Are you leveraging hotel metrics that are in reality triggering higher bottom line?
Or are you missing the forest for the trees?
The cost of not identifying the right hotel metrics which truly deliver a better bottom line can be disastrous.
Are you a victim of that situation?
I will lay out a strong case for coming to terms with 6 hotel metrics which will really deliver higher profitability consistently.
This post is a 3 part series about fixing those basic mistakes in reading the Profit and Loss Statement.
Each part will deal with one basic mistake type made in reading a Profit and Loss Statement.
This is Part 2 of the 3 part series.
Click for Part 1 of the Series if you missed it.
This Blog Post will cover:
All Hotel Metrics Are Not Made the Same
What’s in hotel metrics you ask?
Well, the fact is that, they are all not at the same level.
Are you looking at the right ones?
What right ones you ask?
All in good time.
To begin with, hotel metrics are really hotel key performance indicators.
These tell a story about the performance of the hotel operation during a month and a year.
However, are you reading the right stories?
You are giving me that baffled look.
Hang on, I am going to explain myself.
The tactical way of approaching hotel metrics is to look at the traditional KPIs like occupancy, average rate and even RevPAR to a certain extent.
However, being tactical is not the same as being strategic.
Are you being tactical or strategic?
Strategic thinking can also be loosely called systems thinking.
It is a philosophy that pays importance to systems rather than transactions.
It is an approach that goes to the heart of hotel performance analysis.
To flesh out the hotel metrics that are big picture.
That are long term.
And yes which deliver higher profitability.
You would agree that is a combination hard to beat.
So, what strategic approach am I taking about.
I am getting to that right away.
I will lay out 6 critical hotel metrics which go beyond just hotel performance analysis and literally chart the direction for the future.
I will also provide reasons why these hotel metrics are at a different level.
These hotel metrics broadly belong to the categories of operational and financial performance.
Here we go.
The Revenue Booster Hotel Metric: Average Length of Stay
The tactical approach looks at double and multiple occupancies to boost occupancy and room revenue.
However, this is a limited way of looking at revenue generation.
We need a measure that will place revenue generation on steroids, so to speak.
Enter Average Length of Stay.
If double occupancies boost revenue by adding to the hotel guests, the average length of stay does it by increasing the duration of stay of hotel guests.
Average Length of Stay as a KPI measures the number of days on an average, guests stay in the hotel.
It is one of the most powerful budgeting and forecasting tools and a revenue trigger.
Average Length of Stay [ALOS] as a KPI between say, downtown or city and resort hotels is a product of mainly the target market.
City hotels which generically cater to business customers tend to have lower average length of stay than resorts.
This is because resort customers stay mainly for leisure (paying the bills themselves) and hence tend to stay longer.
Business customers stay for less days because of specific appointments they come for.
They leave immediately thereafter.
Consider the two main categories of stay based on purpose:
- Business and
- Leisure.
In the past decade, a third category has evolved called Bleisure.
A Bleisure customer would be one with a purpose that would be a hybrid of business and leisure.
These are guests who come on business mainly and after completion of their engagements, stay on for leisure.
More and more companies are allowing their managers to combine leisure with business.
Of course, it is important to understand that the business part of the stay is to company's account while the leisure part is on personal basis.
Companies have different policies as to how the return air fare is treated in a bleisure situation.
Many companies take on the air fare as part of business expenses while some ask the managers to foot 50% of the air fare as personal expenses.
The Bleisure hybrid has the effect of boosting the average length of stay.
It ends up being higher than the KPI purely for business trips and lower than the leisure trips.
Bleisure primarily applies to stays at resorts although this can and does happen with city hotels located downtown.
Resort customers purely on leisure pay for their trip and stay longer.
The Average Length of Stay KPI is calculated as follows:
CALCULATION
Average Length of Stay = Total Occupied Room Nights / Total Bookings
The Average Length of Stay KPI behaves differently between a city hotel and resort as we have seen.
It also behaves differently depending upon whether the stay is during a week or over the weekend.
Average Length of Stay tends to be higher during weekdays and lower during weekends in a city hotel.
This is because of what we saw earlier as the business purpose of the trip.
In a resort it is just the reverse.
