Neither revPAR nor occupancy are ideal indicators of hotel profitability – it’s all about the ARPAR!
Revenue management strategies have been in use by the evolved brands for several years now, but with the industry diversifying and whole new segments of travelers emerging, independent properties are also experiencing a growing need for such strategies.
By Kiran Sunny, Content
There's no denying that room sales is the life-source of most hospitality businesses. But while establishing high occupancy is indeed important, it shouldn't be the sole focus of a modern hotel. When considering profitability, concentrating on maximizing occupancy does not always contribute more to the bottom-line. In fact, even occupancy reports cannot portray a clear picture of a property's performance in today's dynamic market.
Why is revenue management necessary?
Travelling trends change dramatically with time, making them impossible to predict. With millennials growing in numbers and attaining more spending power, hospitality began to witness new segments of travelers emerge. Many of these groups actually prefer independent properties over the larger, international chains. The rising seasonal demand for affordable accommodation has added to the already high level of uncertainty in the industry – hoteliers cannot accurately predict price expectations, pricing of competing properties, economic situations or the demand for a given day in the future. Moreover, customers now have a plethora of tools at their disposal to browse through hundreds of hotel rooms and compare them side-by-side before making a booking decision. And most of these booking portals don't contribute much to the hotel's own bottom-line.
Revenue management is becoming a necessity for properties in order to stay competitive in such an environment as it allows hotels to sell the 'right product' to the 'right customer' for the 'right price', at the 'right time'!
Understanding the basics of revenue management
Three of the most commonly used indexes in revenue management are occupancy, average daily revenue (ADR) and the revenue per available room (RevPAR).
Occupancy refers to the percentage of hotel rooms that are occupied at a given time.
The ADR is the average revenue generated per sold room, which is calculated by dividing the total revenue by the number of occupied rooms.
Combining these two parameters gives us the RevPAR, which is the total revenue generated by the property divided by the total number of units.
However, even the RevPAR doesn't give hoteliers a complete picture of their property's performance as it doesn't take into consideration all the costs associated with setting up the room for occupancy – it also doesn't account for additional sources of revenue such as restaurants, bars, casinos and so on.
To better understand this, consider a hypothetical scenario involving two identical hotels A and B, both with ten rooms. Let's assume Hotel A prioritizes occupancy while Hotel B focuses on revenue management – so while A achieves 100% occupancy by lowering prices and selling each room for say, $90; B achieves 90% occupancy but sells each room for $100. In both cases, the total revenue generated is $900. But it's easy to see that Hotel A incurs more operational expenses associated with preparing an additional room and hence isn't as profitable as Hotel B.
Hence it's clear that focusing on revenue management is a much better strategy to boost profitability than prioritizing the occupancy. However, hoteliers do need a better index than the revPAR.
A metric that accounts for costs
In order to find a better index that can be used to effectively track hotel performance, there are two other factors that need to be considered, namely the costs per occupied room (CPOR) and the additional revenue generated at POS terminals. Let's examine these two indexes in more detail.
CPOR: It refers to the costs associated with preparing a hotel room for occupancy. This includes the cost of housekeeping, replenishing toiletries, laundry expenses and so on. The more rooms the hotel fills, the higher these costs become.
POS Revenue: All additional revenue coming in from POS terminals also contributes to the property's bottom-line and helps offset other operating expenses including the CPOR. However, this is only applicable at hotels where the POS terminals contribute significantly to overall revenue.
As Ira Vouk explained in her article on revenue management, the adjusted revenue per occupied room (ARPAR) is a metric that factors in these indexes as well and can be calculated –
ARPAR = [(ADR – CPOR) x Occupancy] + POS Revenue
Coming back to our hypothetical scenario, let's take the CPOR to be $10 and assume there are no additional sources of revenue. When we include these values while calculating occupancy, we can see that,
ARPAR (A) = [(90 – 10) x 100] = $800 and ARPAR (B) = [(100 – 10) x 90] = $810
This is a much better index to assess hotel performance more accurately. And since the expenses associated with preparing a room for occupancy don't change too often, hoteliers won't have to keep calculating these costs.
A robust revenue management strategy is key to the long-term success of any hotel – not only does such a strategy substantially increase profitability during the peak season, it also helps create demand during the off-season by lowering costs. By keeping track of their ARPAR, managers can get a much clearer understanding of how these strategies are influencing their hotel's profitability. Flexibility for implementing revenue management strategies like dynamic pricing depends on the property management system in use – selecting the right cloud-based system that's capable of supporting integration to revenue management tools is integral to the whole process!
Senior Digital Marketing Analyst
Hotelogix provides a robust cloud-based Hotel PMS that helps hotels to automate and manage their end-to-end operations with ease. It also assists hotels to drive growth, increase revenue and to enhance their online reputation. The PMS is hosted on Amazon Web Services, and thus offers the much-needed stability and security to hoteliers. The company has rich experience in serving global markets with customers in 100 plus countries including developed geographies such as North America and Europe.