Modern businesses are realizing the importance of data gathering and analysis to unearth new opportunities. Hotels aren’t any different — they are a beehive of activities, with each task generating vast amounts of data. But manually collecting and making sense of this data is nearly impossible. If you’re using hotel management software for analytics, you must’ve come across the term RevPAR. But what is it?

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RevPAR (revenue per available room) is one of the most important performance metrics in the hotel management industry that helps you determine if your rooms are selling at the right rate and generating revenue. In this article, we’ll delve deeper into this metric and discuss how to use it to improve your overall performance. Let’s dive in.

This Article Covers:

• What Is RevPAR?
• How To Use It
• How To Improve Your Hotel’s RevPAR
• Limitations
• Other KPIs
• FAQs
• Wrap Up

What Is RevPAR?

RevPAR is a key performance indicator (KPI) used by hotel managers to determine the revenue generated per room, whether occupied or not. You can calculate it in two ways:

• Formula 1: Average Daily Rate (ADR) x Occupancy rate
• Formula 2: Total room revenue / Total number of rooms

It’s a performance metric that overviews the number of rooms sold and the total revenue generated from bookings. Hotels use it for performance comparison between time periods (monthly, quarterly, yearly) or with local competitors.

Example

Let’s create a hypothetical situation to understand how to calculate RevPAR and adjust it according to requirements. Suppose your hotel has 10 rooms for $100 each, and guests occupy seven of them on a given night.

Then ADR (Total room revenue / Number of rooms sold) = (100×7) / 7 = $100

(Note: It might seem counterintuitive to calculate ADR as it’s identical to the room rate, but hotels don’t price their rooms equally in real life. ADR is the median of a hotel’s pricing structure.)

Occupancy rate = (Number of occupied rooms / Total number of rooms) x 100 = (7/10) x 100 = 70% or 0.7

Therefore, RevPAR = ADR x Occupancy rate = 100 x 0.7 = $70

Alternatively, using formula 2:

Total room revenue = 100 x 7 rooms = $700

RevPAR = Total room revenue / Total number of rooms= 700/10 = $70

From formula 1, we can derive that RevPAR is directly proportional to a hotel’s ADR and occupancy rate. So if you want to increase it, you should either:

• Change Pricing: Increasing your room rates results in a higher ADR that boosts RevPAR and vice versa.
• Tweak Occupancy: The lesser number of unoccupied rooms you have, the higher your occupancy rate goes, which pulls up the metric.

But it’s important to note that occupancy and pricing are correlated. Increasing your room rates will trickle down your occupancy by dissuading guests from visiting your hotel.

On the other hand, a high occupancy rate could result from a lower pricing structure than your local competitors. You need to analyze the market conditions and fine-tune your pricing and occupancy to achieve a suitable RevPAR for your property.

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How To Use It

Now that you know how to calculate RevPAR, the most obvious questions will arise in your mind — Why should you calculate RevPAR? What is its significance?

Well, the answers aren’t simple. RevPAR is a yardstick to measure the primary goal of every hospitality business — revenue. Let’s review a few use cases to make it easier for you to understand:

Rate Adjustments

You can determine whether you’re charging optimum rates for your room. It shows the topline implications of a pricing adjustment.

In the above example, RevPAR was $70 with 70% occupancy and $100 ADR. But suppose you increase room rates, resulting in $140 ADR. The new pricing doesn’t sit well with a few of your guests, and your occupancy rate decreases to 65% of your total rooms. Seems like a negative change for your business, right? Let’s look closely.

New RevPAR = 140 x 0.65 = $91

With the increased pricing structure, even if your occupancy took a hit, your overall revenue for each room is higher than before. RevPAR goes up to $91 from $70 due to higher room rates and lower operating costs for housekeeping, maintenance, payroll, utility and more.

Marketing Evaluation

It can also help you decide if you want to grow your business by increasing ADR or occupancy rate. This evaluation helps fine-tune your marketing campaigns.

