Industry  |  8 January 2021 |  Eva Lacalle

What is RevPAR and RevPAR index and how do you calculate these metrics?

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The age of analytics has revolutionized the hospitality industry as much as it has any other. With the right metrics at your side, you can gain a deeper understanding of your successes and failures, then nip and tuck your business strategy to drive better numbers. 

If you're new to hotel data analytics, you're probably wondering, "What is RevPAR in hotel management?" In short, it's one of the most widely-used metrics in the industry, measuring your revenue per available room as it relates to your hotel grouping. 

This article explores RevPAR, which is important to do because of its popularity. However, there are also other, more guest-centric metrics that hoteliers can use to measure success. If you'd like to know more about these, download our free Metrics that Matter report.

 

What is RevPAR in hotels (revenue per available room)?

Your revenue per available room informs you of your most profitable periods and most in-demand rooms. That will clarify the inventory you can expect from month to month and guide your booking numbers. It also acts as a basis for other revenue formulas. There are some things TripAdvisor can't achieve, and a balanced revenue-per-available-room metric is one of them.

In contrast, your RevPAR Index measures your revenue per available room in comparison to other hotels. It can function as the core of your competitive analysis or simply as a market trend indicator.

The calculation functions alongside your average occupancy rate, which measures your sales performance. Add your market penetration index and you'll have a comprehensive understanding of your hotel turnover. These metrics work together to create a three-dimensional view of your trade. Knowledge and success are inextricably linked, so bust out that calculator and start typing.

 

Why is RevPar important in the hotel industry?

With your revenue and seasonal performance data in hand, you can plan marketing drives for your quiet periods and improve your inventory management during busy seasons. The metric assesses how well you can fill your vacant rooms every week of the year which, in turn, lets you price your suites accurately. When your revenue per available room rises, your room prices should rise in tandem.

Pricing isn't RevPARr's only superpower. It's essentially a measure of supply and demand, and prices don't always need to fall to balance it out. If you can push your demand up high enough, you won't need to decrease your rates. Can anyone say "advertising"? Your marketing genius is perfectly capable of pushing up those dwindling figures. When you hit a low-demand season, it's time to start working on your social media outreach, special offers, and other sales strategies.

If you run a property group, your revenue and seasonal performance figures will also inform your expansion, locations, and room choices. While the metric can't give you flawless insight into new territories, it's a good general indicator of what you can expect. Now all you need is a psychic and a few angel investors.

 

How to calculate the RevPAR and RevPAR index?

To calculate your RevPAR, simply multiply your average daily rate (ADR) by your occupancy rate. Say you have an occupancy of 80%, and an ADR of €100 – your RevPAR will be €80. 

Alternatively, you can divide the number of available rooms in your property by total revenue from that night (or specified time period). If you have 100 rooms, 80% occupancy means 80 rooms are occupied. Multiple that by 100 (€100 per room) and that’s €8,000 total room revenue. Divide that by the number of rooms available (100) and there’s your RevPAR again: €80. 

To calculate RevPAR index (also called revenue generating index, or RGI), divide your RevPAR with your hotel grouping comparator, then multiply your result by 100. A result of more than 100 means that you’re outperforming the expected market share – anything less than 100 and your competitors are doing better than you. 

For example, let’s say you’ve selected 20 similar hotels that you want to benchmark against, and their average RevPAR is €60. Your RevPAR is €80, which divided by 60 and multiplied by 100 makes 133, which is a great result.

With these two metrics at your disposal, you can discover an entire world of information on your planning and performance.

 

How to increase and improve your revenue per available room score

Your revenue per available room index is more than just a measure of your occupancy rates and profits. Like a thermometer, it also measures your marketing successes, booking strategies, pricing efficacy, and direct sales efforts. Low results could mean bad planning, poor business performance, or shoddy revenue management. To boost your statistics, you have a few options available.

Differentiate

If you're operating alongside a direct competitor who shares your brand position, your score is unlikely to reflect your goals. It might be time to establish a more unique and compelling identity. Don't neglect service excellence, though. A smile is a powerful differentiator.

Choose different pricing strategies for high and low periods

Channel managers and artificial intelligence tools can choose the right prices for every client and season. Don’t assume you have to decrease your prices to drive demand. In some cases, you might need to charge more during low season. Now lean back and listen to the money stream into your account.

Do competitive analysis

Assess your rivals' pricing and demand to raise your ADR and find out what the market's optimal rates are. If your ADR is poor, it'll be very difficult to improve your revenue per room. You need a holistic approach that addresses more than mere demand.

Rebalance your pricing

If you adjust your rates according to your occupancy percentage as each day progresses, every payment you'll receive will be strategically calculated. Prices can be automatically decreased as the evening draws nearer. When low season approaches, it's time to dedicate more hours to your direct sales. This can be done manually or via automated booking engines.

Work harder at decreasing your cancellation rates

A non-refundable reservation policy can stretch those ratings farther than they can generally go. You might also consider planning your room rates by length of stay to encourage visitors to plan longer visits.

Reduce your expenses

The less you earn, the less you can afford, so reduce your expenses in keeping with low demand periods. You can achieve that by adjusting your inhouse team size, streamlining or outsourcing your housekeeping during low season, and relying on smart technology to reduce your energy costs.

Establish minimum length stays

Charging less for longer stays or instituting a minimum stay policy can have a drastic effect on your RevPAR. Alternatively, motivate your guests to stay longer by offering special tourism-related offers. Hotels aren't the only businesses to suffer during low demand periods, so this is an excellent opportunity to form partnerships with other companies that operate in your niche.

Use indirect strategies

Indirect drivers are nothing to sniff at. Simply improving your responsiveness to reviews and social media queries can boost your booking rates. You can also create a loyalty program to fill rooms during low demand periods.

Conclusion

Getting through low demand periods is like trying to run through mud. The slower your hotel becomes, the higher your anxiety climbs. Analytics can swoop to the rescue by highlighting aspects of trade you've never noticed before. It is possible to take full control of your supply curve. All you need are a few good strategies to go with your metrics. 

Treat your RevPAR metric with the respect it deserves, and your hotel can become nimble enough to leap over those tough seasonal slumps – and make hay when the sun is shining.

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Eva Lacalle
8 January 2021