Revenue management is a data-driven approach to predicting customer behaviour, with a view to optimising product pricing and availability, in order to maximise revenue. It is especially useful in the hotel industry, because hotels have a limited number of rooms available and experience varying levels of demand.
When carrying out a revenue management strategy, there are a number of key performance indicators, or KPIs, which should be tracked. Essentially, KPIs are quantifiable measures, which allow a business to assess and compare performance over time. In this article, we look at three of the main revenue management KPI’s.
1. ADR – Average Daily Rate
One of the most important KPI’s for measuring the performance of a hotel against competitors, especially those of a similar size and in a similar location, ADR stands for “average daily rate”. By using this metric, hotel management can know the average price paid per room on a specific day and monitor trends over a longer time frame.
To work out your ADR, you simply divide room revenue by the number of rooms sold. So, for example, if you have a revenue of €20,000 and have sold 200 rooms, your ADR would be €100.
It should be noted that only rooms that were actually available for sale should be factored into your calculations. This means that you should not take into account any rooms that are being used by staff members, nor should you include any complimentary rooms that you have allocated to guests.
Find more detailed information about ADR in the article “What is ADR?”.
2. REVPAR – Revenue Per Available Room
Another extremely important key performance indicator for revenue management is REVPAR, or “revenue per available room”. Although at first glance it may seem similar to ADR, its use is somewhat different, as it can help to tell you how successful you have been at actually filling the rooms in your hotel.
To calculate REVPAR, you simply divide your total rooms revenue by the total number of rooms available. So, if your revenue is €30,000 and you have 600 rooms available, your revenue per available room would be €50.
Perhaps the main thing to take care with when calculating your revenue per available room is that only revenue generated by actually selling hotel rooms should be included. This means that you should not factor in other revenue streams, such as revenue from your restaurant, or from drinks sold at the bar.
Find more detailed information about REVPAR in the article “What is REVPAR?”.
3. GOPPAR – Gross Operating Profit Per Available Room
Finally, GOPPAR, or “gross operating profit per available room” follows on from REVPAR quite nicely in that it is also a KPI measurement based on the number of rooms you have available, rather than actual sales made. However, unlike REVPAR, when calculating GOPPAR you take into account all sources of revenue.
To calculate your gross operating profit per available room, you must first work out your gross operating profit, which is gross revenue minus gross expenses. From there, divide your gross operating profit by the number of rooms that are available to be sold to guests.
The primary value of GOPPAR as a metric is that it allows you to see the bigger picture. After all, while rooms are the main revenue source in hotels, you are also likely to be making money from other areas, such as food and drink sales. Therefore, it allows managers to see how their business is performing overall.
For more detailed information about GOPPAR, like how you can calculate it, also have a look at “What is GOPPAR?”.
Effective hotel revenue management is data-driven and requires the tracking of key performance indicators. Ultimately, by tracking your ADR, REVPAR and GOPPAR, you will be better placed to make decisions regarding pricing, which can then help you to generate the maximum possible amount of revenue from your hotel.