If there’s one revenue management metric that captures the attention of hoteliers the most, it’s likely that many will name Room revenue (RevPAR). A performance analytic similar to the Average Daily Rate (ADR), which demonstrates rates a hotel should charge during a certain period, RevPAR alternatively looks at how successful a hotel is in filling its rooms.
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What is Room Revenue or RevPAR?
As a formula intended to measure a hotel’s revenue performance, RevPAR significantly offers an invaluable opportunity to analyze the number of rooms sold and how much revenue is generated from such bookings.
Leveraging RevPAR is a vital analytical step allowing hospitality professionals to find the ideal balance between rates, occupancy and their revenue performance goals. The goal of any hotelier should be to increase RevPAR results, with a higher figure indicating the success of occupying rooms at a higher rate and therefore leading to an increase in business profits.
How to Calculate Room Revenue?
Option 1
Conducting a hotel RevPAR analysis is fortunately a simple and straightforward process that virtually any hospitality industry professional can perform. To start, hoteliers first must calculate their ADR. With their ADR results in hand, hoteliers next multiply the sum by the occupancy rate for the time period under review to identify what their RevPAR is.
This procedure for calculating RevPAR typically follows the below fosrmula:
RevPAR= ADR x Occupancy Rate
Using a 400-room hotel as an example, let’s assume that the property has an occupancy rate of 75 percent with an ADR of $150. This hotel’s RevPAR performance would be $112.50.
Option 2
Another way of calculating RevPAR is to divide the total number of guest rooms that a hotel has available by the total amount of revenue earned for a night. For example, a 200-room hotel experiencing 65 percent occupancy means that 130 rooms are occupied. The 130 occupied rooms are then multiplied by 100, which shows a total room revenue of $13,000.
With this total revenue sum, the hotel would next divide $13,000 by the total number of available rooms (200) to arrive at a RevPAR of $65. This second formula option therefore consists of the following steps:
Total room revenue= (Total number of occupied rooms/total number of available rooms) x 100
RevPAR= Total room revenue / total number available rooms
What is a Good Room Revenue Result?
Like many performance-related forecast reviews within the hospitality industry, understanding what RevPAR results hoteliers should aim for often comes down to performing a benchmark analysis of how their business compares to the overall performance of their local market.
While strategies leading to long-term and sustainable RevPAR increases should always be the goal, determining how similarly situated properties are faring importantly allows hotel businesses to see if their revenue management results are in line with, exceeding or falling behind the competition.
Hoteliers fortunately can gain access to a range of industry reports that reflect current market average RevPAR performance. Statista, for example, even offers the ability for hoteliers to review average RevPAR results for a specific geographic region.
How to Increase Room Revenue Performance
With RevPAR focusing on obtaining maximum occupancy at a market average rate, hoteliers have several methods at their disposal that can lead to improved performance and significantly higher profit margins. Strategies frequently deployed by hoteliers across the industry which have been proven to deliver effective results include:
Adopting a Successful Revenue Management Strategy
To maximize both revenue and guest room occupancy, many hoteliers recognize the need to create a perfect balance of selling the right room to the right guest at the right time. To consistently achieve this ability, hotels must be able to adjust prices according to demand and available supply.
Yet with hotel businesses typically utilizing an array of booking channels, including direct websites and OTAs, trying to manage and adjust rate pricing to reflect current market and business conditions can easily become a time-consuming and difficult process if done manually.
To avoid complications and potential mistakes, hoteliers should seek to adopt a revenue management platform that can integrate with a property’s various booking channels and engines. Such software can automatically adjust rates as occupancy rises or drops, ensuring that guests always perceive value while increasing hotel opportunities to maximize revenue.
An effective revenue management strategy is largely credited with increasing business revenues by 3 to 6 percent, which is why as much as 63 percent of hospitality professionals soon expect revenue management practices to commonly extend to other hotel offerings beyond guestrooms.
Upselling Ancillary Hotel Offerings
While room bookings do make up the largest share of where a hotel earns its revenue, hoteliers should not overlook the tremendous potential and influence that ancillary services can have on revenue management strategies and RevPAR results. This can include anything from tour guides and amenity rentals to room service plans and dry-cleaning packages.
