RevPAR Guide | Calculator + 7 Smart Ways To Maximize RevenueAugust 1, 2019
One of the challenges facing hotel owners is how to extract the maximum income from their properties. Naturally, owners rely on timely data to measure how well they are doing. Accordingly, owners turn to a standard set of metrics to quantify revenue and expense ratios. Therefore, this article will describe one of the most important, RevPAR. We’ll explore what is RevPAR and the importance of the RevPAR calculation. Moreover, we’ll explain how to calculate RevPAR using the RevPAR formula and we will also survey related metrics. Then we’ll provide you with seven tips to increase revenue, and finish by answering some FAQs.
What Is RevPAR?
RevPAR stands for Revenue Per Available Room. It is a metric that measures the revenue performance within the hospitality industry and elsewhere. A good revenue per available room indicates that a hotel is operating efficiently and filling its rooms. Naturally, hotels look for new ways to boost RevPAR, either by increasing the occupancy rate and/or average room rate.
Note that revenue per available room does not account for the size of the hotel. It is possible for a large hotel with a mediocre RevPAR to outperform a smaller, high-RevPAR property. Thus, if you pay too much attention to revenue per available room, your revenue and profits might suffer. Truthfully, that’s why it’s important to look at other metrics, such as average daily rate and occupancy rate. Accordingly, we’ll examine a few related metrics a little later in the article.
Hotel Revenue Management
Revenue per available room falls into the category of measurements concerned with managing hotel revenues. Hotel revenue management involves forecasting demand and adjusting the price of supply accordingly. Therefore, hotels should understand what different segments of travelers want from their accommodations. Using that information, hotels can then manipulate room prices and availabilities to grab their share of bookings. Interestingly, airlines were the first to adopt revenue management, but eventually hotels too learned how to play the game.
Hotel revenue management requires big data to drive growth. While once a challenge, data collection and sharing technology have advanced to make revenue management more feasible. Beyond hotel rooms, revenue management extends to other revenue generators. For example, these include reservations for hotel restaurants, spas, golf courses, and meeting rooms. Clearly, hotels benefit from understanding the travel patterns of their targeted audiences. Naturally, hotels exploit the information they obtain to forecast property expenditures and to adjust prices. In sum, revenue per available room is an important data point to help optimize your hotel revenues.
How to Calculate RevPAR
There isn’t just one revenue per available room formula — there are actually two, and they provide the same results. The first revenue per available room formula uses average daily room rate and occupancy rate. However, you can substitute another RevPAR formula that uses total room revenues and total number of available rooms. Therefore, you can perform the RevPAR calculation with either formula.
Terms Used in the First Revenue per Available Room Formula
We use these terms in the first revenue per available room formula:
- Average Daily Rate (ADR): The ADR is equal to the room revenue divided by number of rooms sold. It does not include rooms occupied by staff or complimentary rooms. Explicitly, it indicates revenue per room.
- Occupancy Rate: This is the ratio of rented rooms to available rooms over a set time period. Each night, you rent out a certain number of your available rooms, which is your daily occupancy rate. You can average that rate over any number of days. The vacancy rate is 100% minus the occupancy rate.
The First RevPAR Formula with Example RevPAR Calculation
You calculate revenue per available room as:
RevPAR = ADR x Occupancy Rate
For example, suppose you’ve purchased a run-down, 50-room hotel and give it a fabulous renovation. Now, you find that you easily doubled the ADR, which rose to $300/night. Also, your occupancy rate jumps from 40% before the renovation to 90% after. Therefore, your new revenue per available room is $300 x 0.90, or $270 per available room per day. Naturally, that compares favorably to your pre-renovation RevPAR of $150 x 0.40, or $60 per available room per day. It appears that your acquisition and renovation of your hotel property is a smashing success from a revenue viewpoint. Of course, you have to factor in your expenses to see whether you have good profits.
Terms Used in the Second RevPAR Formula
We use these terms in the second RevPAR formula:
- Total Room Revenue: This is a hotel’s total revenues from the rental of available rooms for a given period. It does not include other revenues, such as receipts from restaurants, bars, spas or conference centers.
- Total Available Room-Days: This is the number of rooms available each day times the number of days in the period. This does not include rooms used for other purposes.
The Second RevPAR Formula with Example RevPAR Calculation
The second answer to how to calculate RevPAR is:
RevPAR = Total Room Revenue / Total Available Room-Days
Let’s build off the first example. For the month of June, your total revenues from available rooms was $405,000. The number of room-days available in June was 50 rooms x 30 days, or 1,500 room-days. Therefore, revenue per available room = $405,000/1,500, or $270. Note that this matches the first formula’s result.
Other Relevant Metrics
Recall that we earlier discussed occupancy rate, which is an exceedingly important metric. Obviously, a chronically low occupancy rate signals a mismatch between supply and demand. Clearly, if you want to increase the occupancy rate, you will have to take some action. For example, you could lower the rates you charge, or convert some guest rooms for other revenue-generating purposes. Alternatively, you might increase room demand with extra incentives, such as offering reward points or adding free high-value amenities.
Average Daily Room Rate (ADR)
This is another metric we touched upon earlier. Naturally, you want a high ADR and one that increases over time. That is, a rising ADR shows that your hotel is earning more revenues from the rooms you rent out. Clearly, one of your goals is to boost ADR by increasing price per room. Therefore, you should explore tactics such as cross-sale promotions, upselling, and free offers such as a complimentary massage. Of course, a strong economy is a key determinant of ADR. Importantly, you can compare ADRs of different hotels only if they share similar characteristics, like size, location and amenities.
