The Merchant Model Effect on ADR and RevPAR
By Richard B. Evans, President of Revenue Report Card LLC & Author of “the Definitive Study of Vacation Rentals”
Creating ADR and RevPAR by combining reservation-sources that have their clients pay the hotel in full at check-in with those that accept payment directly from clients, removing commissions before they pay the hotel (net) is mixing apples and oranges.
The case is best shown where one client pays the receptive operator $250 for one night and an OTA who requires the client to pay $250 for one night upon check-in directly to the hotel. For simplicities sake, let's assume each is charging the hotel a 25% commission.
The receptive operator sends a check or credit card payment for that night for $187.50
The On-Line Travel Agent has the client pay the hotel upon check-in for that night $250.00
The industry ADR standard calculation takes total Gross Reservation Revenues of $437.50 and divides that by 2 room nights occupied for an ADR of $218.75. Further, that same $437.50 is divided by total rooms available for sale. If we assume hotel occupancy, in this case, was 50% with a total of 4 rooms available for sale the RevPAR calculated by industry standard would be $109.38.
The hotel financial statement will show total Gross Reservation Revenues of $437.50. In the "Commission Expense" line item a total expense of $62.50 will be shown.
The Net Income in both cases is $375.00. Yet the Merchant Model in essence "hides" the expense component of the Merchant Model within the Gross Reservation Revenue line. The hotel executive never sees it.
One can only draw the conclusion then, when comparing your hotel to your competitive sets ADR and RevPAR that it is an imperfect science unless all 5 hotels have the exact same channel mix.
If we take a small step closer to a possible reality in Channel Mix the effect is as follows:
The statement above, entitled "ADR and RevPAR Compared to Competitive Set", we add an additional channel and hotels with 118 rooms available for sale. All hotels use the industry standard calculation and show ADR's of $330, Occupancy Percentages of 70 ½ % and RevPAR's of $232.
In the middle lower portion of the statement we see the amount collected by Your Hotel and the Competitive Set Hotels. All hotels show Gross Reservation Revenues of $10,000,000.
The only change separating you from your competitive set is the channel mix and the volumes received through reservation-sources that pay the hotel using the Merchant Model and those who have clients pay the hotel in full directly.
The actual ADR of your hotel is $424.47 compared to the industry standard reported of $330.00. A $94.77 ADR variance.
The actual ADR for your competitive set is $361.64 compared to the industry standard reported of $330.00. A $31.64 ADR variance.
Your actual ADR of $424.47 compared to your competitive sets ADR of $361.64 shows a $62.83 ADR variance.
The industry standard shows your ADR to be $330 and your competitive set ADR to be $330. This would show no variance between you and the competitive set and would lead you to believe that you were taking your fair market share. This of course is not the case at all.
The same comparisons can be made in the case of RevPAR which is used to determine and spread revenues over the entire asset (or hotel). All hotels are performing significantly better than that that is presented by the industry standard. If accuracy is the goal, the Merchant Model Effect must be taken into consideration.
Below we now show the difference that channel mix and the Merchant Model can make between you and your competitive set in profitability and the amount of cash deposited in the bank.
First and foremost, the difference is a material one.
This statement, based on industry standard analytics, would lead one to assume that your hotel is taking its fair market share. Yet when we take the Merchant Model into consideration we see that your competitive set is showing a higher profit and depositing additional funds of $600,000.
The Optimization Score is simply a calculation that takes the Merchant Model Effect into consideration and then provides a weighted factor that makes the scale used relevant to scoring that we all have become accustomed too in school and or successes achieved in graded operations. 90%-100% excellent, 80%-89% good, 70%-79% average, 60%-69% fair and 50%-59% requires improvement.
In essence the score shown is an optimization efficiency score.
Richard B Evans
President of Revenue Report Card LLC
Phone: (954) 290 - 3567