The performance review is an indispensable part of running a profitable hotel, yet it frequently falls to the sidelines in favour of more immediate day-to-day tasks. Nonetheless, keeping track of key performance indicators (KPI) can be invaluable for developing a successful hotel revenue management strategy. For convenience, let us break down the KPI that every hotel manager should track:
1. ADR & REVPAR
The two main profit metrics relating to room rates are the average daily rate (ADR) and the revenue per available room (RevPAR). The ADR allows hoteliers to find the golden mean of their rooms’ going rates, by dividing their overall room revenue by the number of rooms occupied.
This way rooms are always priced in accordance to demand and hoteliers can compare metrics across seasons in order to understand better how the demand for their hotel has changed over time.
But ADR’s key purpose also makes it insufficient when trying to map out a more comprehensive view of the hotel’s performance due to the fact that it excludes unoccupied rooms. This is where revenue per available room (RevPAR) comes in.
It calculates as follows, the overall room revenue is divided by all available rooms, regardless of occupancy. A hotel’s REVPAR essentially double-checks the predictions of its ADR, allowing hotel managers to adjust their pricing to better meet their hotel’s seasonal goals.
While RevPAR goes a long way into creating a more comprehensive image of a hotel’s revenue metric, it still does not offer a full picture, as it does not account for cost.
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2. CPOR & Occupancy Rate
Cost per occupied room (CPOR) summarizes the expense of a room, everything from maintenance and marketing, to management into the equation. By dividing the full cost of a room to all sold rooms, a hotelier can come to a clearer conclusion as to whether a room’s rate matches what the hotelier has spent on it, and whether it truly profits the hotel.
But to understand CPOR better we must first look at a hotel’s occupancy rate. The occupancy rate is as simple as metrics go, all occupied rooms on a given day are divided by the overall number of rooms in the hotel.
As a rule the higher a hotel’s occupancy rate the higher the ADR, but average room rates have been dropping in an attempt to remain relevant when faced with online travel agency driven competition. This has created a vicious cycle of room rate slashing in an attempt to keep occupancy high.
This has changed how many hoteliers view CPOR as it is no longer deemed profitable to invest in room maintenance. As a result, many hotels have moved away to a more minimalistic and eco-friendly approach to their accommodation and service, as a way to cut down on long term CPOR.
3. Average Lenght of Stay (LOS)
Being aware of a hotel’s occupancy rate allows hoteliers to track the average length of stay (LOS). LOS allows us a look into how room cost is accumulated. By dividing the number of occupied nights for a certain period to the number of rooms booked we get the average length of stay. If the average length of stay is low then that means that the hotelier is spending more on room maintenance which reduces revenue.
In order to improve their LOS metric, many hoteliers simply raise the rate per room for shorter stays, which incites guests to book for long periods of time, increasing revenue in the process.
4. Gross Operating Profit Per Available Room and Adjusted Revenue Per Available Room
But these KPI’s are too narrow, so when it comes to a more comprehensive indicator of the relationship between occupancy and profit we must look at the Gross Operating Profit Per Available Room (GOPPAR).
We calculate it by taking the overall revenue per room minus the expenses and divide it by the number of available rooms. GOPPAR factors in expenses and the full room availability which makes it a strong indicator of what generates revenue in a hotel.
The Adjusted Revenue Per Available Room (ADPAR) has something that REVPAR misses as a KPI, an actual overview of the hotel's profit margin.
It is a much more complex calculation, as it adds the average daily rate, subtracts the cost of maintaining a room, but adds auxiliary sources of revenue per occupied room and multiplies it by the occupancy rate.
5. Market Penetration Index and Average Rate Index
The internal key performance metric is a great way on seeing how hoteliers can improve their hotels on their own terms, but hospitality is a highly competitive field and it would be an incredible lack of foresight not to compare metrics between properties.
This is done by calculating a hotel’s Market Penetration Index (MPI) by dividing the occupancy rate of one or more hotels against another and then multiplying it by a hundred. If the final result is less a hundred the property being compared is not as in demand as its competitors.
As such a hotel’s MPI is a vital metric as it allows hoteliers to determine if their revenue management strategy requires adjusting before the competition has managed to completely push them out of the spotlight.
Another way of assuring that your business is keeping up with the competition is to keep track of competitors’ ADR and to calculate an average rate index which is the result of dividing your ADR to your competitor’s.
This metric has the capacity to make rate management rather black and white, especially if it has not been tracked over a longer period of time. Many hospitality providers have learned the hard way that playing catch up by drastically cutting down rates in order to draw business away from the competition can have long-lasting effects on a hotel’s REVPAR.
Tracking key performance indicators consistently can make or break a hotel. Which is why this task has been relegated to integrated property management systems such as Clock PMS+ which can collect data from distribution channels and effectively automate revenue management for any number of locations.