How to Calculate RevPAR and Improve Hotel Profitability
Anybody who's worked in the hospitality industry knows that we are prone to confusing terminology. Terms like CPOR, ADR, GSS, NOI, GOPPAR leaves hotel students dizzy studying for final exams. There's good news though, by the end of this article RevPAR will be a breeze.
RevPAR is the queen of all hotel management KPIs (key performance indicators) because it helps us compare different hotels apples to apples. If your hotel's occupancy is higher than the next property in your compset it may be because your rates were too low and vice versa. RevPAR or revenue per available room helps us understand performance by combining both occupancy and ADR (average daily rate).
Hoteliers love using RevPaR because it helps us understand in a single metric how we're doing relative to similar hotels when adjusting for number of rooms. When RevPAR is growing our hotel revenue is increasing; however, a rise in average room rate may actually not increase revenue if occupancy has fallen
In this article we'll show you how to calculate and interpret RevPAR with ease and this article is designed for both industry veterans and those who are newer to the hotel industry.
What is RevPAR in Hotel Revenue Management? (Revenue Per Available Room)
RevPAR is a straightforward hotel performance metric that tracks how much money a hotel is making on its rooms. It’s correlated directly with a hotel’s Average Daily Rate (ADR) and its Occupancy Rate.
For a given period, you can calculate hotel RevPar using these RevPAR formulas:
RevPAR = ADR x Occupancy Rate
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%).
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.
Grow Your Understanding 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.
This metric is total room revenue minus the cost of distribution. 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.
Many hotels aren't just places to sleep; guests can eat in a restaurant, enjoy happy hour at the bar, relax at the spa or book a tour at the concierge. 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 generator 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 Improve 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 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 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.