Hotel Room Revenue – 25 Financial Terms for Beginners

Did you know that the Hotel Room Revenue is the Flag Bearer of revenue management?

What do I mean by that?

In archery, the archer tries to score a bulls eye.

They do it by achieving both power as well distance.

Achieving only power OR distance is not good enough.

The same goes for revenue management.

What am I talking about?

Hotel Revenue Management is not about only:

• occupancy or
• average daily rate.

It is when both are combined that revenue and profitability are enhanced.

Still puzzled?

Hang on.

Let’s find out how and why!

25 Fin Terms Beginner Hotel Mgrs Must Know Series

Welcome to the 25 Financial Terms Beginner Hotel Managers Must Know Series.

My name is Lakshmi Narasimhan Soundararajan.

I will be guiding you through this series of posts.

You will be learning concepts using a real life hotel - Paradise Hotel.

Let us jump right in.

This Blog Post will cover

What is Hotel Room Revenue?

Do You Know your hotel room revenue well enough?

What contributes to it?

Two elements:

• Average Daily Rate and
• Occupancy Rate

Average Daily Rate gives you the:

• average of room prices charged
• for an occupied room

in a hotel for a period.

Or, let’s say it differently.

Average Daily Rate (ADR) is the Revenue Achieved per Occupied Room.

Notice that it is revenue per “occupied room.”

So, ADR measures revenue on business volume (occupancy) achieved.

This means you still do not know how good the business volume achieved is.

Or Could be.

Building Blocks

This post reveals the importance of:

• market segments,
• hotel occupancy rate,
• average daily rate

in not just the revenue generation process but profitability as well.

You could say that they are the building blocks.

Moreover, it shows:

• the role of RevPAR in hotel room revenue,
• where to find room revenue in the hotel financial statements

and more.

Where to Find Hotel Room Revenue in the Financial Statement?

Hotel Room Revenue is found in the:

• Main Profit and Loss Statement and
• Statistics section of Profit and Loss Statement.l

for the Paradise Hotel.

Statistics are normally located at the bottom of the Profit and Loss Statement.

See screenshot below

This is an extract of the Paradise Hotel Profit and Loss Statement.

As you can see, total room revenue is $668,000.

Out of this, note revenue for the individual market segment.

It is contributing 90% to 95% of room revenue for the month of February.

Group market segment on the other hand contributes between 5 to 10%.

So, the individual market segment is a huge revenue contributor to the Paradise Hotel.

Role of Hotel Room Revenue

You may have a question now.

Why is hotel room revenue considered the flag bearer of the hotel industry?

Well, it's simply because of this fact.

In most hotels, room revenue would be:

• contributing upwards of 65% to 75% of total revenue and
• an equal percentage in profitability

as well.

So, you're talking about three quarter of hotel revenue and profit being contributed by room revenue.

Hence, it's important that the hotel revenue strategy be clear cut.

Note, the 66% occupancy in the screenshot above is the total occupancy including non-paid rooms.

So, the total room revenue shown here is generated by total paid occupied rooms.

Now, a hotel occupancy rate we saw earlier is like the oxygen tank.

Say, you shut the valve, as in if you don't have occupancy.

Then your hotel revenue is going to be zero or close to zero.

For reference, during the covid-19 pandemic, this is what happened to hotels.

Occupancies dropped drastically to 10% 12%.

Even for giants like Marriott, Hyatt, Hilton etc.

So, it's important to have the hotel occupancy rate healthy.

Because, that is one of the two factors that generate revenue.

The other factor is the average daily rate.

Lean, Standard & Peak Months

In the screenshot above, note important elements not found part of a hotel profit and loss statement.

That is, the column headers of lean, standard and peak months.

You will see the significance of this shortly.

In an earlier post, we looked at how a hotel occupancy can be for a lean, standard or a peak month.

If you look at the lean month of February, the Paradise Hotel had an occupancy of 66%.

