In this article we’re going to try to give you an accurate picture of why RevPAR is such a crucial formula to get familiar with and to put to use if you want to optimise your data to fill rooms. It’s one of the most important KPIs there is to know and hopefully in this article we’ll give you a comprehensive understanding of why that is exactly.Let’s start with some FAQ’s for good measure.
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What is RevPAR vs ADR?
These two piece of information are going be coming up a lot for you if you’re intent on boosting your revenues and are willing to get your hands dirty beyond simply being nice and offering nice rooms.
RevPAR definition - What does RevPAR stand for?
RevPAR (short for Revenue Per Available Room) is an important metric you may have been hearing a lot about. Perhaps, up until now, your main focus and priorities have been how to get (and keep) your hotel fully booked and how to increase your guest ratings on TripAdvisor. And why not? There is certainly nothing wrong with these objectives! After all, the main goal for any hotelier is not occupancy but ultimately to generate a profit. But knowing your RevPAR and how to use it is an important way of analysing and drawing the correct balance between occupancy, pricing and overall revenue and can have a substantial impact on the success of your hotel. It does not discriminate between loyal customers returning, high guest turnover of one-offs or extended stays for professionals. It’s simply a number to judge performance and a very effective one at that.
Hotel Average Daily Rate (ADR) definition
The definition of hotel ADR is easy enough to comprehend. The letters stand for average daily rate. It’s essentially a measure of the average revenue you receive for each occupied guest room per day.
How do you calculate average room rate?
As formulas go, that for ADR couldn’t be simpler. It’s total daily revenue divided by rooms sold. The formula can of course be expanded to cover multiple dates and is adaptable to any currency you could think of short of livestock. More importantly, it’s one of the key ingredients for your RevPAR calculation.
How do you calculate the RevPAR?
To calculate your RevPAR you need two pieces of information:
- Your Average Daily Rate (ADR): Total revenue earned from all rooms / Total number of rooms sold
- Your Occupancy Rate: Number of rooms occupied / Total number of rooms available
Then the RevPar is calculated by multiplying the Average Daily Rate with the Occupancy Rate.
RevPAR calculation/formula: RevPAR = ADR x Occupancy Rate
That’s just it folks – how could something so simple have such an impact? You could do this with the calculator on your phone no doubt. Well, the same could be said for the wheel in a way? What would it have been at the start but a clean slice of a nice round tree. As with every simple utility in life however – it’s not just the RevPAR formula that matters – it’s how you use it!
To keep things simple, let’s make a fictional example, the Hotel Belvedere, which has 10 rooms in total.
- 5 standard double rooms it sells at £85 / night
- 5 superior rooms it sells at £135 / night
If all rooms are booked (100% occupancy rate) the total revenue that the Belvedere made is (5 x £85) + (5 x £135) = £1,100
Here the Average Daily Rate is £110 (Total revenue £1100 / Total number of rooms 10)
But let’s assume that the Belvedere isn’t always 100% occupied. Instead the following scenario is far more likely, where it sells 4 standard rooms and 3 superior rooms. So our calculation is as follows:
- (4 x £85) + (3 x £135) = £745 This is the Total revenue
Here the Average Daily Rate is £106 (Total revenue £745 / Total number of rooms 7)
Now we know our Average Daily Rate (ADR) we can calculate our RevPar figure.
In the first, unlikely 100% occupancy rate scenario the the RevPar figure is as follows:
- RevPar = £110 (Average Daily Rate £110 x Occupancy Rate 100%)
Now the second scenario:
- RevPar = £74.2 (Average Daily Rate £106 x Occupancy Rate 70%)
Why is ADR higher than RevPAR?
While this isn’t always the case it is generally the case and the reasons are obvious enough. Most hotels are not always full and as such do not have an OR of 100% – and they certainly won’t have anything over that unless they opt to put their stables or rooftops to use!
By the nature of the fact that RevPAR is the result of a number multiplied by a percentage which is rarely at 100 it follows on logically that RevPAR is usually lower than ADR.
What is a good RevPAR?
If the end result of all your revenue management tactics and pricing strategy is a RevPAR that’s the exact same as your ADR over a decent period of time then the reality is that your work is having a significant impact. It will also mean that you’ll have to do a lot of telling people your don’t have rooms available but that’s simply RevPAR for the course hospitality industry.
What is helpful about the RevPAR formula/data?
You can see that there is a correlation and a tipping point between your average daily rate and occupancy rate. Somewhere there is the perfect balance between having a very high average nightly rate but with a low occupancy rate and vice-versa.
At the Belvedere, we know that our Ave. Daily Rate is £106, RevPAR is £74.2 and Total Revenue Per Night is £745.