Gross Operating Profit Per Available Room (GOPPAR)
This key performance indicator measures gross operating profit divided by rooms available. You calculate it by dividing the number of room-days available for the period into the period’s gross operating profit. This profit is the revenue remaining after subtracting operating expenses. In most respects, GOPPAR is more useful than RevPAR because it accounts for expenses as well as revenues. Thus, GOPPAR indicates how efficiently you run your hotel. However, GOPPAR doesn’t account for the mix of revenues your hotel yields. Therefore, you can’t use it to evaluate room revenues because it includes other revenues. But it is useful for indicating the overall profitability of the property.
Revenue Generation Index (RGI)
RGI lets you compare your revenue per available room with the average market RevPAR. Simply divide your RevPAR by the average RevPAR for the comparable market(s) in which you compete. Then you multiply the result by 100 to get the RGI. Ideally, you seek an RGI above 100, indicating that you are taking more than your share of room revenues against the competition. However, the weakness of RGI is the assumption that the hotels are fully comparable with your hotel. That is, there are a number of factors that make hotels unique, increasing the difficulty of comparing RevPARs. For example, you might own the only 5-star hotel in your market, while all the others are 3-star or less. This would diminish the significance of the RGI.
Net RevPAR (NRevPAR)
NRevPAR is similar to revenue per available room, except it factors in certain costs to derive net revenues. The formula subtracts distribution costs, transaction fees and travel agency commissions from room revenue and divides by available rooms. Undeniably, this is a useful metric, but only to the extent that the cost data is available. By including costs directly related to room revenue, you get a better idea of your operating efficiency.
Video: What is Occupancy, ADR, and RevPAR?
7 Smart Ways to Maximize Revenue
These tips should help improve your revenue per available room:
- Offer Discounts: Pick out target audience members and offer them special deals. These might be folks on your newsletter list or your Facebook fans. Let the word get out that loyalty pays off.
- Loyalty Program: Speaking of loyalty, offer rewards to repeat customers. This includes discounts, gift vouchers, and special tours of local attractions.
- Special Add-ons: Package together room stays with free meals, free airport transfers, free shuttle service to special events, and drink discounts.
- Checkout Offers: What better time to offer a discount on your customers’ next stay than at checkout. Have lobby signs announcing the discount for those who book their next stay directly through the hotel website.
- Understand Seasonality: It doesn’t make sense to lavish your discounts on customers during the slow season. Frankly, it just eats into your profits without increasing your business. Save your best discounts for the busy season where they will do the most good.
- Improve Service: Ensure your employees deliver great service. It’s cheaper than fancy renovations and can be just as effective. A better hotel experience can be a very cost-effective strategy.
- Require Minimum Stays: You can require customers who book outside your website to observe a minimum stay of two or three days. Incredibly, you collect multi-day revenues even if the customer checks out early. It’s a classic way to reduce guest turnover costs.
Frequently Asked Questions: RevPAR
The RevPAR index (RPI) is a synonym for revenue generation index (RGI). It is the ratio of your hotel’s RevPAR to the average RevPAR of local comparable hotels. A value greater than 100 indicates that you are taking more than your average share of business. RevPAR, or revenue per available room, indicates whether you are correctly matching demand with supply. You use it to see whether you are harvesting the revenues you expected when you invested in the hotel. If it is too low, you can take steps to increase revenue per available room. A good RevPAR is one that exceeds the average revenue per available room for your neighboring comparable properties. A better indicator is the RevPAR index, which is exactly this ratio of your RevPAR to the comparable average. If your RevPAR index is below 100, you might consider finding ways to improve it. Both metrics focus on top-line results, i.e., revenue. ADR tells you how much, on average, you charge for your rooms. Revenue per available room multiplies ADR by occupancy rate to indicate how productive your property is. Neither takes expenses into account. Naturally, owners and investors care dearly about RevPAR as an indicator of potential return. Lenders and commercial brokerage firms look at RevPAR to help value a property and estimate its free cash flows. Assets America® is a commercial broker that arranges financing starting at a bare minimum loan amount of $5 million. Contact us for more information about hotel financing.
The RevPAR index (RPI) is a synonym for revenue generation index (RGI). It is the ratio of your hotel’s RevPAR to the average RevPAR of local comparable hotels. A value greater than 100 indicates that you are taking more than your average share of business.
RevPAR, or revenue per available room, indicates whether you are correctly matching demand with supply. You use it to see whether you are harvesting the revenues you expected when you invested in the hotel. If it is too low, you can take steps to increase revenue per available room.
A good RevPAR is one that exceeds the average revenue per available room for your neighboring comparable properties. A better indicator is the RevPAR index, which is exactly this ratio of your RevPAR to the comparable average. If your RevPAR index is below 100, you might consider finding ways to improve it.
Both metrics focus on top-line results, i.e., revenue. ADR tells you how much, on average, you charge for your rooms. Revenue per available room multiplies ADR by occupancy rate to indicate how productive your property is. Neither takes expenses into account.
Naturally, owners and investors care dearly about RevPAR as an indicator of potential return. Lenders and commercial brokerage firms look at RevPAR to help value a property and estimate its free cash flows. Assets America® is a commercial broker that arranges financing starting at a bare minimum loan amount of $5 million. Contact us for more information about hotel financing.