Suppose you’re charging the same rates as your competitors, but their RevPAR is higher than yours. In that case, your goal should be to boost your occupancy by offering discounted rates, complimentary services, extended stays and other good stuff that entice travelers to choose your hotel.

However, if your RevPAR is lower than your competitors despite having more or less the same occupancy rate, then it’s time to increase your pricing and add value to your rooms to justify the price hike. You can consider free breakfasts, parking, spa and other add-on services.

Performance Analysis

You can identify performance patterns over a time period by comparing RevPAR. It accounts for the number of occupied nights per room by including the time period in the occupancy rate.

RevPAR = ADR x Occupancy rate x Number of nights

Compare the metrics to gain insights into year-over-year growth, monthly patterns and growth opportunities.

You can also use the metric to understand how your property competes for business in the local market. To do that, you need to calculate the RevPAR index that helps compare your RevPAR to a group of other hotels, markets or sub-markets.

But how can you calculate the RevPAR index?

Like any other index, let’s start by assuming the ideal index is 100. Naturally, if your score exceeds 100, you’re getting more than the expected market share. Anything less than 100 means you aren’t getting what you deserve.

RevPAR Index = (Your RevPAR / Competing group’s RevPAR) x 100

In the above example, revenue per available room was $70. Now suppose there are five other hotels in the locality, and their aggregated RevPAR is $65.

Then, RevPAR Index = (70/65) x 100 = 107.7

This outcome means you’re easily getting more market share than your local competitors.

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How To Improve RevPAR

You can use the metric as a thermometer to measure marketing success, pricing efficiency and occupancy rates. Low readings could mean bad planning, poor performance and shoddy revenue management. A sure-shot way to boost RevPAR is to maximize your revenue from each guest. A few ways to do that are:

• Perform Competitive Analysis: Assess your competitor’s pricing and demand to choose an optimal ADR. You should establish a unique and compelling brand identity. It’s tough to improve revenue per room with a low ADR. Adopt a holistic approach that addresses demand, brand value, customer experience and pricing tiers.
• Rebalance Pricing: You must have dynamic pricing strategies for high and low periods. Adjusting your rates according to occupancy lets you curate RevPAR based on seasons. You don’t necessarily need to lower rates during low season but can focus on driving more direct sales through your website to boost the metric.
• Rethink Expenses: Another strategy to keep profits afloat during low seasons is to reduce your expenses. You can adjust in-house team size, outsource housekeeping and rely on technology for efficient energy and utility usage.
• Implement Length of Stay Requirement: Dictating the Length of Stay (LOS) is a successful hotel revenue management strategy. You can consider implementing the requirement for bookings through specific channels or during peak seasons to avoid short turnover periods. The applications are endless, and you should give them a thought.
• Deliver Exceptional Customer Experience: Charging more than your competitors is a foolproof way to boost your RevPAR, but justifying the price hike is tricky. One of the best ways to justify a bloated pricing structure is by delivering premium customer experiences and services. Otherwise, the only option is to build better rooms with fancier physical attributes. Remember, customers don’t mind paying if they deem it worthwhile. Plus, happy customers can drive future demand through reviews and word-of-mouth marketing.
• Consider Predictive intelligence: Big data analytics has entered the hospitality industry like every other market. Data analytics in hotels can help you manage revenue, streamline marketing campaigns, identify social media trends, track guest experiences and profiles, and much more.

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Limitations

It’s important to note that an improvement in RevPAR doesn’t necessarily translate into better performance and high profitability. There are three primary limitations. It’s essential for you to consider them before making decisions:

• The metric accounts only for revenue earned per room and not costs per occupied room (CPOR). Therefore, your RevPAR can be high, but it won’t represent your profit margins fairly without comparing revenue against your operating expenses.
• It fails to compare two businesses of different sizes as it only considers occupancy rate and not the number of available rooms. So, your competitor can have a lower RevPAR but earn more revenue because they have more rooms.
• Another shortcoming is that it doesn’t include revenue generated through ancillary services like spas, food stores, tour guides, souvenir shops and point of sale systems. You can only calculate the revenue generated solely from selling rooms.

