Measuring hotel performance can become very complex considering its diverse source of revenue. As for many businesses, a hotel’s revenue is reliant on the level of market demand and supply, but the particularity is that a hotel has a limited inventory. Those restrictions reinforced the need for revenue managers to consider both time-variable demand and supply while optimizing the business’s profitability. The complexity of the hotel structure, as well as its competing environment, require hoteliers to have a clear understanding of their goals and the methods for attaining them. This article will focus on the different key performance indicators that hoteliers can use to ensure a healthy business such as tracking RevPAR, Revenue Generation Index (RGI).
Type of Key Performance Indicators
While hoteliers have the choice between a large range of metrics to monitor their business performance, all metrics do not belong to the same category and therefore do not serve the same purpose. In his seek to optimize the hotel’s profitability, the revenue manager is looking at the generated revenue as well as the cost of running the business. Performance measurement plays an important role in tracking the progress against the goals, identifying opportunities and comparing performances against both internal and external standards.
Key Performance Indicators can be categorized as follows:
– Internal Indicators: metrics used to analyse the hotel performance for its different revenue streams by considering the time variable demand: Occupancy, Average Daily Rate (ADR), Revenue per Available Room (RevPAR), Revenue per Available Seat per Hour (RevPash), Gross Operating Profit Per Available Room (GOPPAR)
– Benchmarking Indicators: metrics used to identify the positioning of the hotel within its competitive environment by comparing the hotel’s performances to its main competitors or the industry: Revenue Generator Index (RGI), Market Penetration Index (MPI), Average Rate Index (ARI).
According to a Revenue Management Study, RevPAR (77.4%) is the most preferred way of measuring hotel revenue management performance, followed by RGI (48.5%) (HSMAI & SIT, 2018).
How to calculate a RevPAR?
The revenue per available room is the main standard performance metric used by hoteliers to determine the health of the business. The advantage of using this metric is that it helps to measure the overall success of the hotel at any given time by analysing the revenue generated in relation to the hotel total potential (STR, 2019). Thus, the RevPAR provides hotelier with a good screenshot of how good the hotel is generating revenue and not only for the booking rooms.
There are two ways to calculate the RevPAR:
· RevPAR = Average Daily Rate (ADR) * Occupancy Rate
· RevPAR = Total Room Revenue / Total Room Available
Let’s take the example of a boutique hotel with 60 rooms and an average occupancy rate of 80%. The hotel average selling price is £57.
RevPAR = (£57 per night) * (80% occupancy rate) = £45.6
What is a good RevPAR?
The RevPAR formula shows that there are two ways to increase the RevPAR; by increasing the hotel occupancy or the room rate. However, the law of supply and demand makes it more complicated than it seems like the more the rate increases, the more the demand will decrease and vice-versa. That is why pricing positioning is crucial for hotels to remain attractive on the market and therefore to receive enough business to cover operational charges. Hoteliers are always looking for a higher RevPAR as a guarantee of revenue, however, this metric does not ensure profitability as it does not take into account the CPOR (cost per occupied rooms). Focusing only on the RevPAR can lead to declines in both revenue and profitability.
As the RevPAR is directly linked to the occupancy, it is evident that the RevPAR highly depends on the market demand and therefore on all market players. Just looking at a number will not tell much. Instead, the logical step is to compare the RevPAR with those of the competitors to determine if whether the RevPAR is satisfying
How to define a hotel competitive set?
Identifying the hotel competitive set provides hoteliers with a more accurate understanding of the hotel performance, as well as of the forecast’s baseline and limitations. A hotel competitive set regroups four or five hotels that are qualified as direct competitors. Those are not always in the same given area that the subject hotel, but are most often chosen based on relevant and specific criteria:
Geographical Location & Accessibility
The most obvious criteria to consider is first the location of the subject property. Competitors need to be operating in the same city. The closer they are to each other, the more likely they are to attract similar market segment and therefore to be subject to the same market demand and constraints. Similarly, when defining the hotel competitive set, it is important to identify in which type of city the hotel is operating: main or secondary city? Centre or suburban area? In city centre location it is more likely to identify competitors closed to the property, however, in a rural market, it is not surprising to have competitors located much further. When the supply is very dense around the subject property, hoteliers need to select them based on a narrower range of characteristics.
While customers do not always make the difference between a branded and an independent hotel, from a competitive set perspective it is an important criterion to keep in mind. Identifying the different brands present on the market is an indicator of the potential hotels which could more easily turn online visits into bookings. Therefore, branded properties will most likely consider branded competitor hotels with similar facilities. However, this should not be used as a rigid rule as in some situation it is possible to consider independent hotels as competitors considering their property’s conditions and historical background or special market patterns.
Hotel size is an important criterion while defining a hotel competitive set as it is a crucial parameter for yield management. Indeed, the less room a hotel has, the easier is to use revenue management to sell rooms at a higher rate and boost occupancy. On the other side, hotels with a larger room count are more likely to get a higher marker fair and be more attractive for larger group bookings for example. In addition, considering the average room size of the competitors is a good indicator of their market scale.
Main KPIs to compare with the competitive set: RGI, MPI and ARI
Benchmarking KPIs help hoteliers to know if their hotels are performing well enough towards their competitors. The category of ‘market share key performance indicators’ is widely used in the industry and includes the following indexes:
· Market Penetration Index: shows if the hotel is capturing more market demand than its competitors.
MPI = (Hotel occupancy / Compset Occ) * 100
· Average Rate Index: shows what is the hotel pricing strategy compared to its competitors.
ARI = (Hotel ADR / Compset ADR) * 100
· Revenue Generator Index: shows whether the hotel is gaining a fair share of the market business compared to its competitors.
RGI = (Hotel RevPAR / Compset RevPAR) * 100
Hotel market share is described as the percentage of business a hotel is getting within its overall market. In an ideal world, each hotel will always have a percentage of market business equivalent as if it was fully occupied every day (Fair Share). But in reality, hotels occupancies vary, thus challenging hoteliers to determine their actual market share.
Fair Market Share = Hotel total number of rooms available / Compset total number of rooms available
Actual Market Share = Hotel total number of room nights sold / Compset total number of room nights sold
Let’s consider that the 60-rooms boutique hotel reached a RevPAR of £45.6 and its Compset reached a RevPAR of £53£:
RGI: Hotel RevPAR (45.6)/ Compset RevPAR (53) * 100 = 86
How to know if you are doing right?
All key performance indexes mentioned above use an index base of 100. Meaning that with an RGI, MPI, or ARI equal to 100 the hotel is achieving its fair share. If the hotel has one index below 100 it means that the hotel is underperforming the market and is likely to convert less business than its competitors. As opposite, if the index is superior to 100 it means that the hotel is performing better than its competitors.
The analysis of those three indicators shows to the hotelier the impact of his pricing strategy and booking reservation policies on the hotel’s revenue. While a price increase may lead to a greater ARI it can also lead to a decrease of the MPI if the hotel’s competitors have more attractive prices and vice-versa. The RGI shows if revenue managers have succeeded to balance occupancy and rate.
While looking at historical data can help hoteliers to identify opportunities and strategies, it is also the revenue manager’s responsibility to leverage data to monitor real-time demand.
- HSMAI & SIT. (2018). Revenue Management Metrics Study. Retrieved from https://hsmaiacademy.org/wp-content/uploads/sites/11/2019/02/2019-hsmai-and-sit-revenue-management-metrics-study-final.pdf
- STR. (2019, 08 29). What is RevPAR. Retrieved from STR: https://str.com/data-insights-blog/what-is-revpar