Understanding Hospitality Metrics ADR, RevPAR and More
The hospitality industry got a lot more complicated recently. The borders are closed, travel is suspended, there’s mass quarantine and scarcity of tourists. The law of the jungle rules in the travel and hospitality industry. Only the most prepared and adaptive businesses will survive.
Your gut feeling won’t get you out of the woods and it won’t help your business pull through in a tough market. You need information in order to make the right calls.
Obviously, you want higher revenues, reduced operating costs and great profit margins. However, realizing these goals requires diving deep into the data and optimizing several key performance indicators that put your business in the context of the surrounding market.
In this article, we’ll go through the most commonly used metrics and KPIs of the hospitality industry and explain how they work and why they matter for your business.
ADR – Average Daily Rate
Average Daily Rate (ADR) is the most commonly used performance metric in the hotel industry.
Different rooms go for different rates, depending on their size, features and furnishings. ADR gives you a single metric to compare your hotel’s prices against similarly sized and equipped competitors.
You can calculate ADR by dividing the total room revenue to the number of rooms sold for the given period. For example, if you sold 56 rooms yesterday and realized $6,500 total revenue, the ADR is calculated as follows:
-
ADR = Total Revenue / Rooms Sold
-
ADR = $6,500 / 56 = $116 per room
You can calculate this metric for a week, month, quarter and year by multiplying the rooms to the number of days in the given tracked period and using the total room revenue for the same time frame. If the hotel scores $7 higher ADR than your main competitors, it means you’re getting better value from your property.
ARI – Average Rate Index
This metric measures how your hotel’s ADR measures against your segment / competitors. You calculate the ARI as follows:
-
ARI = Hotel ADR / Market ADR * 100% = some percentage
If you’re in tune with the market, your ARI should equal 100%. If you score higher, then you’re earning more than your direct competitors. However, ADR does not account the occupancy rate of your hotel. You could only fill 30% of your rooms and still get a higher ADR than your competitors who’re taking in twice as many guests and have much bigger revenue and profit. In order to get a more complete picture, you need to consider how much of your rooms are occupied and how many remain empty.
Occupancy Rate
The occupancy rate is pretty straightforward – the percentage of rooms you have full for any given period.
-
Occupancy Rate = Rooms Booked / Total Rooms * 100% = some percentage
Obviously, a higher occupancy rate is desirable, since it adds direct revenue and has a potential of increased spending on other vicinities, such as restaurants, bars, gyms, etc.
Higher occupancy also adds operating costs. 100% occupancy at dramatically reduced prices can end up losing you profit. That’s the exact opposite of your goal, so a fine balance must be achieved.
Of course, 100% occupancy is unimaginable for any significant period. There will be natural peaks and dips in occupancy depending on the seasonality, location and type of accommodations you offer.
MPI – Market Penetration Index
Additionally, you can observe the occupancy rate in relation to the average occupancy for your segment or local market.
-
MPI = Hotel Occupancy Rate / Market Occupancy Rate * 100% = some percentage
If your hotel hits the average market occupancy rate, the measurement should be exactly 100%. Any more and you have the edge over the competition, unless you’re unreasonably reducing your prices.
RevPAR – Revenue Per Available Rooms
Revenue Per Available Rooms (RevPAR) is a measurement of the ability to fill all rooms in a hotel property, given the average room price.
You can calculate RevPAR by multiplying the average daily rate to the occupancy rate in a given period. For example, if your ADR is $120 per room, and you have 85% of your rooms booked up, the RevPAR for your property is calculated as follows:
-
RevPAR = ADR * Occupancy Rate
-
RevPAR = $116 * 85% = $98.6 per room
Only revenue from sold rooms should be considered for this calculation. Revenue from restaurants, lobby bars, tourist shops or other services should not be included.
RevPAR will grow proportionally to the average daily rate and occupancy rate. It’s useful to judge real world performance of the property and how effectively the rooms are priced compared to their take up rate. If everything is going great, you should see this number grow.
For this example, decreasing the going rate by $9 (9.3%) in order to get 9% more occupancy, will increase RevPAR to $100.6.
RevPAR does not account for the size of the hotel, and it’s not a measurement for the profit. More occupancy means more running costs.
