This blog provides a cursory overview of some of the key concepts related to next-generation revenue management practices, starting with the ever-evolving performance metrics that are commonly used to track and measure success.
Useful performance metrics in revenue management
The most commonly used metric for measuring how well a hotel is managing its inventory and rates is revenue per available room (RevPAR), which is calculated in one of two ways:
- by either multiplying the average daily rate (ADR) by occupancy or
- by dividing the total guest room revenue by the total number of available rooms and then dividing that number by the number of days in a given time period.
Just to be clear, occupancy refers to the percentage of guest rooms that are occupied during a given time period while ADR refers to the average room revenue per occupied room. Some hotel operators still make the mistake of focusing their promotional efforts solely on increasing room occupancy, no matter that higher occupancy can, in some cases, actually lead to lower profits.
Yet while RevPAR provides a good picture of performance, it fails to measure actual profitability. That’s because RevPAR doesn’t take into account costs per occupied room (CPOR). Without knowing the operating costs, it’s not possible to calculate the actual profit margin or determine target optimal occupancy.
Hence the emergence of gross operating profit per available room (GOPPAR), which takes into account not only the amount of revenue generated but also the actual operational costs. Still, neither RevPAR nor GOPPAR look at non-room revenue streams such as restaurants, casinos, parking, spas, golf courses, etc.
This shortcoming helps explain the advent of other metrics like TRevPAR (total revenue per available room).
In addition, the industry is seeing new metrics around performance in other areas. Function space revenue performance can be measured in terms of meeting room utilisation, attendee density and revenue per attendee.
Revenue generating index (RGI), also known as RevPAR Index (RPI), looks at relative hotel revenue performance, by measuring the extent to which a hotel is achieving its “fair share” of revenue in comparison to a defined group of hotels. RGI is calculated by dividing the hotel’s RevPAR by the RevPAR of the competitive set (the data for which can be obtained through a third-party provider).
Similarly, average rate index (ARI) measures the extent to which the hotel is achieving its “fair share” of ADR. It is calculated by dividing the ADR of the hotel by the ADR of the competitive set. RGI and ARI — and, also, market penetration index (MPI) —provide a solid basis for performance comparison in the market.
Read our second blog where we review the next 2 key concepts in next-generation revenue management: relevant data sources and intelligent pricing HERE.