With each ancillary offer that is successfully upsold to guests, a hotel can significantly increase the total amount of revenue that each available guestroom represents. Just by boosting its front desk upselling efforts, La RÉserve GenEve Hotel & Spa, for example, was able to increase its RevPAR by 4.75 percent.
To truly maximize upselling results and RevPAR, however, hoteliers should consider a strategy that promotes offerings to guests prior to their arrival. This can ultimately boost sales by communicating with guests at a time when travel itineraries are still being planned out.
Better still, AI-based upselling platforms can personalize promotional messaging according to individual guest preferences in order to maximize the likelihood of a sales conversion. By aligning with a guest’s specific interests, such solutions have in fact been proven to convert up to 20 percent of guests into purchasing additional hotel offerings.
Leveraging Different Pricing Strategies
Identifying optimal pricing rates isn’t a one-size-fits-all approach, but can instead be subject to various factors including season, day of the week, any upcoming local events as well as the presence of a guest loyalty program.
Hoteliers should identify which scenarios require differing pricing strategies in order to determine the highest price point that a room should be sold at without risking an overprice that results in low occupancy. Using a hotel’s loyalty program as an example, many returning guests understandably believe that they should receive a discount on a property’s room rates.
For example, and according to a study performed by Cornell’s University of Hotel Administration, hotels that joined a network loyalty program such as Stash Rewardswere able to experience a 57 percent revenue gain per year.
Increase the Number of Direct Bookings
Hoteliers have a love/hate relationship with OTAs for good reason. While they are essential in boosting the number of bookings that a hotel receives, OTAs also eat into the total amount of revenue that each guest room represents by charging commissions.
To maintain healthy RevPAR growth, hoteliers therefore should look to increasing the amount of direct bookings they receive. Several effective examples include having a mobile-friendly website, integrating a booking engine with a hotel’s website, as well as optimizing a hotel’s website to rank higher on Google searches.
Major hotel brands that have increased efforts to enhance the number of direct bookings include Hilton Hotels and Marriott International, with results demonstrating that each sale made directly enhanced revenue by 30 percent.
Reduce Cancellation Rates
High cancellation rates can wreak havoc on a hotel’s RevPAR results and performance forecasts. Yet while cancellation options are necessary to ensure guest confidence and safeguard business reputations, there are ways to drastically reduce the number of cancellations that a hotel receives.
Hotels should first always have a cancellation policy that is transparent and easily available to guests. This notably sets expectations on when guests can expect to have a cancellation request honored. This also prevents room revenue from being subject to otherwise unpredictable fluctuations in the number and type of cancellation requests a hotel may receive.
Other effective ways to minimize the number of cancellations can include offering discounts for confirmed bookings and collecting a deposit at the time of booking. With guests who stay for longer periods less likely to cancel, many hotels have also implemented a cancellation policy with length of stay restrictions.
Hotels also often encounter guests who decide to cancel just before their anticipated arrival date. This can leave hoteliers with the unenviable challenge of trying to re-sell a room within a very short time frame in order to prevent any loss of revenue.
To sidestep this issue, many large hotel brands have implemented cancellation policies where at least 48-hours notice must be given. Examples include Marriott International, Hyatt, IHG and Ritz-Carlton.
Pitfalls to Avoid when increasing your Room Revenue
While hoteliers do have several opportunities to increase their RevPAR performance, there perhaps are just as many risks that they need to avoid which can not only stall but reverse their progress. These include:
- Ignoring online reviews and allowing negative experience comments to increase.
- Failing to understand the importance of digital marketing which is now critical to increasing a hotel’s market reach and visibility.
- Allowing cancellation rates to spiral out of control and impact the amount of total room revenue otherwise being generated.
- Not offering a loyalty program that incentives guests to convert themselves into repeat customers.
- Maintaining a rigid pricing rate structure that does not take market and business environment conditions into account.
By following the industry’s best practices while avoiding common mistakes, hoteliers can not only safeguard vital sources of revenue but can also create a business model where such sources can reliably continue to grow.
Graduated from Standford University, Arielle has over 5 years of experience in the Hospitality industry. She holds an MBA in business administration from the IDC Herzliya, Israel. She currently works as Account Manager at UpStay, building and maintaining strong, long-lasting customer relationships. She is deeply passionate about helping hoteliers unlock significant new revenue streams from unsold premium inventory.
