Picture this: You’re at a conference for hotel managers, and you get involved in a conversation with a few of them, and suddenly they’re babbling about something called RevPAR.
You smile and nod. They just keep going.
Apparently, it’s some metric that’s a big deal to them, which is weird. The only metric you’ve cared about is how full you can get your hotel and how high you can get your guest rating on TripAdvisor. I mean, what could possibly be more important than that?
As you know, occupancy isn’t really your goal in the hotel industry. It’s making money. And RevPAR could have a big effect on your bottom line if you use it right.
So what the heck is RevPAR anyway, and why should you care?
What is RevPAR?
RevPAR is short for “Revenue Per Available Room,” and it’s a key performance metric in the hotel industry. Figuring out your RevPAR is simple: just take your average daily room rate and multiply it by your occupancy rate and, boom, you know what your RevPAR is.
- RevPAR = Average Daily Room Rate x Occupancy Rate
Let’s say, for example, you run a hotel that has 50 rooms. On average, you rent out about 45 of those rooms every night, making your occupancy rate about 90%. If you charge an average of $100 per night, your RevPAR looks like this: $100 x 0.90 = $90.
Basically, RevPAR is the money you’re pulling every night from every room in your hotel, not just the ones that are booked. This figure is a good snapshot of how good of a job you’re doing at making money, and not just booking rooms.
So how can RevPAR help you boost profits? Here are four ideas for you.
1. RevPAR tells you if your rates are right
Believe it or not, you could be charging too little for your rooms. Let’s say you’ve been charging $100 per night for your 200 guest rooms, and each night you’re booking 180 of them. Pretty good, right?
Maybe, maybe not. Let’s take a look at the numbers. That’s an occupancy rate of 90%, which comes out to a RevPAR of $90 when multiplied by your average room rate of $100.
But could you be making even more money? Let’s say you raise the average rate to $150, and the next night you only get 150 bookings. That’s a big drop off in bookings, but relax: let’s take a look at the RevPAR before we panic. With a 75 %occupancy rate and a $150 average booking price, your RevPAR is now $112.50.
Profits have gone up, and you were able to spot a much better price point for your hotel thanks to RevPAR. That’s an extra $4,500 you’re pocketing each night in a 200-room hotel, and your hotel staff has to clean 30 fewer rooms.
Now not only are you making a lot more money per night than you were before, you may even be able to find creative ways to use those unbooked rooms for a little extra cash — say, by putting them on third-party websites for big discounts.
2. RevPAR reminds you not to cut prices to attract customers
Many hotel managers think they have to undercut their competitors to attract guests, but that’s not really the case in this industry most of the time. Demand for hotels is pretty inelastic — a family of four isn’t going to be interested in a $39 room, which is a rate that suggests dubious quality even if it’s a perfectly good room. They’re willing to open their wallets for a good room, and a higher price can signal that.
By paying attention to your RevPAR, there’s a strong chance you’ll notice that you’re much more profitable at a price point that is higher than your competitors.
RevPAR keeps your from missing the forest for the trees. Instead of dropping your prices in the name of boosting your occupancy rate slightly, that RevPAR stat will keep you laser-focused on what you should really care about: profits.
3. RevPAR helps you realize when you’re spending way too much
Hotel managers who don’t track RevPAR and just focus on filling their rooms may be taking a steep loss and not even know it. But by using the data at your fingertips, you will avoid this.
RevPAR establishes a baseline for your revenue that your costs cannot exceed. Add up the amount of money you’re spending each day on your hotel, and divide it by the number of hotel rooms you have. Is that number higher than your RevPAR? Then you are actually losing money when you fill up your hotel.
By comparing your costs with RevPAR, you can spot when you’re booking at a loss, and change course before it’s too late.
4. RevPAR lets you compare the profitability of all your room types
Many hotels have more than one type of room with different price tags. By grouping each of these rooms into their own category and calculating their RevPARs, you’ll be able to figure out which rooms are making you major bank and which are money and effort drains.
By spotting your least profitable rooms with RevPAR, you can turn your focus to them and figure out a way to boost their profitability.
Ask yourself the following questions if the RevPAR of a room type is low:
- Am I charging too much for this room, giving me too low of an occupancy rate?
- Am I charging too little?
- Is there some way I can increase the value of this room, such as with a free breakfast, better technology, access to an executive lounge, or complimentary valet service?
- Am I not properly emphasizing some of the valuable amenities, like an incredible view, a jacuzzi or a balcony?
Shortcomings of RevPAR
Like any individual stat, RevPAR won’t tell you the whole story when it comes to revenue. Obviously, a large hotel with 500 rooms will pull in a lot more money than a hotel with 50 rooms, even if it has a much lower RevPAR than the smaller hotel.
Also, it won’t tell you much about your profits. You could have an awesome RevPAR, but if your costs are outstripping it, your hotel will be suffering. While that may seem obvious, many hotel managers get sucked into the trap of focusing on improving their RevPAR without remembering that other factors are equally important.
Many hotel managers eschew the RevPAR stat in favor of Average Daily Rate (ADR). A hotel that pulls in $10,000 in revenue for the night and has sold 100 rooms would post an ADR of $100. This helps better inform hotel managers what the optimal price is for their hotel rooms, and thus increase their occupancy rate and, consequently, their RevPAR.
Despite its shortcomings, RevPAR is a good way to keep you focused on profitability, and used in combination with other metrics, it will keep you on top of your hotel’s performance so you know where you should focus your time and energy.
Now get out there and start RevPARing
What are you waiting for? Now’s the time to sit down and calculate your hotel’s RevPAR. Do it every single night and pay attention to how it fluctuates.
Ask yourself why you’re seeing your RevPAR fluctuate. Was there a major event nearby, and therefore you can maximize your revenue during the next event by increasing room rates at that time? Is there a lull during certain weeks when it’s good to start experimenting with raising and lowering prices to see where the RevPAR is highest? There’s so many things you can do with the stat that will tell you a lot about where you stand in terms of profitability, and you can start playing with it right away with nothing more than a pencil and a piece of paper, or a simple online tool.
Believe it or not, there is even software specifically for RevPAR fanatics. Many hotel management software solutions have tools built in to help you maximize RevPAR. Base7Booking, for example, has a “Yield Management” tool for figuring out an optimal price for a room.
Do you use RevPAR, or are there other metrics you depend on that you think are better? Please, let us know by commenting below.
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