budget hotels.  Even within luxury different types of hotels will command different rates based on attributes like amenities and reviews.  Similarly branded properties (all else equal) typically command higher RevPAR than independent boutique hotels (assuming it's with a strong brand).

To see how this plays out, let's consider a scenario. You’re the revenue manager at a four-star hotel in New York City. Business has been slow and so you're considering dropping your rates to increase occupancy. Your RevPar for the same period last year was $280 ($350 ADR * 80% occupancy) but you’ve been running 20% under year-over-year occupancy for the past 6 weeks. Your forecast for the next month shows a RevPar of $180 ($300 ADR * 60% occupancy). 

To close this revenue gap, you decide to drop your average rates to $250. Over the next week, bookings accelerate and forecasted occupancy goes up to 70%, which means RevPar is now $175 ($250 * 70%). 

Wait, what? 

Yep, you dropped your prices and now you're actually making a bit less money per available room than you were before. This might not seem like a big deal; more revenue is good, right? Wrong. You need to keep profitability in mind so that you don't drop rates to increase occupancy...and actually make less money because it costs a fixed amount of money to service each additional room.

As you can see, revenue management strategy is complex; you need to make sure that pricing decisions don’t inadvertently affect overall profitability. RevPar is one data point within a broader analysis. You must have a broad base from which to gather real, accurate insights on your hotel’s performance -- and which revenue strategy works best for a given period of time and for specific business goals.

Understanding the Different Types of RevPAR

To get more nuance from RevPar as a core hotel metric, consider its siblings: Net Revenue Per Available Room (NRevPar) and Total Revenue Per Available Room (TRevPar). These variations can help you maintain an accurate and useful analysis of your current revenue strategy.

NRevPAR (Net RevPAR)

NRevPAR, or Net Revenue Per Available Room, is a hotel metric that measures net room revenue per available room after deducting distribution costs, commissions, and other fees. NRevPAR offers a clearer view of a hotel's profitability by focusing on revenue remaining after expenses.

Here’s how to calculate a hotel’s NRevPar:

NRevPar = (Total Rooms Revenue - Related Distribution Costs) / Total Rooms Available

This metric could be calculated for a specific time period, channel or segment. For instance, you could track your net revenue from OTAs and then compare it to direct bookings. This is a helpful comparison, as direct bookings also have a distribution cost. From the technology required to handle direct bookings to performance marketing and other demands generation efforts, direct booking certainly isn’t free. 

NRevPar aligns revenue, marketing and management around profitable distribution. All things equal (such as demand and caliber of guest), inventory should be allocated to the lowest-cost channels first and then onwards based on the overall cost of each booking.

TRevPAR (Total RevPAR)

TRevPAR, or Total Revenue Per Available Room, is a hotel metric that measures total revenue generated per available room, including income from all sources like dining, events, and spa services, not just room revenue. TRevPAR provides a comprehensive view of a hotel’s revenue performance across all departments.

To get a more accurate picture of the hotel’s overall performance, use TRevPAR, which is the total revenue per available room. 

Here’s how to calculate TRevPAR:

TRevPAR = Total Revenue During a Period / Total Rooms Available

You can use this metric to see how well you were doing at generating incremental revenue from food and beverage and other on-site amenities. The higher the number, the more money you are capturing from each guest. And if TRevPAR is trending lower, it's time to do a deep dive and investigate the root cause.

How to Increase RevPAR at Your Hotel

There are two ways to increase your hotel’s RevPAR: Increase your room rates (higher ADR) or put more heads in beds (higher occupancy %).

As we saw earlier, there's a delicate balance at play. If you increase your rates too much, you risk lower occupancy. If you focus on occupancy only, you'll likely need to lower your rates. Here are some tactics to help you maintain this balance.

Ultimately the top way to improve RevPAR is by utilizing a revenue management system like BEONPRICE which can help you price rooms more efficiently and maximize the balance between occupancy and average daily rate.

Tactic 1: Increase RevPAR by Increasing ADR (Average Daily Rate)

You don't necessarily need to remodel your hotel operation to increase ADR, even minor (yet targeted) improvements to the guest experience can boost online review scores which help prospective guests justify paying more for your rooms relative to the competition.

Optimize your channel mix. Frequent data-driven channel optimization is a great way to boost ADR. Make it a habit to compare your average rates across your major booking channels so that you can focus on higher rate channels first. This comparison not only includes your OTAs and metasearch but also direct bookings. Use that comprehensive benchmark of channel performance to prioritize channels that deliver a higher ADR. For instance, if metasearch is performing well, you may want to reallocate Facebook ad budget to TripAdvisor. 

Upsell more. Are you doing enough to maximize revenue from every booking that you earn? Effective upselling is one of the most straightforward and impactful ways to increase average rates. Among the most effective upsell techniques is email marketing, which can be automated to send pre-arrival emails that entice guests to upgrade their experience. Each upgrade, whether sold prior to arrival or at the front desk, pushes your ADR up.

Tactic 2: Increase RevPAR by Increasing Occupancy

Adapt to demand. It's pretty easy to increase your rates when your market is busy. It's during those slow periods where you may want to focus more on your occupancy rate. Talk to your OTA market managers about running promotions. Build outreach campaigns targeted to specific segments, such as groups and corporates, that can efficiently fill rooms. Also, be sure to let automation amplify your efforts: revenue management systems like BEONPRICE will automatically make pricing decisions based on real-time market- and property-level data. Your prices will be based on the latest data and you can make adjustments as needed

Market to loyal guests. Your most loyal guests can bring your occupancy up (and are often less price-sensitive than a transient guest from an OTA). Nurture these relationships over time so that you stay top-of-mind. Then, when you’re looking at a less-than-desirable forecast, create a promotion for past guests. By focusing on this segment, you can put heads in beds without resorting to discounts on third-party channels.

Frequently Asked Questions

What is the Difference Between ADR and RevPAR?

The main difference between ADR (Average Daily Rate) and RevPAR (Revenue Per Available Room) is that ADR measures the average income per occupied room, while RevPAR considers both occupancy and room rates, reflecting total revenue per available room. RevPAR provides a more comprehensive view of revenue efficiency.

What is a Good RevPAR Number?

A good RevPAR number varies by market, but generally, it should cover operating costs and generate profit. A RevPAR that matches or exceeds a hotel’s average daily rate (ADR) is often considered strong, as it indicates high occupancy and pricing effectiveness. Comparing to industry benchmarks helps assess RevPAR quality.

Should RevPAR be High or Low?

RevPAR should be high, as a higher RevPAR indicates that a hotel is effectively filling rooms at profitable rates. A strong RevPAR reflects successful pricing and occupancy strategies, signaling good revenue performance and efficient use of available rooms.