Performance metrics: Measures of perfection

12 September 2014
Performance metrics: Measures of perfection

With a bewildering range of metrics available for evaluating how well a hotel is performing, Elly Earls investigates which work best

Hotels come in many shapes and sizes and when it comes to measuring their performance, there is no one-fits-all solution. If your business is almost totally accommodation-focused, for example, then the revenue per available room (revpar) metric will be important; but if much of your earnings

Average daily rate (ADR), occupancy and gross operating profit per available room (goppar) are also commonly used by hoteliers, but it's not always the most popular metrics that are the most useful. Sometimes making up your own, depending on the factors that mean something to your business, can be much more valuable.

Revpar: how well are you sweating your assets?
In recent years, revpar (revenue per available room) has become a particularly popular metric for hoteliers, but according to Carl Weldon, chief executive of hospitality finance, revenue and IT professionals association HOSPA, even revpar can be misleading.

"For instance," he points out, "what measure of 'revenue per available room'? There can be room revenue and of course total revenue - hence trevpar and revpar. Your choice will depend on the nature of the business; for example, your hotel could be purely accommodation- based and you would choose the former.

But if you have a more food and beverage [F&B] or a conference and banqueting-based operation, then total revenue [trevpar] will be particularly important."

Tony Oliveira, business development manager at hospitality intelligence provider HotStats, agrees. "Revpar doesn't show the full revenue picture as it only accounts for rooms' revenue and doesn't take into consideration the rooms' cost of sales [travel agents' commissions]," he notes. "Full service hotels with restaurant and bar operations, for example, need to monitor trevpar to understand the ability of the hotel to generate revenue."

Either way, a par (per available room) metric is an 'asset' measure. "It is dividing the revenues by how many rooms you have in the hotel overall - in other words, it is telling you how well you are 'sweating the asset'," Weldon explains, adding that revpar is particularly valuable for reviewing your hotel against its competitive set.

James Byrne, manager and co-owner of London boutique property Eccleston Square hotel, agrees that revpar has its uses. "Revpar is very useful for comparing your performance against other properties," he says. "However, revpar doesn't really give you a full picture of what the business is doing and it's not something that's critical in the day-to-day running of the business. What is critical day to day is your average daily rate and your occupancy, and it's important to know how each affects the other."

For Weldon, too, the por (per occupied room) measurement is crucial - in room terms, the ADR. Yet, he actually prefers the total revenue per occupied room statistic to ADR. "It will tell you what each room sold is generating over and above its accommodation element. This is particularly useful for very quick forecasting."

Goppar: great for comparisons, but doesn't tell the whole story Of course, revenue measurements are unable to tell a hotelier how profitable their business is, and therefore how healthy it is, as Oliveira is keen to emphasise. "Goppar is the only metric which truly highlights the health of the business and the ability of the hotel to generate profits," he says.

Yet according to Weldon, goppar doesn't tell the whole story. "You need to recognise that gop is a profit line drawn after all the direct operating costs of the hotel - payroll, F&B, administration, sales and marketing, utilities and maintenance - but before the property costs of rates, insurance and rents,"
he explains.

"This is a particularly good line for comparing different businesses operationally against each other, as it can highlight operational efficiencies between operations. However, you do need to be aware that there is much going on between the top sales line and the gop line. Large hotels can be complex businesses, and that this can hide a multitude of sins."

The HOSPA chief executive advises operators to think accordingly about devising their own metrics as well as using the common measurements that fit their business best.

"Putting it simply," says Weldon, "there is something to be said for picking out key cost lines and creating averages at this granular level which mean something to you and your operation. A key line here may be for travel agents' commission or online travel agent [OTA] costs - preferably at por level as you will normally only pay commission for bookings actually taken.

"Even creating a measurement that takes in your room revpor and deducting online travel agent costs, por will give you a good idea of room profitability. Utility costs par and por are also very interesting."

Whatever the other key statistics are for you and your business, Weldon's top tip is to combine them into a dashboard, something that 'sits above' your normal profit and loss report.

"Ask your finance department or accountant to keep a track of these numbers in graphs," he suggests. "This can be very enlightening, enabling you to see the change in the numbers over a period of time in a picture - for example, using revenues weekly and costs monthly. Any spike or serious change can be seen straight away and acted on, which of course is the point of any useful piece of information."

Pick of the metrics
According to HotStats business development manager Tony Oliveira, the five most commonly used metrics for hoteliers are:

The proportion of bedrooms available to customers that were actually occupied during the selected time period. The figure is for rooms charged for, not complimentary rooms.

Average room rate
The average price charged for each bedroom during the selected period. This price is quoted net of any sales taxes and package allocations.

Room revpar
The average revenue earned for each bedroom available to guests in the selected period (calculated as total rooms revenue divided by rooms available). This bedroom revenue is quoted net of any sales taxes and package allocations (those parts of an inclusive package that are not bedroom revenue, such as an inclusive breakfast).

Total revpar is the total hotel revenue for the period divided by the total bedrooms available for occupancy during the period.

Gross operating profit per available room represents total departmental operating profit less all undistributed operating expenses divided by the total bedrooms available for occupancy during the period.

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