In a standard month of March, the occupancy has gone up to 81%.

In the month of April, considered a peak month, occupancy jumps to 93%.

Are these lean, standard and peak months the same for every hotel?

Certainly not!

There are many factors which play a part.

Now, take a look at the average daily rate of the Paradise Hotel for the 3 months.

You can see that the lean month has an average daily rate of $241.

This moves up to $246 in a standard month where the occupancy has also gone up.

Finally, the average daily rate hits the highest during the peak month of April.

These two key elements:

• total occupancy rate
• average daily rate and

their movement across three months of

• lean standard and peak occupancies

are common elements of the seasonality of a hotel.

The Paradise Hotel belongs to an industry which is seasonal.

Power of RevPAR in Hotel Room Revenue

In two earlier posts, you read about hotel occupancy rate and average daily rate.

These are separately two important KPIs required for revenue generation.

However we also talked about the archer.

How an archer looks for a bullseye target wants to achieve both power as well as distance.

In the hotel revenue generation process, metaphorically that would be the

• occupancy And
• average daily rate.

Note that I say “and” not “or.”

So, how is that to be achieved?

Great question!

To the rescue is Revenue per Available Room.

This is a hotel KPI that has both power as well as distance.

Meaning, it covers both occupancy as well as average rate.

Now, you would ask what is the big deal about having both of it?

Let me illustrate right here.

Illustration

Take a look at the revenue per available room for the Paradise Hotel for the month of February.

It's showing $145 that is achieved with a combination of

• occupancy of 66% and
• average daily rate of $241.

We are looking for power plus distance, remember.

So, in March (standard month) notice that the RevPAR has jumped to $199 (from $145 in February).

This is despite average rate increase from $241 in February to $241 in March.

Thus, average daily rate has gone up only nominally.

What has made a difference is the occupancy which has gone from 66% to 81%.

This explains how the RevPAR has jumped from $145 to $199.

That is indeed the power of having both occupancy and average daily rate producing the revenue.

Moreover, you saw in the average daily rate post that:

• the two major market segments individual and group played a part in the hotel revenue.

But it is even more clear when we now look at the RevPAR for these two market segments.

Take a look at the individual (market segment) RevPAR.

Total Hotel RevPAR is $145 for February.

The RevPAR for the individual market segment individual is $139.

On the other hand, the group RevPAR is only $21.

This again underscores the importance of the individual market segment.

However, more importantly:

• when occupancy jumped from 66% to 81%

• the RevPAR jumped by $54.

That is because both occupancy and ADR are now playing a part in the revenue generation.

Let’s take this example a bit further in the month of April.

The occupancy jumped to 93% and the ADR was the highest at $250.

Take a look at where the RevPAR is.

It's at $225 which is $26 more than even the standard month of March.

This is the magic of RevPAR.

Say, you use a concerted strategy to include occupancy as well as ADR.

This means being driven by RevPAR,.

Your revenue generation process is going to be that much more powerful.

COVID-19 Example

During the covid-19 pandemic, hotels suffered in their room revenue.

Even big players like Marriott, Hilton, Hyatt were running very low room revenue numbers at times.

You will see shortly why a consistently good hotel room revenue is key for not just revenue generation.

But also higher profitability.

And this is what suffered greatly during the pandemic.

We will be providing covid-19 references throughout this series.

Why Should You Know About Hotel Room Revenue?

Why is Hotel Room Revenue critical?

Hotels depend on Rooms department to deliver from 70% to 85% of total hotel revenue in a year.

It is key because it determines the real performance of the hotel.

Both from revenue and profitability perspective.

Owners and stakeholders have poured millions of dollars as investment in the hotel project.

Their objective is to earn a reasonable return on investment.

Return on investment will depend primarily on the revenue, profit earning potential of the hotel.

That potential is squarely dependent on the room revenue of a hotel at any time.

