Are you on top of your hotel room inventory?

What does being on top mean, you want to know?

Well, it means: are you utilizing it to the full?

You still look puzzled.

Let me explain.

Utilizing to the full means managing room inventory for best business results.

More specifically hotel revenue results.

You could say that it is an asset management challenge.

Meaning, managing the hotel guest room asset.

Did you realize that not utilizing room inventory means lost revenue and profit opportunities?

I will lay out a case first, why and then how you could get the best out of hotel room inventory.

To achieve the highest revenue and profit performance.

It is one of the most critical hotel revenue management strategies.

Let’s get going.

This is Part 2 of a 7 Part Series on Hotel Revenue Management.

Click to read Part 1 - Hotel Revenue Management Strategies - 7 Ways to Re Think Basics.

It will make your understanding of this Part 2 better. 

It also has an Infographic on the 7 hotel revenue management strategies.

This Part 2 Blog Post will cover:

Room Inventory - a Capacity Decision

Room Inventory is often a capacity issue.

First, What is capacity?

And then, why is capacity so critical?

It is fine to talk about revenue generation, profit retention and so on.

However, much before that, it is important to talk about the tool that will produce revenue.

In other words, you need an asset first and foremost.

That asset in the case of a hotel and more specifically the Rooms department is the guest room.

It is commonly referred to as room inventory.

The reference is to capacity.

Digging further, we know that the total number of units of guest rooms is collectively known as Rooms Available.

Rooms Available tells you the highest number of rooms that a hotel can sell at any point of time.

Or, to say it differently, Rooms Available is the Capacity.

Why is Capacity or Rooms Available critical?

First, owners and stakeholders have poured millions of dollars as investment in the hotel project

• The objective is to earn a reasonable return on investment.
• The reasonable return on investment will depend primarily on the revenue earning potential of the hotel.
• That revenue earning potential is squarely dependent on how many guest rooms a hotel has.
• In other words, on room inventory.

Second, the number of rooms available will be a huge factor in the share that the hotel will command in the market.

• The higher the number of rooms, the better the possibility of a greater market share.
• In the hospitality industry, market share is a huge KPI.
• Market Share determines positioning of the hotel among other things.

Third, based on the total number of rooms available, a hotel will categorized as small, medium or large sized.

• Meaning, room inventory determines hotel size.

In the hotel industry, Rooms Available are also known as Total Units.

While total Rooms Available determines capacity, those guest rooms will be further categorized into different room types.

Each guest room type will cater to a target audience.

It will have amenities tailored to that as well as being priced accordingly.

Rooms Available is also a KPI (Key Performance Indicator) which is used for measuring other KPIs.

For example:

• customer patronage,
• spending,
• number of employees

in the hotel etc.

In the case of the Paradise Hotel, you can see the hotel has 150 Rooms Available.

Or, its room inventory is 150 guest rooms.

You will see later that almost all major hotel KPIs will be with reference to this room inventory.

That underlines the critical importance of hotel room inventory management.

Owner Obsession with Room Inventory Utilization

Rooms Available is the KPI which is referenced to calculate other KPIs like

• occupancy,
• average daily rate etc.

You could say that hotel revenue generation begins with Rooms Available.

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

This is room inventory utilization.

In other words:

• how much revenue is being generated and
• what profit is being retained

from the rooms available in a hotel.

This is one of the most important measures of room inventory utilization..

However, we first need to understand how room inventory utilization is arrived at.

Occupancy as Room Inventory Utilization

Hotels calculate revenue in their Profit & Loss Statement using occupancy and average daily rate.

Revenue Calculation

Revenue = Occupied Room Nights X Average Daily Rate

Note: The above calculation does not include two elements which often also form part of revenue - service charges and taxes.

Both service charges and taxes normally take the form of a percentage of room revenue.

Taxes are based on the law of the land.

Occupied room nights are derived by taking the ratio of Occupancy % to Rooms Available.

It can be calculated the other way round too.

For example, taking the total of all rooms occupied (room occupied are also known as rooms sold) on a day.

This is Total Rooms Occupied.

Then using the ratio of this Rooms Occupied to Rooms Available to arrive at Occupancy %.

Rooms Available is the highest number of rooms that can be sold or occupied in a day.

It represents the room inventory or capacity of the hotel.

Average Daily Rate is the average of all prices charged for various market segments and room types for the hotel.

Occupancy Calculation

Occupied Room Nights = Rooms Available X Occupancy %

Understand the Rooms Available - Rooms Occupied gap

For example: in the above image, Paradise Hotel rooms available is 150, on a daily basis.

From the Statistics, you can see that different months show different occupancies.

These are based on whether the month is a peak, lean or standard month.

At 61% occupancy in the lean month of June, Paradise Hotel is utilizing only 61% of the capacity.

In other words, it is not utilizing 39% of its room inventory (for a total of 100%).

While a hotel can be running at 100% occupancy not more than 5-10 times a year, notice something important.

In the previous peak month of May, Paradise Hotel ran occupancy of 91%.

This means it dropped a whopping 30% points from May to June.

This definitely is an example of poor asset management.

Or under utilization of room inventory.

During the covid-19 pandemic, hotels suffered most in room inventory utilization.

This was reflected in

• poor occupancies,
• room revenue and
• overall losses in place of profit.

Owners prefer hotel managements to be as close to the rooms available as possible in occupancy.

Why is room inventory utilization so critical?

Well, simply because higher occupancies mean revenue begins to exceed fixed expenses.

Any excess of revenue over the fixed expenses goes to the bottom line after deducting variable expenses.

Resulting in a boost to the overall bottom line of the hotel

This is the reason why hotels try to achieve as high occupancies as are possible.

It is a battle of utilizing room inventory to achieve:

• highest occupancy and
• manage the room asset well

Analyze Rooms Occupied for higher paying market segments

Within overall occupancy, look for market segments which produce higher rated business.

A higher Average Daily Rated market segment will contribute more to the profitability than others.

We will see how this works in the next part of this post series on yield.

Occupancy will obviously also have lower paying market segments.

A good balance between the two will ensure your profitability is given a boost.

Does Hotel Occupancy achieve year on year growth?

Owners like to see the revenue graph consistently showing upper trajectory.

In other words, are occupied rooms:

• higher than last year and
• year after year?

Often times, hotels will be forced to take on lower rated rooms just to achieve growth in occupancy.

This is yet again to boost room inventory utilization.

You may ask a question?

Is this kind of lower rate room inventory utilization a good strategy?

Awesome question!

Next Part 2 of 7 - The Yield-Revenue Balance

In the next part of this series, we will see exactly how to assess this strategy.

It is by comparing revenue to yield.

Stay tuned, some exciting strategies will unfold with yield.

What is your room inventory strategy?

Do you consider the above factors?

Is there any strategy that improves on this post?

Comment below, I am keen to know your thoughts.

Related Posts of Hotel Revenue Management Strategies - 7 Ways to ReThink Basics

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