Since the major purpose of the target market in resorts is leisure, the average length of stay is longer over weekends and shorter on weekdays.
The holding of huge corporate conventions at resorts has however further blurred the behavior with average length of stay during weekdays going up although only slightly.
So, you would want a hotel metric that will not just measure number of occupants in a guest room.
But an entire stay.
It also is a powerful way to look at budgets and forecasts which ultimately will deliver the revenue.
The Average Length of Stay will give you pointers to whether the hotel's revenue tapers toward a weekend.
And whether the weekdays are stronger or the weekends.
Powerful information that impact your revenue generation.
So, leverage the power of this hotel metric to boost room revenue.
And now on to the next hotel metric.
The Guest Loyalty Hotel Metric: Guest Repeat Ratio
While double occupancy and average length of stay are powerful revenue triggers, they do not measure something which has long term and totally different implications.
Every hotel of whatever type or size is aiming for a continuous stream of revenue sustainable over years.
It is easier said than achieved.
A continuous stream of revenue may not always be sustainable with one time guests.
In other words, there must be a factor which allows a certain volume of business that can be assumed to be available each month.
That factor is an element of loyalty from customers.
Customers who will choose to return to your hotel every year and hopefully more than once in a year.
That loyalty factor in the industry is measured by a hotel metric called Repeat Guest Ratio.
Repeat Guest Ratio is a KPI which measures how many of the guests staying in your hotel on any given day are there for a second, third or more times.
The Repeat Guest Ratio is another KPI which is different between city and resort hotels.
City or downtown hotels do not lend themselves to a high Repeat Guest Ratio like a resort does.
This is despite corporate contracts signed by city hotels which ensure the guest on business only stays there on trips.
Add to this, the frequent stay benefits that attract rewards.
Resorts on the other hand are suited to a moderately high Repeat Guest Ratio.
This is because of the relationships forged by guests during vacation stays.
Moreover, the strong family focus means that the family target market is more likely to go back to the resort if they have had a great experience.
Personally, when I book vacation trip hotels, I first consider ones where I have stayed before and had a wonderful experience.
Millennials are changing this phenomenon on its head.
They often choose different vacation locations and thus repeat guest ratio may not be high.
Repeat Guest Ratio has another major advantage.
Marketing costs are lower for a guest who comes back since he or she had already experienced value and had been sold, so to say.
You do not need to put in place more marketing promotions costing money to convince these repeat guests.
In reality, every hotel should strive to offer a higher value of guest experience than what the guest is paying for.
This is, at the end of the day, good motivation for the hotel to be considered for a second or more trips.
Repeat Guest Ratio is calculated as follows:
CALCULATION
Repeat Guest Ratio = Total Repeat Guests / Total Guest Arrivals
This KPI is another great budgeting and forecasting tool.
Average Length of Stay and Repeat Guest Ratio are KPIs that influence revenue in a big way.
They thus act not only as revenue but also as profit triggers.
After all, no profit increase is possible (other than by an expense decrease) without first a revenue increase.
The Repeat Guest Ratio along with the Average Length of Stay are powerful triggers in financial decision making for highest business results possible.
So, leverage this hotel metric as part of your customer focus programs.
The Repeat Guest Ratio is often taken to a higher level by what is known as Lifetime Value of Customer.
This calculation tends to look at a guest stay as one of the many that the guest will be having in future.
It kind of projects the Repeat Guest Ratio to a lifetime value calculation for each guest.
Let us now get to the 3rd of 6 hotel metrics that really delivers higher profit in your Profit and Loss Statement.
The Competition Hotel Metric: Market Penetration Index
Having set up a strategic approach with the average length of stay and repeat guest ratio, we are ready to look externally.
I mean, look to the market in which your hotel operates.
Your competition in other words.
How are you performing compared to your competitive set?
The Competitive Set is the short list of 4 or 5 hotels which you can consider your direct competitors.
The hotel properties that can take away business from you.
A related term with competitive sets is market penetration.
Market Penetration takes into account two other powerful measures:
- Actual Market Share and
- Fair Market Share
Broadly stated, if you have 10% of the supply of your market (competitive set), other things being equal you should have 10% of the demand too.