RevPAR is one of the major factors in the market share that a hotel will command in the market.

The higher the RevPAR, the better the possibility of a greater market share.

In the hospitality industry, market share is a KPI that determines positioning of hotels among other things.

Based on the RevPAR, a month could be categorized as:

• peak,
• lean or
• standard.

RevPAR is a KPI (Key Performance Indicator) used for measuring other KPIs like:

• customer patronage,
• spending,
• room types sold etc.

RevPAR is the KPI which is used to calculate powerful performance indicators like:

• room revenue,
• room profitability.

which we will look at in later posts.

You could say that the hotel revenue and profitability capability is dependent majorly on RevPAR.

Owners and stakeholders often want to know how well the guest room asset is being utilized.

In other words:

• how much revenue is being generated and
• what profit is being retained from the average daily rate achieved in a hotel.

RevPAR answers both these questions posed by hotel owners.

RevPAR is one of the most important KPIs which we will revisit later on.

In a later post, you will learn the powerful link between:

• market segments (which represents customers) and
• RevPAR levels which are part representative of a hotel performance.

Formula for Hotel Room Revenue

How do you calculate Room Revenue?

Room Revenue = Average Daily Rate x Occupancy %

Related Financial Terms

The following financial terms are closely related to the Hotel Occupancy Rate.

I will discuss these in later posts in this series.

• Occupancy Rate
• Average Daily Rate
• Revenue per Available Room

FAQs

What are KPIs used for in hotels?

KPI is a generic acronym which represents the financial term “Key Performance Indicator.”

KPIs can measure:

• financial performance,
• marketing effectiveness,
• customer satisfaction,
• employee retention,
• payroll costs and

various other performance indicators of a business.

What is the best indicator of hotel success?

1. Occupancy Rate
2. Average Daily Rate (ADR)
3. Revenue per Available Room (RevPAR)
4. Customer Acquisition Cost (CAC)
5. Employee Satisfaction.

How do hotels measure performance?

Occupancy Rate measures the business volume of the hotel.

• This means how many hotel rooms are occupied or sold in that period.

Average daily rate measures average revenue earned from prices charged on occupied rooms

• It measures average revenue earned from each occupied room per day.
• This sheds light on pricing strategies.
• Average Daily Rate is commonly known by the acronym ADR.

Revenue per available room is how hotel utilizes available rooms for revenue generation.

• It combines occupancy rate and ADR to give a comprehensive view of both room sales and revenue.
• Revenue per Available Room is commonly known by the acronym RevPAR.

25 Financial Terms for Beginners Series

Here is the list of 25 Hotel Financial Terms that Beginner Managers Must Know in this Series.

We will be discussing each of these in blog posts in this series.

1. Occupancy Rate [Published]
2. Average Daily Rate [Published]
3. RevPAR [Published]
4. Market Segments [Published]
5. Hotel Room Revenue [This Post] 
6. Market Share [Next Post]
7. Average Length of Stay
8. Guest Repeat Ratio
9. Restaurant Seats Available
10. Food & Beverage Covers Served
11. Average Food & Beverage Check
12. Meal Period Analysis
13. Year on Year Growth
14. Fixed & Variable Expenses
15. Undistributed Operating Expenses
16. Management Fees
17. Gross Operating Profit
18. Depreciation
19. Net Income
20. Balance Sheet
21. Assets - Fixed & Current
22. Liabilities - Long Term & Current
23. Owner Equity
24. Cash Flow Vs Cash Balances
25. Financial Ratios
    

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Your Guide to Professional Success

So, there you go.

25 Hotel Financial Terms which will make you a business savvy hotelier.

Click below for other hotel financial terms as chapters of this Ultimate Guide.

Coming Soon - Market Share

Market Share is the holy grail of performance in the hotel industry.

Understand what this financial term means and how it enhances revenue and profitability.

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Ultimate Guide on Hotel Financial Terms (Other Chapters)