Originally published: Dec 16, 2016, on: customer-alliance.com

Things are becoming more complex within hotel revenue management. Learn about the evolution of RevPAR and increase your revenue with Customer Alliance!

Origin of RevPAR

A hotel is like a living organism. In the rapidly changing market of hospitality industry, supply and demand can totally change, top to bottom, from one day to another. Hotel Revenue Management has therefore grown in complexity during the past decades.

So, let’s take a look at the three major Key Performance Indicators used to measure the economic success of a hotel.

  • Average Daily Rate (ADR): Average daily income per occupied room
  • Occupancy: All occupied rental units of a hotel at a given time (measured in %).

In the past, many hotels either defined high occupancy rates or heavy room rates as their primary business goal to achieve. By doing this, however, they often ignored important aspects of their business performance.
This is why some years ago, Hotel Revenue Management introduced a new concept.

  • RevPAR: Arguably the most important figure to look at when calculating an accommodations’ financial performance. It provides relevant information about the REVenue Per Available Room, putting in relation the hotel’s daily rates with its occupancy.


Examples for RevPAR calculation

Generally, there are two ways of calculating a hotel’s RevPAR. The classic approach is multiplying the Average Daily Rate (ADR) with the occupancy.

ADR x Occupancy

Alternately, the same result can be arrived at by calculating the following:

Total Room Revenue in a Given Period
Number of Available Rooms in Same Period


So let’s do the math:


For our case, we take a hotel with 100 rooms of which 60 rooms are sold for a given day, generating a total revenue of 4200€.

By dividing the Total Revenue by the Number of rooms sold (4200 / 60), we get the value of 70€ as the Average Daily Rate.
Meanwhile, we find a 60 % Occupancy rate (60/100 rooms occupied).

So, taking either the first calculation formula (70€ * 0,6), or the second (4200€ / 100), we arrive at a RevPAR result of 42€.


Limitations of RevPAR

Within current Hotel Revenue Management, RevPAR is believed to be the most accurate figure that can be looked at to calculate a hotel’s’ performance. It is also used to compare hotels’ economic performances.

However, if you take a closer look, there are some limitations to its relevance.

Let’s take a look at two simple cases:

A Hotel with 50 rooms in total

  • sells 50 rooms for 20€ each.
  • sells 5 rooms for 200€ each.

In both cases, the hotel generates a revenue of 1000€ while maintaining a RevPAR of 20€.

So, if RevPAR remains the same right here, does that mean that the hotel will have the same net operating income (NOI) in both cases?

No! Unfortunately, traditional RevPAR calculations do not take into account things like costs per occupied room or additional revenue per room for each individual room that is sold.

As a result, RevPar still isn’t the perfect indicator of a hotel’s financial success.


Evolution of RevPAR

Because of this, successful Revenue Managers such as Ira Vouk – Vice President and Co-founder of iRates – have introduced the concept of Adjusted Revenue Per Available Room (ARPAR), also referred to as Total Revenue per available Room (TRevPAR).

Let’s take close a closer look at both concepts:

TRevPAR looks at the total revenue of the property. Consequently, it will include all consumer consumption (at the bar, from room service, breakfast, etc.). In short, it sums up all revenue factors generated by a hotel taking a meaningful look into it’s profitability.

TRevPAR = Total Revenue / Number of available rooms 

Unfortunately, TRevPAR does not consider cost factors and does not take into account the occupancy rate, where these numbers are required to fully understand the hotel’s efficiency.

On the contrary, The ARPAR formula as used by Ira Vouk “is a clear reflection of the bottom line profit”. There are different ways of doing the relevant calculations, and the formula is expandable. However, in this article we want to emphasise that RevPAR alone is no longer significant enough to get the whole picture.

This is why we stick to Ira’s simplest formula to calculate ARPAR:


ARPAR = (ADR – Variable costs per occupied room + Additional Revenue per occupied room) х Occupancy


Let’s go back and apply this formula to our hotel example:


A Hotel with 50 rooms in total

  • sells 50 rooms for 20€ each.
  • sells 5 rooms for 200€ each.


As we’ll recall, RevPAR came out to 20€ for both cases.
What about ARPAR?

In our scenario, we assume

  • Variable costs per occupied room = 10€


  • Additional Revenue per occupied room = 5€

Case 1:

(20€ – 10€ + 5€) * 1 = 15€

Case 2:

(200€ – 10€ + 5€) * 0,1 = 19,5€

In this case, we therefore find that Case 2 is the more profitable one for the hotel. Off course, this is only an example. The results of a ARPAR calculation will vary depending on the variable costs per occupied room and additional revenue per occupied room, which are themselves likely to be different for each hotel. Besides that, commission rates and the amount of direct bookings respectively will significantly influence a hotel’s NOI.

