Chapter 1 RevPAR 101
RevPAR combines two of the most widely-used metrics in hospitality—occupancy and room revenue—to create a more insightful snapshot of a property's financial performance over a defined period of time.
In this first chapter, we'll show you the different ways you can calculate your property's RevPAR, as well as what those calculations can reveal about the health and profitability of your property.
For simplicity's sake, RevPAR is typically presented to hoteliers, pre-calculated, in weekly or monthly reports, such as STR Global's STAR Report—a report that tracks supply and demand data for the global hotel industry. But in order to understand how to grow this number, it's important to understand how it's formulated.
The most commonly used equation to calculate RevPAR is multiplying the average daily rate (ADR) by occupancy percentage over the course of a month.1
RevPAR = ADR x Occupancy %
RevPAR is your go-to stat for determining the average net revenue that your property receives per room–occupied or not–over a defined period of time, typically either a week or month.
For example: Let's say you manage a 20 room property. Over the course of a month (30 days), your 20 rooms translate to 600 available room nights (30 X 20 = 600).
Last month, your property collected $30,000 from the 300 rooms you sold, generating an ADR of $100 ($30,000 / 300 = $100). However, your property failed to sell the remaining 300 rooms, giving you an average occupancy level of 50% (300 rooms occupied / 600 total rooms = 50% occupancy).
Thus your RevPAR, the revenue collected ($30,000) per available room (600) over the course of the month (30 days), was $50.
$100 [ADR] x 0.50 [OCC%] = $50
$30,000 revenue / 600 rooms / 30 nights = $50
While having a healthy RevPAR can indicate a strong revenue strategy, it doesn't necessarily tell you the efficiency of your revenue strategy.
Let's use the same example of the 20-room property: Alarmed by your low occupancy levels last month, you develop a promo to fill your rooms, such as a third night free.
1 If occupancy percentage information is not readily available, divide the total room revenue by the total number of rooms available during a month: RevPAR = Total Room Revenue / Total Rooms. The equations will yield the same answer, so whichever you choose is up to you and the information you have readily available.
As a result, you sell out every night, doubling your occupancy and bumping your revenue up to $45,000 for the month. So, how are you feeling about this month compared to last month? Let's look at your metrics and see:
ADR: $45,000/600 = $75
RevPAR: $75 x 1.00 = $75
You brought in more money and serviced more guests which caused your RevPAR number to jump 50%. However, in an attempt to fill more rooms, you ran a promo that ultimately dropped your ADR and potentially left additional revenue on the table.
The Dos & Don'ts of RevPAR
While calculating RevPAR is an important step in your understanding of revenue management, it doesn't reveal everything about your property's viability. Instead:
Do use RevPAR to determine the net revenue your property keeps after taxes, commissions, and fees. If you include these other stats, you'll have artificially inflated stats that may look impressive, but aren't particularly useful. RevPAR only accounts for the revenue hotels can rely on after taxes and third party expenses are paid out.
Do use RevPAR to show your property's performance compared to budget. A more informative insight than ADR, RevPAR may not have a column in your annual budget, but as we've come to see, it may deserve one. And since your budget already includes all of the components, it's basically already calculated for you.
Don't use RevPAR to show you the efficiency of your room-related expenses or profitability. The cost of operating your rooms is not factored into your property's RevPAR number. These expenses can eat directly into your property's net revenue, negatively impacting your profitability.
Don't use RevPAR to speculate how well your property could have done. RevPAR is truly a measurement of what a property has done, not how well it could have done.
Chapter 2 Increasing Your RevPAR through Incremental Revenue
It sounds so simple, doesn't it? You want to make more money? Just increase your rates. However, finding ways to maximize and continually grow rates while maintaining high occupancy is, and will always be, the biggest challenge any property faces. Potential guests are more empowered than ever before, armed with an array of resources to ensure they're getting the best available rates.
As a result, room rates have become a science, employing the efforts of entire departments, all focusing on the dozens of constantly-evolving factors that contribute to a successful revenue strategy such as promotions to fill rooms, ways to cut operational costs, and new marketing techniques. So right off the bat, let's go ahead and take the "just increase your rates" solution off the table entirely. Because it's truly not a solution.
Good–now the fun part. This is your opportunity to get creative. The key to increasing your RevPAR is finding ways to add value to your product and enriching the guests' experience. We've compiled some of the most creative and industry-leading examples for driving incremental revenue.
Driving Incremental Revenue
Given the stiff competition in the industry, the best place to start boosting RevPAR is to drive incremental revenue. There are two main methods for increasing incremental revenue:
1. Fees - Fees, such as occupancy, resort, and pet, are an opportunity to present guests with additional benefits that might not otherwise be possible. Fees can be integrated into room rates and paid during the booking process or as a supplement that's collected separately (e.g., upon check-in).
2. Upselling - The opportunities and resources available for upselling to guests and prospective guests have never been greater. Upselling helps create the perfect guest experience, or enhance the existing one, by presenting an array of options, such as larger rooms or nicer views, to choose from.
We've compiled industry-leading examples for increasing incremental revenue as well as the challenges and tools necessary to implement them in your own property.
Using Hotel Fees to Drive Revenue
Occupancy and facility fees are a fairly standard way to drive incremental revenue. If you want to go a step further and think outside the box, check out this industry-leading technique that not only drives revenue but also offers a world-class guest experience.
What it is: A fee structure for guests traveling with pets.
Why it works: Similar to the facility fee, pet fees are collected at check-in and not susceptible to third party commissions, transferring directly to net revenue. Fees offset increased operating expenses.
Implementation legwork required: Moderate. Insurance companies present the biggest potential hurdle in going pet-friendly. Development of housekeeping procedures are also required.
Challenges: Increased emphasis on housekeeping and maintenance procedures.
Adding Extra Value into Your Resort Fee
What it is: Resort fees are a staple of the industry, allowing hoteliers to offer additional services to guests in one bundle. Getting creative with your amenities can improve the perception of your resort fee.
Why it works: If done right, resort fees should add real value and an additional level of customer service to the guest.
Implementation legwork required: Moderate. You need to communicate that the fee exists and what the guests has access to because of the fee. Also rolling out the amenities will require some legwork.
Challenges: Surprising guests with fees or not educating them on all the amenities they have access to can be a struggle for your guests' expectations.
Unique Upselling Examples to Drive Increased Revenue
Upselling promises the guest a remarkable stay and allows you an opportunity to add to your bottom line.
What it is: A guest room bundled with additional amenities, attractions, or add-ons, advertised at a single price.
Why it works: Packages are completely customizable and only available by booking directly, eliminating the involvement of third parties.
Implementation legwork required: Low. Stick with in-house components (i.e. breakfast, parking, welcome amenities, etc.) to capture added revenue while minimizing operational logistics.
Challenges: Promotion and maintaining visibility leading up to and throughout the booking process on all platforms.
What It Is: An opportunity for guests to upgrade to a more expensive room type prior to arrival.
Why it works: Incremental pricing (e.g. "For just $30 more per night…") presents potential options at temptingly-low costs. A variety of tools and methods enables properties to present upgrade opportunities to guests throughout the sales cycle from booking to check-in.
Implementation legwork required: Low to Moderate. Website integration has potential to be complex, but the upgrade itself requires little to no effort. Ensure that the upgrades are easily available during booking to facilitate upselling.
Challenges: Finding the right combination of offer and timing to truly maximize revenue potential.