This is the concept of Fair Share.
However, it is rarely the case that this happens.
Most times, hotels are either getting less demand than what their supply suggests.
Or, more importantly, hotels are getting higher demand than what their supply suggests.
This is a situation that hotel owners love to see their hotel properties in.
This also has a term.
This hotel metric is known as Market Penetration.
The related KPI is known as Market Penetration Index or MPI.
In order to compete in the market with your hotel property and services it is very important for a hotelier to find out how their hotel stands in the domestic market.
This MPI metric can serve as a way to map your hotel’s market share within your competitive set.
This metric assists the hotelier to know the number of guests that are going ahead and booking with your hotel in comparison to other hotels which share the same location.
The MPI metric is calculated as follows:
CALCULATION
Hotel Occupancy / Hotel Market Occupancy x 100
How do you interpret the measure?
If the result you obtain is more than 100:
- This shows that you are out penetrating the market.
If the result comes out to be less than 100:
- This means your hotel is under penetrating the market.
Under penetration means guests are choosing your competitors instead of your hotel.
It is important to understand a few things about this measure:
- Occupancy is just one of the factors in a market penetration calculation
- Average Daily Rate is often another factor taken into account
- RevPAR most often is the factor taken into account to calculate Market Penetration Index.
This is because RevPAR considers both occupancy and average daily rate and is a composite measure.
Are you looking at the Market Penetration Index for your hotel regularly?
It is critical to know whether the services offered by your hotel are in demand by your customers.
If your hotel occupancies start falling consistently, knowing how you are performing vis-a-vis your competitive set is a life saver.
And now on the 4th hotel metric.
The Revenue Efficiency Hotel Metric: Net RevPAR
RevPAR is a global norm for hotels.
It is a measure that brings in capacity or rooms available to measure revenue performance.
In the process, it combines occupancy and average daily rate in a powerful way.
When revenue generation is combined with asset capacity, you get a measure which is long term and strategic.
However, RevPAR often hides an element which may well give new meaning to the measure.
RevPAR is what can be called a gross measure.
It does not factor in expense elements at play.
A hotel's revenue is generated by incurring of expenses.
A good chunk of these expenses can be directly linked to booking of hotel stays.
Or in other words, the revenue generation.
The most important of these expenses are:
- Distribution costs
- Transaction fees and
- Travel agency commissions
So, what is the big deal here, you ask?
Well the big deal is that when you deduct these expenses from the RevPAR, your resultant measure may tell a different story.
What story you ask?
I am getting to it.
If your hotel is relying on volume business to bump up its occupancy through heavy bookings in the distribution channels, there is a cost to that.
That cost may be and is often significant.
Expense percentages can vary from 15% all the way to 40% or sometimes even higher of the revenue.
Now do you realize what can happen.
The RevPAR measure may mask this heavy expense which is directly related to that revenue.
Accounting often makes its more difficult to gauge this.
Why you ask?
This is because all the distribution and other expenses sit in the Profit and Loss Statement on the expenses side.
So, unless you compile the expenses and then deduct from the RevPAR, you may be suffering under the illusion of a healthy RevPAR.
Are you calculating Net RevPAR for your hotel?
Do you know the percentage of distribution and other related expenses to the revenue earned for your hotel?
Net RevPAR is calculated as follows:
CALCULATION
Room Revenue Less Distribution Costs / Available Rooms
And finally, these expenses are eroding your bottom line in the Profit and Loss Statement.
The above four were operational hotel metrics.
Now we will look at two financial metrics that are powerful profit triggers.
The Asset Efficiency Hotel Metric: GOPPAR
The RevPAR is a powerful hotel metric.
But it suffers from a rather huge shortcoming.
It only focuses on revenue.
In the hotel business (any business for that matter), the top line is only the starting point.
It is the bottom line that matters.
For hotel owners the bottom line is the holy grail.
In other words, revenue that does not translate to profit is meaningless.
And often that is the case.
Enter a hotel metric that will cure that defect.
GOPPAR.
Or Gross operating Profit Per Available Room.
All hotels calculate GOP or Gross Operating Profit.
What is so great about GOPPAR you ask?
