A few years ago, I was asked to do a talk on Conversion Rate Optimisation for websites with other practitioners in the digital world. It was not something I had done a lot of before but I had always enjoyed it so was happy to oblige.
It turns out that those that do a lot of this sort of this sometimes play a game called ‘Bullshit Bingo’. It works like this … all the speakers write a word on a piece of paper, fold the paper so the word can be seen, you then have to randomly pick up one of the pieces of paper (that isn’t yours!) and the word you get is the word you use. The rules are quite simple … you have to use your chosen word in your presentation and the winner is the one who uses that word the greatest number of times in the presentation without anyone calling them out.
I sometimes feel that that is how some hoteliers use industry acronyms …. Used a lot of times, out of context and nobody calls Bullshit.
Part of the reason for this is that as new people come into the industry, I feel that sometimes they can be overwhelmed by the amount of jargon being used and may not have a full understanding of its meaning.
In this article I will focus primarily on revenue acronyms rather than financial or operational although there is some overlap.
This is how I believe best to use the terms but I don’t expect everyone to agree!
Some Basic ones to start off with:
This is the percentage of available rooms that you have sold over a particular time.
If you have 120-bedroom hotel and 80 of them are occupied last night, you were 67% occupied.
There is no industry standard in calculating the number of ‘available rooms’ for sale but I would include rooms that are off for minor issues e.g., deep cleaning and exclude rooms that are off for significant repair e.g., bathroom retiling.
The other consideration is whether you use complimentary rooms in the number of rooms sold, my view is not to, as there are no prizes for inflating your occupancy % by giving rooms away.
ARR / ADR / HAR
This is the Average Room Rate (or Average Daily Rate) that you are achieving over a specific period and is calculated by the revenue from the rooms sold divided by the total rooms sold.
I like to use gross rates and again exclude complimentary rooms sold.
For example, Last night I achieved €10400 in gross revenue from 80 rooms sold the ARR or ADR is €130.
If I had 2 complimentary rooms on that some night, I could also calculate my Hotel Average Rate which would be the same €10400 in gross revenue but this time from 82 rooms giving a HAR of €126.83.
As you can see the ARR and ADR will always be at least as high as the HAR.
Revenue Per Available Room brings into account both occupancy and Average Room Rate by multiplying the two of them together and is a helpful performance indicator specially to understand whether revenue strategies are working as it is a combination of the two-core metrics.
RevPAR = ARR x % occupancy.
So, if last night I had an average rate of €120 and an occupancy of 75% my RevPAR would be €90.
A word of caution … you must be consistent in you inclusion or exclusions of complimentary rooms (either both out or both in) for your RevPAR metric to be correct.
Although these are basic calculations it is important to see the idiosyncrasies about what to include or not, bearing in mind that your competitors who you benchmark against my use slightly different calculations due to this.
Some valuable but underutilised performance metrics
An oldie but a goodie … Average Length of Stay is a very underutilised performance indicator. As the name suggests it calculates the average number of nights an entity stays. Due to the cost of turning a room, administration costs for check-in and out and the average total spend increases for longer stays it makes sense to look at this through a number of lenses:
- Strategies should be in place to increase the average length of stay overall
- Corporate and leisure accounts should be benchmarked against this
- Some origin markets can prove more worthwhile if their ALOS is longer
- Understand the different ALOS from each of your Distribution Channels
Gross Operating Profit Per Available Rooms takes into account the cost of the sale of the room.
In this instance GOP = total revenue – (total departmental expenses + total undistributed expenses)
Total departmental expenses = Rooms expense + Food and Beverage expenses + other operated department expenses.
Total undistributed expenses = Administrative & General + Information & Telecommunication Systems + Sales and Marketing + Utilities + Property Operations and Maintenance.
Depending on the granularity you want to get to and how your hotels market and operational costs differ I would suggests taking the following as a minimum into account when calculating your GOPPAR:
- Commission to aggregators
- Commission the travel agents
- Commission on your own booking sides
- Proportionate costs for manual reservation input
Total Revenue Per Available Room is another underutilised beauty and in my mind the performance indicator that hotels should spend a lot more time analysing as it takes into account all sources of revenue within a hotel.
All hotels would benefit from a refocus on this but resort properties in particular with the additional revenue centres available should pay particular attention.
Revenue Per Available Guest is similar to TRevPAR but divides the total revenue by the number of sleepers rather than the number or rooms … this gives a better sense of revenue contribution on an individual level.
We talked about occupancy earlier with selling 50 rooms of a 100-bedroom hotel being 50% occupancy… right? Well not really.
What if, a guest arrives at 9pm and leaves at 9am the following day. We would have traditionally seen this at 100% occupancy as the room was occupied overnight. However, the guest only stayed 50% of the total time available for the day in that rooms (12 out of the 24 hours in the day), therefore the true occupancy could be seen as 50%.
Whilst this is a departure from how we have traditionally seen occupancy, if you redefine the time units available it opens to opportunity to transform the use cases of our finite physical assets, currently called bedrooms!
Understanding of performance metrics is essential in the effective running of hotels. Over use, out of context and misunderstanding leads to confusion and misalignment of goals. Choose the ones that are the most relevant to you and be consistent in your approach.
There is a real opportunity for hotels to redefine their performance metrics and move on from the more traditional Occupancy, ARR and RevPAR. TRevPAR and RevPAG especially are much more guest centric and require the whole hotel team to contribute, focussing on high levels of upselling and customer service as well as the more traditional ARR and occupancy %.
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