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April 3, 2024

Keep Your Eyes on the Prize: Setting Objectives in Hotel Revenue Management

Here are the four main hotel revenue management objectives hoteliers use to guide decisions along with tracking and measuring success.

Setting Objectives in Hotel Revenue Management

Whether you operate a boutique hotel, inn, hostel, vacation rentals, serviced apartments, or another type of independent lodging business, smart revenue management starts with setting clear objectives. 

What do you wish to achieve through your pricing strategies? Here are the four main revenue objectives hoteliers use to guide decisions, along with key performance metrics (KPIs) for tracking and measuring success.

1. Increase Occupancy

Building occupancy is important because bookings bring in revenue and help cover costs. It’s also important because hotel room inventory is perishable. Each night a room sits empty, the opportunity to sell it that night is lost. 

Sometimes increasing occupancy is a top priority. For example, a new hotel might offer special introductory rates to entice travelers to try the property for the first time. Not only will this help attract bookings, it will also generate awareness and positive online reviews, helping to put the hotel on the map. 

 

Occupancy Formula

A hotel’s occupancy percentage on a given date or over a period such as a month or year is calculated by dividing the number of occupied rooms by the number of available rooms and then multiplying by 100.

Occupancy % = Number of Occupied Rooms/Number of Available Rooms X 100


2. Increase Average Rate

Hotels often place too much emphasis on filling rooms and not enough emphasis on building average rate. As a result, they charge lower rates than they need to and capture less revenue. On the other hand, if hotels set prices too high, they risk losing potential bookings to competitors.

It’s a delicate balance. When demand for rooms is high, a hotel has more pricing power. When demand is low, it may need to lower rates to meet occupancy objectives. 

 

ADR Formula

A hotel’s average daily rate (ADR) on a given date or set of dates is calculated by dividing total room revenue by the number of rooms sold.

Average Daily Rate = Room Revenue/Number of Rooms Sold


3. Increase Revenue

A key objective of revenue management is to find the sweet spot between occupancy and rate that generates the most revenue. But it’s not just about room revenue. If a property has a restaurant, bar, function space, spa, or other revenue outlets, maximizing total revenue might be more important. 

For example, a hotel with function space may offer discounted room rates to attract meetings and events that will spend more money on property than independent travelers.

 

RevPar & TrevPar Formulas

A primary measure of revenue performance is revenue per available room (RevPAR). It is calculated for a given date or set of dates by dividing room revenue by the number of available rooms. TRevPAR is a measure of total revenue per available room.

RevPAR = Room Revenue/Number of Available Rooms 

TRevPAR = Total Revenue/Number of Available Rooms 


4. Increase Profitability 

The ultimate objective of any property is to maximize profitability. To do so, hoteliers must find ways to bring in maximum revenue while also controlling costs. 

Part of that means recognizing that some types of business bring in more revenue than others, some have higher costs of acquisition and servicing, and room sales are generally more profitable than other types of revenue (though not always).

For example, if two guests pay the same price for the same room type, but one guest books on Expedia and the other books on the hotel’s website, the latter guest will generally be more profitable because the hotel doesn’t pay a commission on the room rate. 

 

Profit Margin Formula

A hotel’s profit margin is calculated for a given date or set of dates by taking total revenue and deducting operating costs, dividing the amount by total revenue, and then multiplying by 100. 

Profit Margin = (Total Revenue – Operating Costs)/Total Revenue x 100

 

Annual Hotel Planning: Combining the Four Objectives

When preparing the annual budget, use these KPIs to set objectives for the coming year, breaking them down by month and day. Then plan the strategies required to achieve your objectives, adjusting them as needed throughout the year. 

By taking an objectives-based approach to revenue management, hoteliers not only keep their eyes on the prize, they win it: a profitable lodging business.

 

Want to learn more? Check out Hotel Pricing Strategies, A Guide for Independent Hotels.

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