Well, your GOP is a hotel metric that represent the index of efficiency of operation.
But even GOP has a defect.
It does not relate profitability to the asset that creates the profit.
In other words, GOP does not relate the profit to hotel rooms available.
And that is something the GOPPAR hotel metric achieves.
The GOPPAR measures something else which is powerful.
It reflects whether the number of rooms available is just right.
Or are you having too many or too little number of rooms available?
This is a question that needs to be answered at or before developing the hotel.
GOPPAR is Gross Operating Profit per Available Room.
GOPPAR is calculated as follows:
CALCULATION
Gross Operating Profit / Available Rooms
Are you measuring GOPPAR for your hotel?
It will tell you a story different from a GOP.
And now on to the 6th hotel metric.
It will literally bring your revenue generation capability and profitability together.
Enough said, let us get on with it.
The Profit Translator Hotel Metric: Flow Thru
All the drama of revenue generation will not mean anything if it does not result in a bottom line.
It is fitting that the 6th hotel metric we will talk about can be considered the final litmus test.
So, let me ask a question.
How will you know the ultimate result of all that revenue generation effort?
In other words, your bottom line.
Do you have a measure that considers translation of revenue into profit?
If not, you may be deluding yourself.
It is all very well to relate asset to revenue achieved.
But what about profitability to revenue achieved.
Enter the magic of such a measure.
Profit Flow through.
The game is given away in those latter two words - flow through.
Consider this.
Gross Operating Profit measures the efficiency of the hotel operation in terms of profitability.
Profit Flow Through takes that to new levels by measuring how revenue was managed to produce the profit.
In other words, how much of that revenue achieved resulted in profit retained?
So, simply stated, if your hotel revenue for a period is $100 more than the previous period, how much of that $100 did you take to profit?
Profit Flow Through is calculated as follows:
CALCULATION
Profit Flow Through considers two separate calculations:
- how much revenue increased in this period compared to the previous period and [A]
- how much profit increased in this period compared to the previous period [B]
- Profit Flow Through is [B] divided by [A] and
- Profit Flow Through % by multiplying above by 100
So, what is the big deal with flow through you ask?
I am coming to that right now.
To understand the power of the profit flow through metric, we need to back off a couple of steps.
Go back to where revenue came from.
You look puzzled.
Hang on, I will shortly clear the air!
One of the flawed approaches to profitability is thinking of it at the profit stage.
It is just too late.
So, then what you ask?
The essence of good profitability really begins with revenue.
And how it is achieved.
Revenue has two major contributors:
- Price and
- Business volume.
In other words, for room revenue - average daily rate and occupancy.
Many hotel managers do not know that profitability behaves differently with occupancy and average daily rate.
How do you ask?
Remember this golden rule:
- If revenue increases from one period to another only because of price (average rate), that entire increase translates to profit.
- On the other hand, if revenue increases from one period to another only because of business volume (occupancy), that entire increase does not translate to profit.
Why not?
Because when occupancy increases, variable expenses also increase.
This means that profit gets diluted.
Now you realize what a powerful measure profit flow through is.
It not only tells you your profit capability but also alerts you to how revenue is earned.
Profit Flow Through is calculated as follows:
CALCULATION
[A] This Period Revenue minus Last Period Revenue
[B] This Period Profit minus Last Period Profit
Profit Flow Through is [B] / [A] x 100
Profit Flow through moreover is different for Rooms department compared to Food and Beverage department.
It is higher for the former because of lesser variable expenses.
So, there you go, 6 Hotel Metrics that Really Trigger Higher Profit in your Profit and Loss Statement.
For your convenience, I have filtered out the exact actions steps you can take right now.
Action Steps You Can Take Right Now
STEP 1:
Look at Average Length of Stay rather than Double or Multiple Occupancies
STEP 2:
Build Up the Guest Repeat Ratio for your hotel to retain more customers longer.
STEP 3:
Measure your Market Penetration Index and know your competition better.
STEP 4:
Deduct expenses from your RevPAR and measure Net RevPAR.
STEP 5:
Go beyond GOP and calculate GOP Per Available Room for your hotel.
STEP 6:
Measure Profit Flow Through and discover this powerful profit translation tool.
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