Revenue per Available Room - Your Key Profitability Strategy!

Did you know that Revenue per Available Room can achieve both higher revenue and profitability?

In archery, the archer tries to achieve both power as well distance to hit bulls eye.

Achieving just power or distance is not good enough.

The same goes for revenue management.

What am I talking about?

Hotel Revenue Management is not about just occupancy or average daily rate.

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

RevPAR uses both and more.

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 Revenue per Available Room?

Consider this.

Average Daily Rate gives you:

• the average of room prices charged
• for an occupied room 

in a hotel for a period.

Or, to say it differently, Average Daily Rate is the Revenue per Occupied Room.

Notice that it is revenue per “occupied room.”

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

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

Capacity

What about Capacity?

In the above example, assume the ADR achieved is high.

However, what if occupancy is low?

Let me give you an example.

Say ADR achieved is $250.

Let us also say that based on Paradise Hotel performance, this is considered high.

However, say, occupancy is only 50%.

This literally means Paradise Hotel is achieving ONLY 50% of its rooms available capacity.

This is despite high ADR.

So what is the moral of the story?

The moral is this.

In the hotel industry, two KPIs contribute to room revenue:

• Occupancy Rate (which you saw in the previous video) and
• Average Daily Rate

It is only when you combine both occupancy and ADR that your revenue scales heights.

Just higher occupancy or ADR will not cut it.

You need both these KPIs.

In the same way the archer aims for power + distance.

It means that RevPAR is the measure that is multi dimensional.

It removes any illusion that either higher occupancy or ADR might provide.

This has tremendous implications for profitability.

Where Do You Find Revenue per Available Room in a Financial Statement?

RevPAR is found in Statistics section of the Paradise Hotel Profit and Loss Statement.

Statistics are found at the bottom of the Profit and Loss Statement.

This is the Statistics section of the Paradise Hotel Profit and Loss Statement.

As you can see Paradise hotel has RevPAR as follows:

• $145 in February
• $199 in March
• $225 in April

As you can see, RevPAR can be different in different months.

This is the seasonality factor in the hospitality industry.

It makes the hotel business model a challenging one.

Hotels are constantly trying to keep the RevPAR high at all times.

Notice something critical in the above three month RevPAR figures.

As occupancy %:

• increases from 66% in February (Lean Month) to 93% in April (Peak Month)
• RevPAR is scaling to its highest level in the three months.

This is the power of RevPAR as a Key Performance Indicator.

COVID-19 & Revenue per Available Room

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

Even big players like Marriott, Hilton, Hyatt were running very low RevPAR at times.

You will see shortly why a consistently good RevPAR 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 Revenue per Available Room?

Why is RevPAR critical?

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
• with an objective of earning a reasonable return on investment.

The return on investment will depend primarily on the revenue and profit earning potential of the hotel.

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

Revenue per Available Room - a Powerful KPI

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.

Market share is a huge KPI that determines positioning of hotel 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 are 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 video, 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 Revenue per Available Room

How do you calculate Revenue per Available Room?

RevPAR = Average Daily Rate x Occupancy %

Alternate but less powerful formula is:

Total Room Revenue / Total Rooms Available

NOTE: The three months are an extract to highlight Lean, Standard and Peak Months.

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.

• Rooms Available
• Occupancy Rate
• Average Daily Rate

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

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Revenue per Available Room - 25 Financial Terms

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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 Segments

Market Segments are the building blocks of revenue 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)