But what if the Belvedere changed its prices? We would expect our occupancy rates to go up or down in accordance with our price. You can see that with just some small changes to the price and occupancy rate that the total revenue per night can change dramatically.
If the occupancy rate is not at 100% and the RevPAR is below the ADR, a hotel operator knows that it can probably reduce the average price per room to help increase occupancy. So the Belvedere should drop its prices slightly to increase occupancy rates and yield more revenue overall.
In general, RevPAR is simply the revenue you generate every single night from the total number of rooms in your hotel, whether booked or not. Such a figure gives you a clear indication of how well you are doing at stipulating rates and making a profit, more than just simply getting lots of bookings.
Knowing your RevPAR can help you correctly set your room rates against expected occupancy rates and help you know exactly where your cut-off points are. While dropping your occupancy rate might seem scary, if you are still making the same overall revenue then that’s absolutely ok!
With a better average booking price point you are maintaining your total revenue and what’s more, freeing up rooms that you can place on OTAs and elsewhere perhaps with a discount.
If you want to know more ways to fill your rooms, check out our channel manager to help you connect to over 120 OTAs with just a simple click and increase your hotel’s exposure.
Back to RevPAR… Knowing you have a suitable price point and overall revenue can help you know that cutting prices is not always the best way to stand out against your competitors and attract customers. You should always keep in mind the calculation between average price and occupancy rate.
RevPAR growth explained
If you focus solely on filling your rooms and pay little or no attention to RevPAR, you may be taking a steep loss without even realising it. With RevPAR-based data at your disposal, here is how to avoid that.
With RevPAR, you establish a clear baseline for your daily revenue, for which your total expenditure cannot exceed. To illustrate, try summing up the total daily costs for your hotel, and divide it by the total hotel rooms. If the resultant number exceeds the RevPAR, then you guessed it, you are losing money even when your rooms are fully booked.
As such, comparing your RevPAR with your daily costs helps you identify an optimal booking price point, to always avoid bookings at loss.
RevPAR is not the whole story
On matters of revenue, RevPAR alone does not tell the whole story, especially if you are a small hotel. A large hotel with 500+ rooms may have a lower RevPAR, but is pulling in a lot more revenue. As such, we recommend that while trying to increase your RevPAR, keep in mind other equally important factors such as costs and other key performance indicators.
Nevertheless, RevPAR is a good indicator that can help you grow your business if you use it right and complement it with other metrics. It can keep you on top of your financial and overall hotel performance. Now we’ve got to grips with RevPAR and how to use it, you can get going on those crucial calculations as soon as you can!
What is RevPAR index?
One way larger chains tend to use a RevPAR is to form up a RevPAR index. A RevPAR index measures a hotel’s RevPAR performance relative to an aggregated grouping of hotel, such as a competitive set. All things being equal one’s RevPAR index is at 100 – meaning you’ve earned and received your fair and square market share in terms of RevPAR.
Anything higher than that indicates an RGI higher than one would expect and anything below indicates an underperformance. In both case further investigation is warranted, either to double down on what’s working or reel back from whatever is seeing you shoot below par.
How to calculate RevPAR index?
RevPAR index is arrived at as such: (Your RevPAR / Aggregated group of hotels’ RevPAR) x 100. Being honest, I’m including this because a lot of people have asked about it in the past. I’m not sure how useful it is, especially when you’re working with fifty rooms or less.
For sure, if you’re operating on a huge scale it’s worth your while to mine data to gain ground on your competitors. For more regularly sized establishments there are more productive ways to expend energy.
Finally - how can you increase total RevPAR?
Well isn’t that just the million dollar question! To increase your RevPAR metric is to increase gross operating profit, plain and simple. Your gross operating profit is what’s left after you’ve made your money and paid your cost of goods sold – so internet bills, inventory staff members and all of that. It is the money in your bank account and for this reason it’s considered one of the strongest indicators of performance and of your overall profitability that there is.
One way is to use it and other strong indicators of performance to get yourself up to speed with the world of Revenue Management, which as luck would have it I’ve recently published an article that can guide you through the basics of this, which you can find right here.
Another way – one I recommend most highly for those who got queasy at the thought of doing a RevPAR index – is to work on your offer. Add to your spa services or focus on a more personalised experience. Do some comparisons between your offer and that of your competitive set in the local market. See what you can do from within your own house before you higher a PI to tot up their revenue numbers and play a purely numbers-driven game.
And don’t forget where the customer experience starts either – the booking process. If you really want to put your house in order start with your website and your PMS. Amenitiz complete suite will not only build you an easy-to-adjust SEO-optimised website but it comes with a fully integrated PMS, channel manager, booking engine and payment solution. The latest addition to the team – Amenitiz PriceAdvisor – will give you price recommendations based on your own data that you can adopt at the touch of a button.
Give us a call and one of our experts will talk you through the whole process.