RGI – Revenue Generation Index
The Revenue Generation Index is a comparative metric measuring your hotel’s RevPAR against your market segment.
RGI = Hotel RevPAR / Market RevPAR * 100% = some percentage
Again, just like other comparative metrics, 100% means you’re getting a fair share of your desired market. You’re aiming for a larger figure.
TrevPAR – Total Revenue Per Available Room
TrevPAR is similar, however, it accounts for all revenue streams attached to the property – restaurants, bars, gyms, spas and other amenities. If you have a total revenue of $26,000 and 240 rooms in the property, your TrevPar is calculated as follows:
-
TrevPAR = Total Revenue / Total Rooms
-
TrevPAR = $26,000 / 240 = $108.3 per room
GOPPAR – Gross Operating Profit Per Available Room
GOPPAR gives you the big picture – how much profit you generate per room in your hotel. That accounts for all operational expenses – maids, cleaning, maintenance, rent, utilities, supplies and other costs.
You calculate GOPPAR in the following manner:
-
Calculate Gross Profit for the given period. For example, if you earned $7.3 million for the entire year, but paid $2.6 million in salaries and $1.1 million in supplies and consumables, your Gross Profit (before tax) would be $3.6 million.
-
Next, multiply the total room amount by the days in your measured period. In this case, let’s say we have 130 rooms and 365 days in the year, so a total of 47,450.
-
Finally, divide the two figures. Your average annual profit per room is $3.6 million / 47,450 = $75.87.
Takeaway
Let’s quickly recap what we learned about key performance indicators in the hospitality industry:
-
Average daily rate – the average price of a room across your portfolio in a measured period.
-
Occupancy rate – the percentage of hotel rooms sold.
-
RevPAR – the average revenue generated per room in your hotel. A metric taking into account the previous two.
-
TrevPAR – similar metric taking into account all revenue sources in the hotel’s facilities.
-
GOPPAR – a metric that measures the profit per room in a given time frame.
These are not all possible performance metrics about the hospitality industry, but they should give you a great starting point to develop more sophisticated methods to collect and analyze data.
The right decisions are based on reliable information about your performance in relation to the market around you. If your hotel is not collecting data, you’re already trailing behind the competition.
Make that your top priority!
ADR, RevPAR and More
The hospitality industry got a lot more complicated recently. The borders are closed, travel is suspended, there’s mass quarantine and scarcity of tourists. The law of the jungle rules in the travel and hospitality industry. Only the most prepared and adaptive businesses will survive.
Your gut feeling won’t get you out of the woods and it won’t help your business pull through in a tough market. You need information in order to make the right calls.
Obviously, you want higher revenues, reduced operating costs and great profit margins. However, realizing these goals requires diving deep into the data and optimizing several key performance indicators that put your business in the context of the surrounding market.
In this article, we’ll go through the most commonly used metrics and KPIs of the hospitality industry and explain how they work and why they matter for your business.
ADR – Average Daily Rate
Average Daily Rate (ADR) is the most commonly used performance metric in the hotel industry.
Different rooms go for different rates, depending on their size, features and furnishings. ADR gives you a single metric to compare your hotel’s prices against similarly sized and equipped competitors.
You can calculate ADR by dividing the total room revenue to the number of rooms sold for the given period. For example, if you sold 56 rooms yesterday and realized $6,500 total revenue, the ADR is calculated as follows:
ADR = Total Revenue / Rooms Sold
ADR = $6,500 / 56 = $116 per room
You can calculate this metric for a week, month, quarter and year by multiplying the rooms to the number of days in the given tracked period and using the total room revenue for the same time frame. If the hotel scores $7 higher ADR than your main competitors, it means you’re getting better value from your property.
ARI – Average Rate Index
This metric measures how your hotel’s ADR measures against your segment / competitors. You calculate the ARI as follows:
ARI = Hotel ADR / Market ADR * 100% = some percentage
If you’re in tune with the market, your ARI should equal 100%. If you score higher, then you’re earning more than your direct competitors. However, ADR does not account the occupancy rate of your hotel. You could only fill 30% of your rooms and still get a higher ADR than your competitors who’re taking in twice as many guests and have much bigger revenue and profit. In order to get a more complete picture, you need to consider how much of your rooms are occupied and how many remain empty.
