Can Revenue Management Resolve Conflict between GOP PAR and REV PAR as Hotel Performance Indicator?
By Ahmed Mahmoud , Founder of Revenueyourhotel.com
Far in the past for the hotel industry analysis, there were two simple classic indicators used to measure the hotel performance: average room rate and % of occupancy. Then, in the 80s, yield management or "profitability management" started to be the main indicator, because it reflected how efficient the hotelier can manage occupancy and price at the same time, depending on demand.
Larkspur company began using GOPPAR as primarily a measurement tool to analyze the flow-through as it's one of the benchmarking tools to analyze the company performance against the competitors and even within the company regions, across its brands and compared to budget.
Larkspur found that GOPPAR assists in analyzing the results of cost-saving measures. Analyzing not only how the savings flow through, but how well the company can sustain them over time, even when market conditions improve.
From San Francisco to European cities, by late 2009 and early 2010 the GOP PAR indicator received the same wide exposure as REV PAR in the current analysis of the market. This became especially true when the term began to appear in some of the hotel news magazines.
The term, now widely recognized globally, it is about profit management not revenue management. Since it indicates gross operating profit per available room, it shows how to get the most profit for a room. So there is a cost saving involved with the indicator.
Some analysts have gone so far as to say that profit management ought to replace revenue management in hotels where we are not supporting that theory. Although there is nothing inherently wrong with tailoring a management strategy to maximize profit; in fact, this is the ultimate goal of any management strategy.
Let's clarify, can GOP PAR be an alternative to widely the used REV PAR? What are advantages and disadvantages to each? What are the changes in the hospitality industry analysis?
1 - Rev PAR
RevPar or revenue per available room is a performance metric in the hotel industry that is calculated by dividing a hotel's total guestroom revenue by the room count and the number of days in the period being measured
REVPAR's formula looks like this:
- ADR (Average daily rate) x Hotel occupancy = REVPAR
- Ex. $100 (ADR) x 50% (Occupancy) = $50 (REVPAR)
- Or more precisely: REV PAR = total room revenue/total available rooms
REV PAR analysis
A. REV PAR is covered in the fact that the hotel, which corresponds to its market REV PAR, is not necessarily profitable. REV PAR does not reflect mutual influence between Room's department and F&B.
B. In hotels Rev PAR is accepted differently on how to take into account no-show status of booking, early departures, in house extend and penalties for last minute cancellations. Some hotels consider a share of such incomes at REV PAR calculation since its income calculated as room revenue, others classify these incomes as "other incomes", the third consider them at calculation of the total room's profit, but do not consider at calculation of average tariffs.
All this complicates any comparison between hotels. Certainly, supervision for REV PAR levels of one hotel in time period under condition of stable indicators allows following up its changes and growth of its market share.
C. REV PAR does not consider cost of sale of room (i.e. cost of the distribution channel - commission fee, payments to GDS). Actually, room sold for 100$ through the channel with 20 % commission will affect on REV PAR positively while room sold directly to the client for 90$ is more profitable for hotel. Therefore, at the big share of sales through distribution REV PAR of the hotel can be up to standard, but profitability not at all.
D. RevPAR is just one piece of the performance puzzle. The measurement of successful revenue optimization must include growth, decline and actual fair market share and GOPPAR. Depending on the hotel and the niche, ancillary spending for capturing a guest's Wallet Share makes a big difference to your bottom line.
2 - GOP PAR
GOPPAR, or gross operating profit per available room, is defined as total gross operating profit (GOP) per available room per day, where GOP is equal to total revenue less the total departmental and operating expenses.
- GOPPAR = G.O.P. (gross operating profit) / Available Rooms
In GOP PAR, the formula takes all factors into consideration - it is not only takes incomes, but also expenses, more and above the analysis on GOP PAR considers also growth of variable expenses at increase of the turnover (for room these expenses are for housekeeping, linen washing, the electricity power etc.), and the additional income taken from a room's sale (F&B incomes, laundry, telecommunication service, transportation and others), together with cost of distribution channels. For example, if there was a decision taken to increase commission fee for a certain distribution channel, the GOP PAR indicator will reflect it at once, but not REV PAR.
Also it will be taken into account if the hotel goes on essential discounts for corporate clients who increase sales in F&B services and in addition take the conference areas.
GOP PAR takes into consideration all incomes of the hotel, and this allows comparing large and small hotels, hotels with a various share and volume of a profit from F&B department and additional services.
After so much research GOP PAR doesn't account for many aspects of hotel operations that most owners and operators will recognize as truly important KPI or as profit management trend. Yes, in certain situations and for some hotels higher occupancy implies a higher ration of expenses to revenue. But it also guarantees more individual guest impressions of the hotel, which can translate to more future bookings.
Higher occupancy also usually correlates to higher ancillary sales, including food and beverage, retail, spa services, in-room F&B, Golf, among others. Granted, many ancillary revenue sources carry a higher cost of sales that hotel rooms, but under the right circumstances, the amount a guest might spend on ancillaries could exceed the room rate itself, as we often saw during the recession.
GOPPAR does not take into consideration the revenue mix of the hotel. So it does not allow an accurate evaluation of the room revenue generated. It is however a good key performance indicator for the efficiency and effectiveness of your hotel operations. It demonstrates the profitability and value of the property as a whole.
After all, GOP PAR is a good internal indicator for independent hotel, or a hotel chain or the company. Its dynamics allows tracing your own activity and its results, and this means you will be able to search for the reasons to correct wrong actions, to analyze success or failure of the innovations and carried out investments.
3 - GOP PAR or REV PAR
The difference between REV PAR and GOP PAR consists in the time period, but there is a strong statistical link of 98.4% between revPAR and profitability - actions taken to increase revPAR will translate into improved profit.
Occupancy and the average rate are counted up daily, and also monthly and annually. Thus, REV PAR remains an indicator which operatively, daily, measures a hotel profile in the market, reflects its interaction with the market, its market share, becomes a base for comparison with competitors and with the general market indicators.
The total operational profit is usually traced monthly, quarterly and annually; accordingly time periods are the same for which it is possible to receive GOP PAR.
Remember that Revenue management alone doesn't create maximum performance. Today, revenue optimization and driving GOPPAR are equally critical to your success, but the belief that as hotel occupancy goes up so should rate is a myth that has cost many hotel owners and operators a lot of money.
Profit management is a good idea, but it rests too firmly upon this assumption. Revenue management remains the best way to maximise profits for the vast majority of hotels, and RevPAR remains the best measurement for revenue management performance. And to make sure that your property's revenue management tactics are the most effective ones possible, it is important to continually search for innovation and embrace forward-thinking strategies, because good revenue management tactics will never be replaced, considering the below for revenue management strategy review:
- Are your restaurant(s), spa, golf course, laundry services and front-desk team reaping the benefits of your revenue management strategies?
- Is your revenue strategy considering the cost of marketing and other channel related expenses?
- Do you offer easy ways for your customers to purchase and increase their spending?
- Is your focus on top line or bottom line growth?
- Does your team understand what is customer Wallet Share and its role in driving revenues?
- Do you create true demand forecasting?
- Does your hotel management team understand the difference between RevPAR and GOPAR and the hotel's performance in the market?
If you answer no to any of these you are probably leaving money on the table. And it's best to remember that an Empty Room Doesn't Generate revenue no matter how you indicate your hotel performance.