11 hotel revenue management terms explained

Conversion. RevPAR. GOPPAR. If you’re still getting to grips with promoting your property online, the number of technical-sounding terms can be off-putting.

But it doesn’t need to be that way. Understanding how to refer to these business concepts will help you master the art of hotel revenue management – and increase your profits.

In this article, we’ll explain some of the most common revenue management terms, and how they apply to your business.

1. Occupancy Rate (OCC)

What does it mean?

Your occupancy rate is a way of saying how full your property is over a given period of time. Generally speaking, the higher your occupancy rate, the better. That’s because a high occupancy rate reflects a high number of bookings.

How is it calculated?

OCC is always a percentage, calculated as rooms occupied divided by rooms available. So if your property has 30 rooms and 22 of those have guests in them, then your occupancy rate is 73% for that night. Over time, you’d be talking about average occupancy rate for a month-long period, for example.

Anything else?

While a high occupancy rate is generally a good thing, it needs to be measured alongside other factors like your average daily rate (ADR). If your property is full but you’re underpricing your rooms, then you’re still not making as much profit as you could.

2. Average Daily Rate (ADR)

Your ADR is exactly what the name suggests: the average price for all rooms that you sold over a given period (a week, a month, a quarter, etc). It’s a simple way of seeing more or less what you’re charging your guests over a certain period of time. This is particularly useful when comparing your prices in high season against your prices in low season – and also when comparing your property against your comp set.

How is it calculated?

ADR is calculated as total room revenue divided by rooms sold. So if you make $2,420 in revenue in one night, and 22 of your rooms are occupied, your ADR is $110 for that night.

Anything else?

ADR doesn’t take into account your unsold rooms, so by itself it doesn’t give a full picture of how business is going.

3. Revenue Per Available Room (RevPAR)

RevPAR is about how much revenue you’re making on each available room. It’s a good indicator of the overall health of your property. If you increase your RevPAR, you’ll be moving in the right direction.

How is it calculated?

RevPAR combines the two previous concepts to give a more sophisticated picture of how your business is going. You take the ADR and multiply it by your OCC (which is a percentage).

So following on from the previous example, if your average daily rate is $110 and your occupancy rate is 73%, then your RevPAR is $80.30. This is the amount of revenue you’ve made per available room for that period.

Anything else?

While RevPAR is a very useful way of seeing how much money you’re making on each room, it doesn’t take into account additional services like food, or extras like spa services. This means you’re still not quite getting the full picture of your overall revenue per guest or room.

4. Cost Per Occupied Room (CPOR)

CPOR is a useful figure to take into account when drawing up an overview of your business. It refers to all the money you spend per guest, including expenses like housekeeping, staff costs, amenities, laundry, electricity, marketing costs and more.

How is it calculated?

CPOR is calculated as the total outlay on upkeep and marketing divided by number of rooms sold.

Anything else?

CPOR is an important factor in your overall mix. For example, if your RevPAR is high but you’ve spent a lot of money in upkeep, then you’ll need to consider if it was worth the outlay, and if there are ways of cutting down your CPOR.

5. Gross Operating Profit Per Available Room (GOPPAR)

This is similar to RevPAR in that it reflects how much money you make per room. But unlike RevPAR, GOPPAR is about actual profit, not simply revenue (as we’ve seen, you might be making a lot of revenue but also spending a lot on upkeep and staff costs). So overall, GOPPAR gives a more accurate picture of your overall financial situation.

How is it calculated?

Take the total revenue over a given period of time, subtract your expenses and then divide by the number of available rooms. For example, if you have a 24-room property and 22 of those are booked, your occupancy rate is 91.6%. Your revenue for that night is $2,420, meaning your ADR is $110 – and so your revenue per available room (RevPAR) is $100.76.

However, let’s say your expenses per occupied room come out at $40, once you count up your cleaning costs, other staff, fixed costs, commission, etc. That means that for your 22 rooms, you’ve paid out $880 just to have them available and occupied.

Therefore, while you’ve made $2,420 in revenue, you’ve spent $880, so in real terms you’ve made $1,540. Once you have this figure, you can calculate your overall profit per available room (GOPPAR), which is $64 (1540/24).

Anything else?

When you’re working out your profits, it’s vital that you take into account what you’re spending per room. Otherwise you’re not getting the full picture. GOPPAR is a good way of solving this. In fact, the above figures are probably the minimum that you should be looking at if you want to improve as a business.

6. Total Revenue Per Available Room (TRevPAR)

TRevPAR is the total revenue that you make per room, including extras like breakfast, mini bar and other services. This makes it a clearer reflection of your overall revenue than RevPAR.

How is it calculated?

To get TRevPAR, you need to divide your total net revenue by the number of available rooms. So if on top of your $2,420 in room revenue you’ve made another $100 in extras, your TRevPAR will be $2,520 divided by 24, which comes out as $105.

Anything else?