Calculate your ARPAR now!


Final Words

According to findings from Robert Mandelbaum, Director of the Office of Research Information Services, a low inflationary environment is projected for the near future. This means that any increases, both in occupancy and ADR, will drive up TRevPAR in 2015 and 2016. “The resulting strong increases in revenue, combined with tempered growth in operating expenses, will result in double-digit gains in NOI for the next two years.”

In conclusion, things have become more complex within the field of Hotel Revenue Management. Hoteliers should be aware of many factors when measuring the performance of their property. At the same time, increasing complexity offers the opportunity to obtain a strong lead over competitors.

Originally published: Dec 16, 2016, on: guidingmetrics.com

In this article you’ll learn the most critical metrics that companies in the Hotel Industry should track.The article does not include metrics such as Profits and Sales that are critical to companies in all industries; rather the focus is on metrics more specific to the Hotel Industry.

By tracking your metrics, you will dramatically improve your business results.

Why? Because not only is the old saying “If you can’t measure it, you can’t improve it” true, but visibility into your metrics allows you to identify WHERE you can make the easiest and most impactful improvements.

For each metric, we will answer the following questions:

– What is the metric?

– How do you calculate this metric?

– Why is this metric important?

Let’s get started…

1. Total Available Rooms

What is this metric?
Total available rooms represents the number of rooms available multiplied by the number of days in the reported period. It is used as a measure of capacity in the system of hotels.


Total number of rooms – Number of rooms out of order/not in service/out of inventory

Why is this metric important?
This metric is essential for proper inventory calculations, which lead to proper number bookings. It also is important for all of the hotel’s financial calculations as it determines how many operable rooms there to base revenue formulas off of. For example, if a hotel has 300 rooms, but only 290 are in service, then for that period, 290 is the base to use for metrics like RevPar.

2. Average Daily Rate (ADR)

What is this metric?
Hotel ADR measures the average price paid per room. This hotel performance metric assesses the total guest room revenue for a specific period versus the total amount of room revenue paid and occupied hotel rooms within the same timeframe.


Rooms Revenue / Paid Rooms Occupied

Why is this metric important?
The ADR is useful to measure a property’s financial performance, as well as to compare the hotel’s performance to its competitors.

3. Revenue Per Available Room (RevPar)

What is this metric?
This accounts for the average daily rooms revenue generated per available room. This metric doesn’t account for other revenue centers such as F&B, spa or retail. Average RevPar varies widely by market. As a hotel performance metric, it differs by market, segment and timing and is a time-based snapshot of a hotel performance.


Total Room Revenue / Total Rooms Available

Why is this metric important?
RevPAR represents the success the hotel is having at filling its rooms. Increasing RevPAR means either that rates or Occupancy Rate are rising, or both.

Do you currently know how you’re performing on each of these key metrics?
Click here to schedule a free demo with one of our dashboard builders. They’ll show you how we can build a dashboard that automatically calculates all your key metrics in real-time.

4. Average Occupancy Rate

What is this metric?
Occupancy is a percentage of the available rooms occupied for a specific period. It is calculated as total paid rooms occupied divided by total available rooms.


Occupancy % = Paid Rooms Occupied / Rooms Available
Occupancy % = Revenue per Available Room / ADR

Why is this metric important?
Usually, the higher the occupancy the better because the company is earning more revenue than companies with low occupancy. However, this may not always hold true if the company cuts prices to boost its occupancy. The rate is also key to the operational side of the business to ensure proper staffing and inventory.


What is this metric?
Gross operating profit per available room.



GOP (gross operating profit) / (per) Available Rooms

Why is this metric important?
The metric measures performance across all revenue streams. Hoteliers are able to see profit across all revenue centers/the sum of all the parts- not just rooms.

6. Market Penetration Index (MPI) or Occupancy Penetration Index

What is this metric?
This hotel performance metric measures how a hotel’s occupancy compares to a competitive set. The index is designed to measure a hotel’s share of either a comp. set, a market set or tract.


Hotel Occupancy % / Market Occupancy %.

Why is this metric important?
The metric serves as a guide to understanding a hotel’s dominance and demand in the marketplace. Increasing demand, naturally leads to more revenues.

7. Average Rate Index (ARI)

What is this metric?
This hotel performance metric measures how a hotel’s average daily rate compares to a competitive set.


