RevPAR is probably the most common measure of hotel performance. But is it always the best? Or the most suitable? In our latest guest post, David Eisen from HotStats discusses a few of the other Key Performance Indicators (KPIs) that you could use instead.
Key performance indicators (KPIs) are the successful hotel manager’s or investor’s secret weapon. The right KPIs are powerful diagnostic tools, but the best metrics don’t just give you a peek under the hood or serve as a kick at the tires. They show how each part is helping the whole of the operation run, and they point out every blockage or misfire.
Unfortunately, the hotel industry doesn’t always consult the full range of KPIs that are available. Historically, revenue per available room (RevPAR) has been the de facto metric for determining a hotel’s financial health. But the data point is only a reflection of how well a hotel generates room revenue That’s like predicting how well a race car will perform by the grade of the fuel in its tank. It tells you what’s going into the engine, but it doesn’t necessarily tell you how your whole machine will perform in the long run.
Hotels are similar to a race car in that there are many moving parts that all have to work in harmony in order to produce a profitable result.
Luckily, there are many KPIs that allow you to look under the hood at revenue at expanse and the impact on the bottom line. Here are eight important KPIs that go beyond RevPAR.
You can figure out your total revenue per available room (TRevPAR) by dividing the property’s total revenue by the total number of available rooms. You may be wondering: How is TRevPAR different from RevPAR? While RevPAR only calculates revenue generated by rooms, TRevPAR shows the full potential of a property’s ability to generate total revenue—from rooms to F&B, and everything else in between. It adds up revenue from all sources.
In the age of online travel agencies and other intermediaries, net revenue per available room (NRevPAR) is a key KPI to keep tabs on. It measures the amount of revenue pulled in per room after outlays to commissions, transaction fees and other revenue-reducing forces. Simply put, NRevPAR considers net revenue. This means that distribution costs are subtracted from revenue before revenue is divided by available rooms. It tells a more in-depth story about the money rooms are bringing in.
Gross Operating Profit (GOP) is the hotel industry equivalent of a full-body checkup. It’s the top indicator of a hotel’s financial health and illustrates operational profitability at a hotel. The KPI measures an operation’s profits once all costs are subtracted. For hoteliers and investors, it shines a light on how well hotels are able to get the most out of what they’re earning and spending.
Gross operating profit per available room (GOPPAR) uses the same tactics of GOP and dives deeper. It takes the hotel’s operating profit and compares it to the number of available rooms. This metric displays a hotel’s overall performance and helps align the top line with the bottom line. It is calculated by taking GOP and dividing it by total available rooms.
Market penetration index (MPI) gives you a bird’s-eye view of a hotel and where it stands with its competition. You can find MPI by dividing a hotel’s occupancy by the market’s average occupancy. This metric can be a good signal of a hotel’s popularity. It doesn’t necessarily show much about a hotel’s operational health, but it’s a solid way to learn whether a hotel is in relatively high or low demand.
Having a difficult time pricing rooms or determining whether a hotel is setting prices outside the norm? Average rate index (ARI) could be a lifesaver. This metric looks at how a hotel’s average daily rate (ADR) compares to that of its competition. You can calculate ARI by determining a hotel’s ADR and dividing that number by the combined ADR of a competitive set.
This metric is a bit of a “Choose Your Own Adventure” because you determine what group of hotels to consider worthy competitors. However, if you nail down a solid comp set, ARI can make it easier to set pricing. At the same time, it can give investors a window into a hotel’s relative pricing strategy.
Each of these KPIs can play an important role in figuring out a hotel’s value and determining how to up a hotel’s profit. The bottom line? The more benchmarking data at your disposal, the better insight into your overall operation and the better positioned you’ll be to one-up the competition.