So if you’re a hotel management student or a veteran looking to dive deep into analytics to discover valuable insights, we recommend using a few other KPIs on top of this metric to accurately calculate revenue, expenses and profitability.

Other KPIs

RevPAR is a popular KPI for comparing revenue across brands and properties, but it falls short if you’re looking for profitability rather than just revenue. Here are some other metrics for comparing growth, profits and revenue performance:

• TrevPAR (total revenue per available room) accounts for revenue earned from selling rooms and other outlets like spas and pools. But like RevPAR, it doesn’t account for operating expenses and the number of rooms. The formula for calculating TrevPAR is total revenue / number of rooms.
• ARPAR (adjusted revenue per available room) helps measure the performance and effectiveness of a hotel’s pricing policy. It considers every revenue stream and cost per room, including cleaning, utility, internet, TV and toiletries. Formula: (ADR – variable costs per occupied room + additional revenue per occupied room) x Occupancy rate.
• GOPPAR (gross operating profit per available room) is a nifty metric that calculates each room’s gross profit, whether occupied or not. Gross profit is the amount you have after subtracting operating expenses from your total revenue. The formula is (total revenue – expenses) / number of rooms.
• RevPAC (revenue per available customer) demonstrates how much value each guest brings to your property. It includes revenue for both selling rooms and other ancillary services and helps monitor how well your amenities perform. The formula is total revenue / number of guests.
• EBITDAR (earnings before interest, tax, depreciation, amortization and restructuring costs) is a metric not restricted to the hospitality industry. Any business can use it to track revenue. It compares a business’s earnings after deducting operating expenses and doesn’t account for variable costs like interests, depreciation and amortization.
• NOI: Net operating income is what’s left of your total revenue after deducting all operating expenses (like payroll, utility bills and maintenance charges) and non-operating expenses (like loan payments, taxes and interests).

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FAQs

What is an occupancy rate?

Occupancy rate is the ratio or percentage of occupied rooms to the total number of available rooms. It allows real estate investors to get a rough estimation of cash flows.

For example, an investor looking to acquire a restaurant can find out the occupancy rate of nearby hotels to know the number of potential diners. The formula for calculating occupancy rate is:

Occupancy rate = (Occupied rooms / Total number of rooms) x 100

What is ADR?

The average daily rate (ADR) indicates the aggregated rate at which a hotel’s rooms sell. It determines the average revenue earned per room. Hotel analysts rarely use this standalone metric and combine it with other KPIs like RevPAR, GOPPAR and EBITDAR to correctly measure revenue, expenses and profitability. The formula for calculating ADR is:

ADR = Total room revenue / Number of occupied rooms

What’s the difference between ADR and RevPAR?

RevPAR determines each room’s revenue based on your ADR and occupancy rate. It shows the hotel’s ability to fill its rooms at a given time period and rate.

On the other hand, ADR is the average rate at which the hotel sells its rooms. It doesn’t account for unoccupied rooms and is the median of a hotel’s occupied room rates. It signifies the hotel’s ability to maximize its revenue at a given occupancy rate.

While both are useful metrics, you shouldn’t use them separately. You must understand how they play into each other to make wise, data-based decisions that can increase your revenue and help attract more customers.

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Wrap Up

RevPAR is an important KPI in any hotel analyst’s arsenal. It helps them estimate the average worth of each room. You can either add value to your rooms or tinker with the pricing structure to arrive at a suitable RevPAR for your business.

But nothing is perfect, and this performance metric also has its shortcomings. It doesn’t account for your business size, additional revenue streams and operating costs. It’s important that you acknowledge its limitations and club it with other hotel management KPIs for accurate reporting on business health, expenses and profitability.

Did we answer all your queries? Which KPIs do you use the most? How are you planning to improve your RevPAR? Join the conversation by leaving a comment below.