Hotel’s ADR / Hotel Market ADR.

An ADR Index of 100 equals fair share of ADR, compared to the aggregated group of hotels. An ADR Index greater than 100 represents more than a fair share of the aggregated group’s ADR performance. Conversely, an ADR Index below 100 reflects less than a fair share of the aggregated group’s ADR performance.

Why is this metric important?
This metric serves as a metric to pricing right in the marketplace as well as an illustration of a hotel’s rate performance against its competition, helping determine whether rates needs to be lowered or elevated.

Want to discuss the specific metrics you’re tracking (or want to track) for your company?
Click here to schedule a free consultation and demo with one of our dashboard consultants.

8. Revenue Generation Index (RGI) or RevPar yield index

What is this metric?
This hotel performance metric measures how a hotel’s RevPar compares to their competitive set. It measures a hotel’s fair market share of their segment’s (competitive set, market, submarket, etc.) revenue per available room. If a hotel is capturing its fair market share, the index will be 100; if capturing less than its fair market share, a hotel’s index will be less than 100; and if capturing more than its fair market share, a hotel’s index will be greater than 100.


Hotel’s RevPar / Hotel Market RevPar

RGI results should exceed 1 (a 100 base index) otherwise hotels in a competitive set are converting more business than you.

Why is this metric important?
Enhancing the RGI maximizes hotel profitability. The index figure illustrates how a hotel’s RevPar figures are performing in comparison to their comp. set. This helps determine where costs need to be decreased and/or rates needs to be increased.

9. MCPB (marketing cost per booking)

What is this metric?
This tracks actual production vs the cost of each S&M channel


Each channel carries a wide range of distribution costs that can run from 10% to 50% of revenue. These costs are subtracted from the total booking amount to get the MCPB.

Why is this metric important?
This metric measures ROI. It illustrates the cost of acquisition, which is a huge factor in computing gross profits. The goal is to explore each and every channel to create demand, awareness, increase booking, and thus increase revenue. However, there needs to be the perfect mix across all channels with the best, most affordable solutions. Hotels cannot overspend on a marketing channel to simply obtain customers, there needs to be a balance between acquisition costs and profit.

10. Sentiment score on TripAdvisor

What is this metric?
Using a reputation/social media monitoring tool allows you to measure guest satisfaction/sentiment.


Why is this metric important?
This reflects product acceptance, issues, complaints and/or alerts you to product deficiencies. It also allows you to respond in real time and publicly to customer issues.

11. DRR (direct revenue ratio)

What is this metric?
This metric measures the percentage of online revenue coming in directly vs expensive third-party channels


Why is this metric important?
In order to maximize profitability, you need to get at least 40% of revenues from an own hotel website/booking engine. Travel agent bookings and other third party bookings come at a high price and decrease overall profit.

12. Website conversion rate

What is this metric?
This calculates the number of unique website visitors that convert into bookings. Revenue originates from potential guests researching a property online. As a hotel’s digital front door, a website influences guests’ impression more than any other marketing asset.
According to Hospitality Times, the average conversion rate for hotel websites is about 2-3%. In other words, approximately 97% of visitors to a hotel’s website leave without making a reservation.


Why is this metric important?
Converting a higher percentage of visitors is critical to reducing the cost of revenue and MCPB. The conversion rate also provides insight into how a visitor interacts with their website and what measures can be taken to capitalize on visitors’ interest.

13. Segmentation

What is this metric?
Segmentation data displays performance relative to three customer segments. These are:

  • Group: Group rooms are sold simultaneously in blocks of a minimum of ten rooms or more.
  • Transient: Transient rooms include rooms occupied by those with reservations at rack, corporate, corporate negotiated, package, permanent guests, government, or foreign traveler rates. Also includes occupied rooms booked via third party web sites.


Why is this metric important?
Segmented data provides insight into what type of visitors make up a hotel’s guests/revenue base and can demonstrate a clear pattern between group and transient guests. If there are dates that are historically slow for group business, that might be an area of focus moving forward. Similarly, the data may validate that an event your destination hosted resulted in a significant amount of group business leading to high occupancies at area properties.

14. TrevPar

What is this metric?
This is the total revenue per available room. This metric is the sum total of net revenues from alloperated departments plus rentals and other income per available room for the period divided by the total available rooms during the period.


Why is this metric important?
This metric helps determine the overall financial performance of the property, whereas Revpar only considers rooms revenues. TRevPAR is especially useful for hotels where rooms are not necessarily the largest component of the business.