Occupancy Rate
The occupancy rate is pretty straightforward – the percentage of rooms you have full for any given period.
Occupancy Rate = Rooms Booked / Total Rooms * 100% = some percentage
Obviously, a higher occupancy rate is desirable, since it adds direct revenue and has a potential of increased spending on other vicinities, such as restaurants, bars, gyms, etc.
Higher occupancy also adds operating costs. 100% occupancy at dramatically reduced prices can end up losing you profit. That’s the exact opposite of your goal, so a fine balance must be achieved.
Of course, 100% occupancy is unimaginable for any significant period. There will be natural peaks and dips in occupancy depending on the seasonality, location and type of accommodations you offer.
MPI – Market Penetration Index
Additionally, you can observe the occupancy rate in relation to the average occupancy for your segment or local market.
MPI = Hotel Occupancy Rate / Market Occupancy Rate * 100% = some percentage
If your hotel hits the average market occupancy rate, the measurement should be exactly 100%. Any more and you have the edge over the competition, unless you’re unreasonably reducing your prices.
RevPAR – Revenue Per Available Rooms
Revenue Per Available Rooms (RevPAR) is a measurement of the ability to fill all rooms in a hotel property, given the average room price.
You can calculate RevPAR by multiplying the average daily rate to the occupancy rate in a given period. For example, if your ADR is $120 per room, and you have 85% of your rooms booked up, the RevPAR for your property is calculated as follows:
RevPAR = ADR * Occupancy Rate
RevPAR = $116 * 85% = $98.6 per room
Only revenue from sold rooms should be considered for this calculation. Revenue from restaurants, lobby bars, tourist shops or other services should not be included.
RevPAR will grow proportionally to the average daily rate and occupancy rate. It’s useful to judge real world performance of the property and how effectively the rooms are priced compared to their take up rate. If everything is going great, you should see this number grow.
For this example, decreasing the going rate by $9 (9.3%) in order to get 9% more occupancy, will increase RevPAR to $100.6.
RevPAR does not account for the size of the hotel, and it’s not a measurement for the profit. More occupancy means more running costs.
RGI – Revenue Generation Index
The Revenue Generation Index is a comparative metric measuring your hotel’s RevPAR against your market segment.
RGI = Hotel RevPAR / Market RevPAR * 100% = some percentage
Again, just like other comparative metrics, 100% means you’re getting a fair share of your desired market. You’re aiming for a larger figure.
TrevPAR – Total Revenue Per Available Room
TrevPAR is similar, however, it accounts for all revenue streams attached to the property – restaurants, bars, gyms, spas and other amenities. If you have a total revenue of $26,000 and 240 rooms in the property, your TrevPar is calculated as follows:
TrevPAR = Total Revenue / Total Rooms
TrevPAR = $26,000 / 240 = $108.3 per room
GOPPAR – Gross Operating Profit Per Available Room
GOPPAR gives you the big picture – how much profit you generate per room in your hotel. That accounts for all operational expenses – maids, cleaning, maintenance, rent, utilities, supplies and other costs.
You calculate GOPPAR in the following manner:
Calculate Gross Profit for the given period. For example, if you earned $7.3 million for the entire year, but paid $2.6 million in salaries and $1.1 million in supplies and consumables, your Gross Profit (before tax) would be $3.6 million.
Next, multiply the total room amount by the days in your measured period. In this case, let’s say we have 130 rooms and 365 days in the year, so a total of 47,450.
Finally, divide the two figures. Your average annual profit per room is $3.6 million / 47,450 = $75.87.
Takeaway
Let’s quickly recap what we learned about key performance indicators in the hospitality industry:
Average daily rate – the average price of a room across your portfolio in a measured period.
Occupancy rate – the percentage of hotel rooms sold.
RevPAR – the average revenue generated per room in your hotel. A metric taking into account the previous two.
TrevPAR – similar metric taking into account all revenue sources in the hotel’s facilities.
GOPPAR – a metric that measures the profit per room in a given time frame.
These are not all possible performance metrics about the hospitality industry, but they should give you a great starting point to develop more sophisticated methods to collect and analyze data.
The right decisions are based on reliable information about your performance in relation to the market around you. If your hotel is not collecting data, you’re already trailing behind the competition.
Make that your top priority!
