The metrics of measuring a hotel’s performance relative to its peers (Part 1)As Hotel management organisations formulate strategies and programmes regarding existing and future hotel facilities, services, and positioning, a question that arises is: What actually drives a hotel’s profitability? Should an owner be building a hotel that will command a huge average daily rate (ADR), or is it a hotel that fills ups every night that will have the highest net income levels? Though the profitability goal of hotels is abundantly clear, there exists a significant level of ‘noise’ in the hotel industry regarding the actual relationship between hotel revenue indicators including occupancy percentage and average daily rate.
Average Daily Rate (ADR) and Occupancy percentage
Recently, at a well-attended evening social gathering, I overheard several hotel managers exchanging information on the ADR’s each of their hotels were achieving. Almost all of them had this smug glow of self-congratulation and appeared to be in a very buoyant mood. The ADR figures they mentioned had nothing to do with Alternative Dispute Resolution, which in the world of law refers to any means of settling disputes outside of the courtroom. For those in the hotel industry, the term ADR is known as the Average Daily Rate. Calculating one’s ADR helps hotels see where they stand in the marketing field. It also indicates in a simplistic manner their place in comparison to competition.
The Average daily rate (ADR) is calculated by dividing the total revenue from room sales by the total number of rooms sold. Let us imagine a hotel with 70 rooms which sold 50 rooms last night and earned room revenue of $ 4,150/.It’s ADR is 4,150 / 50 = $ 83/- and its occupancy percentage for rooms sold last night is 50 / 70 x 100 = 71%. Predominantly, and especially in Sri Lanka, most managers still think that ADR is the best tool to measure the hotels performance because it shows whether a property is earning enough money for each room – but again, a high ADR is only good if the hotel rooms aren’t sitting empty.
Some managers even superficially judge their efforts solely by the percentage of room occupancy that has been achieved, because it shows how full the hotel is on any given night. But, looking at occupancy in isolation ignores the price paid and the revenue earned on each room, which are obviously also important factors in pricing. It is worthwhile to remember that ADR or PO% (Paid Occupancy percentage) alone is far from adequate proof to measure any hotel’s efficiency.
To illustrate this, let us return to our imaginary hotel which achieved $ 83/- ADR at an Occupancy (PO) of 71%. A similar hotel close by may have achieved 66% PO at an ADR of $ 96/-. It is not difficult to judge which hotel is in an enviable position. However, Occupancy can play a pivotal rate during low or off-peak seasons. During such periods occupancy could be the larger contributor to a hotel’s bottom line than ADR - where all other factors been equal, hotels with higher occupancies (i.e. ‘heads in beds’) may in fact trade some ADR, for greater efficiencies, allowing them to be more profitable.
Revenue Per available Room (RevPar)
If ADR and Occupancy percentage is considered inadequate to evaluate the efficiency of the hotel management in selling rooms, what is it that reasonably indicates efficiency in a qualitative perspective? Knowledgeable hoteliers rely on a combination of ADR plus Occupancy as a reasonably superior index to measure the efficiency and success of the management insofar as room sales are concerned. This combination is called RevPAR (Revenue Per Available Room). RevPAR is the total guest room revenue divided by the total number of available rooms. Let us understand this concept with our imaginary hotel which we had discussed earlier. Earning $ 4,150/- last night, from the sale of 50 rooms (out of a total 70 rooms), its revenue per available room (RevPAR) is 4,150 / 70 = $ 59/-.
RevPAR differs from ADR because it provides a convenient snapshot of how well a hotel is filling its rooms, as well as how much it is able to charge. ADR on the other hand shows only the average rate of rooms actually sold and unlike RevPAR, it is unaffected by the amount of unoccupied available rooms. It should be noted that RevPAR, by definition, is calculated on a per-room basis. Therefore, one hotel can have a higher RevPAR than another, but still have lower total revenues if the second hotel manages to sell more rooms. As I mentioned earlier, savvy hotel operators opine that RevPAR (Revenue Per Available Room) is the way to go, because not only is it one of the most important gauges of health among hotel operators - it is also something that you can actually take to the bank.
To be continued. |
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