TRevPAR is useful for tracking how successfully you’re selling your add-ons like meals. It can also help you to identify your higher-paying guests, separate them into segments and then target them in a smart way. For example, if you see that families from the US spend more on amenities, you could consider launching promotions in English that include child meals or kids’ activities. On the other hand, if you notice that guests from Thailand tend to book airport transfers, you could put signs at your front desk in Thai about this service.

Overall, segmenting helps you tailor your service to your customers, as well as increasing your overall revenue.

7. Total Available Rooms (TAR)

As the name suggests, this is quite simply the number of rooms you have available to sell. When it comes to analysing your performance, it’s a useful figure to have to hand because it helps you calculate lots of other important statistics.

How is it calculated?

Take your total number of rooms and subtract the number of rooms that are not in service.

Anything else?

This overall figure is less applicable to smaller properties, as it’s unlikely they’ll have a major discrepancy between the total number of rooms and those that are available to book. However, for larger properties, it’s an important consideration when calculating an accurate RevPAR.

8. Average Length of Stay (ALOS)

ALOS is an important part of understanding your guests’ typical behaviour. If you know how long your guests tend to stay, you’ll be able to be smarter about what kinds of deals and promotions to offer.

How is it calculated?

ALOS is simply an average figure, so it’s your total occupied room nights divided by the number of bookings. Let’s say that over the month of April, your property gets 200 booked room nights, and those bookings come from 50 different guests. That means your average length of stay for April is 4 nights (200/50).

Anything else?

ALOS is great for deals based on length of stay (minimum 3 nights for a discounted price, for example). This is particularly useful if you’re able to segment your guests, for example business vs. leisure travellers. Knowing each segment’s ALOS will allow you to offer more relevant – and more profitable – promotions and deals. It can also help you to work out your staffing requirements.

9. Direct Revenue Ratio

This is a way of working out how much of your money is coming through your own website as compared to OTA (online travel agencies) like Booking.com.

How is it calculated?

It’s calculated as a percentage, so you divide the revenue that comes through your website by your total revenue.

Anything else?

Direct bookings are generally more desirable than bookings through OTAs, as they’ll incur less commission than the ones you get through OTAs. So the higher your direct revenue ratio, the better.

10. Website Conversion Rate

Conversion is a word you’ll hear a lot in online sales. It’s a way of working out how effective your page (or in this case, your website) is in converting possible customers into paying guests.

How is it calculated?

Your conversion is measured as a percentage. To get the figure, you take the number of visitors that make a booking and divide by the number of visitors to your website. The higher the percentage, the better.

Anything else?

A lot of factors can influence conversion, including the time it takes for your page to load, your prices, your content, etc. So it’s useful as a general indicator of how attractive your offer is, and how smooth an experience your website offers. Check out our article on how to build an effective website for more information.

11. Marketing cost per booking (ROI)

Return on investment (ROI) is a concept that’s applicable to all areas of business. In order to make sales, you’ll always have to make an initial investment – be it marketing, manufacture or staffing. So in order to get an overall picture of your business, and to keep your product on the shelves, you need to weigh up the money coming into your account against the money going out of it.

How is it calculated?

In the case of your marketing ROI, take your total marketing spend and divide it by your overall number of bookings. You could do this as an overall figure, or per channel (your own website and each OTA your property appears on).

Let’s take it as an overall figure first. If your property spends $15,000 on marketing per year, that’s $1,250 per month. That initial spend will be split between things like OTA costs, Google ads and any promotions you may be running (either with local businesses or for special deals at the property) – all with the aim of getting people to book a stay with you.

If in return you get 200 bookings in a month, then your marketing cost per booking for that month is about $6.25 ($1,250 divided by 200).

Ultimately though, one of the aims of marketing cost per booking is to see which marketing channels are working for you – so you can then make a decision about which ones to pursue. That means that a breakdown per channel can be very useful to know where to put your resources in the future.

You could do this breakdown by distribution channel (i.e. comparing the value you’re getting out of your different OTAs and your own website), or you could look at the marketing ROI of your acquisition channels like Facebook ads and Google paid search.

In the second case, if your Facebook ads ended up costing $22 per booking, whereas with Google you were spending $17 per guest, you’d most likely decide to invest more in Google ads going forward, as they represent better value.

Anything else?

Marketing cost per booking is generally seen as a way to see if your marketing strategies are paying off or not. So you’d always need to be comparing a ‘before’ and ‘after’ figure, one before you adopted a certain strategy, and the other after.

Hotel revenue management is as much art as it is science. To master it – and get the most out of your business – you need to start somewhere. Getting familiar with the terminology is a good entry point. As time goes on, you’ll see which numbers are most relevant to your business, and what kind of figures represent good business for your property. As you make small changes, you should notice your stats improve.

 

1 Comment

  1. cheap sash Windows belfast
    November 19, 2018

    You actually make iit seem so easy wifh your presentation but I find tuis matter to be actually something that I think I woyld never understand.

    It seems too complicated and very broad for me. I am
    looking forward for your next post, I will trry to get the hang
    of it!

    Reply

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