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"RevPAR: The Metric to Measure Hotel Profitability"
One of the aspects that has always struck me is seeing a hotel manager, an owner, a representative of a hospitality facility, measure the efficiency of their structure by talking about Average Daily Rate.
The average daily rate, known as ADR (Average Daily Rate), that is the average daily rate that a hotel obtains for the rooms sold, is certainly among the essential KPIs (Key Performance Indicators) to monitor the financial and operational performance of a hotel but not the most important, because if it is not well interpreted it generates a distorted image of the actual performance of the hospitality facility.
To get practical, I will give you an example of calculation:
ADR = Total revenue from rooms / Number of rooms sold
Example of calculation:
Each room sold has generated on average 200€ in revenue.
An important KPI but incomplete for a thorough analysis of the profitability of the hospitality facility, because in reality the index to consider is RevPAR.
The RevPAR (Revenue per Available Room) is a key performance indicator in the hotel sector. It allows evaluating the profitability of a hotel by measuring the revenue generated per available room, always taking into account the production generated by the occupied rooms, that is the 2,000€ of revenue from the 10 occupied rooms above, divided by the rooms present in the hotel, occupied or not, that is 100.
Example of calculation:
The RevPar is a figure that cannot be overlooked in the application of a pricing policy that must be flexible, always referring to its market.
Moreover, it helps us understand if the hotel is optimizing its capacity or if there are pricing or demand issues, in fact for example a price that is too high can reduce occupancy, lowering the RevPAR, for this reason it is wrong to consider only the ADR, because:
1 room sold at 200€ in a hotel of 100 rooms generates an ADR of 200€, but a RevPAR of 2€, and perhaps at this point it would be better to sell 5 rooms at 150€ of ADR in a hotel of 100 rooms and generate a RevPar of 7.5€, don't you think?
Yes, marginal costs and we will talk about the rest next time.
Moreover, RevPAR helps to find the break-even point between competitive rates and optimal occupancy rate, in fact we Revenue Managers use RevPAR to adjust rates based on demand, season, and competition, always helping ourselves with Revenue Management tools like our Profitwise (Revenue Management System) useful for monitoring KPIs, market segmentation, and much more.
Ah, it is important to calculate RevPAR gross of commissions and various distribution costs, not to be confused with NRevPAR (Net Revenue per Available Room)
Is everything clearer now?
The important thing is always to have a single final objective, to maximize revenues without underselling rooms or leaving too many rooms empty. 😊
The average daily rate, known as ADR (Average Daily Rate), that is the average daily rate that a hotel obtains for the rooms sold, is certainly among the essential KPIs (Key Performance Indicators) to monitor the financial and operational performance of a hotel but not the most important, because if it is not well interpreted it generates a distorted image of the actual performance of the hospitality facility.
To get practical, I will give you an example of calculation:
ADR = Total revenue from rooms / Number of rooms sold
Example of calculation:
- If a hotel has generated 2,000€ in revenue from rooms and has sold 10 rooms out of 100 available, that is 10% of the total capacity, the calculation will be:
Each room sold has generated on average 200€ in revenue.
An important KPI but incomplete for a thorough analysis of the profitability of the hospitality facility, because in reality the index to consider is RevPAR.
The RevPAR (Revenue per Available Room) is a key performance indicator in the hotel sector. It allows evaluating the profitability of a hotel by measuring the revenue generated per available room, always taking into account the production generated by the occupied rooms, that is the 2,000€ of revenue from the 10 occupied rooms above, divided by the rooms present in the hotel, occupied or not, that is 100.
Example of calculation:
- 2,000€ in revenue from 10 rooms sold out of 100 available.
The RevPar is a figure that cannot be overlooked in the application of a pricing policy that must be flexible, always referring to its market.
Moreover, it helps us understand if the hotel is optimizing its capacity or if there are pricing or demand issues, in fact for example a price that is too high can reduce occupancy, lowering the RevPAR, for this reason it is wrong to consider only the ADR, because:
1 room sold at 200€ in a hotel of 100 rooms generates an ADR of 200€, but a RevPAR of 2€, and perhaps at this point it would be better to sell 5 rooms at 150€ of ADR in a hotel of 100 rooms and generate a RevPar of 7.5€, don't you think?
Yes, marginal costs and we will talk about the rest next time.
Moreover, RevPAR helps to find the break-even point between competitive rates and optimal occupancy rate, in fact we Revenue Managers use RevPAR to adjust rates based on demand, season, and competition, always helping ourselves with Revenue Management tools like our Profitwise (Revenue Management System) useful for monitoring KPIs, market segmentation, and much more.
Ah, it is important to calculate RevPAR gross of commissions and various distribution costs, not to be confused with NRevPAR (Net Revenue per Available Room)
Is everything clearer now?
The important thing is always to have a single final objective, to maximize revenues without underselling rooms or leaving too many rooms empty. 😊