September 28, 2023
Adam Hoeksema
The hospitality industry employs several metrics to evaluate hotel performance, and RevPAR or Revenue Per Available Room is one of the most significant among them as it plays a pivotal role in gauging a hotel's performance and future potential. Whether you're an industry newbie or a seasoned hotelier seeking a refresher, here's an in-depth look at RevPAR:
What is RevPAR for a Hotel?
RevPAR, short for "Revenue Per Available Room," is a vital performance metric in the hotel industry. It provides a snapshot of a hotel's ability to fill its available rooms at an average rate. Here's a more detailed explanation:
Holistic View: While metrics like occupancy rate tell you how many rooms were occupied and ADR (Average Daily Rate) gives you the average rate at which rooms were sold, RevPAR combines both these aspects. It essentially captures the average revenue generated by each room, irrespective of whether it was occupied or not.
Performance and Profitability: RevPAR is especially useful because it directly ties into a hotel's bottom line. A higher RevPAR usually indicates that a hotel is either filling its rooms consistently, achieving higher rates, or both. On the contrary, a lower RevPAR might indicate challenges in occupancy, pricing, or a combination of the two.
Market Positioning: Hotels often use RevPAR to benchmark their performance against competitors or the broader market. If a hotel's RevPAR is growing faster than its competitors or the market average, it may indicate successful marketing initiatives, superior guest offerings, or effective revenue management strategies.
Strategic Decisions: RevPAR can guide crucial business decisions. For instance, if a hotel's RevPAR is stagnant due to high occupancy but a low average rate, the hotel might consider strategies to increase room rates. Conversely, if a hotel has a high average rate but low occupancy leading to stagnant RevPAR, strategies to boost occupancy might be prioritized.
Operational Insights: A consistent understanding of RevPAR can help hoteliers identify operational efficiencies or inefficiencies. For example, if two properties have similar ADRs, but one has a significantly higher RevPAR, it can highlight differences in operational practices, guest experiences, or marketing effectiveness.
External Factors: RevPAR is also influenced by external factors like the broader economy, local events, tourism trends, and more. A sudden drop in RevPAR might indicate external challenges, like increased competition, economic downturns, or shifts in travel patterns. Conversely, a surge might suggest a successful local event, a booming tourism season, or effective hotel promotions.
How to calculate RevPAR?
To calculate RevPAR, you'll need two key pieces of information: total room revenue and the number of available rooms.
Here's the formula for calculating RevPAR:
RevPAR = Total Room Revenue / Number of Available Rooms
Total Room Revenue: This is the total revenue generated from room sales during a specific period. It includes revenue from room bookings, room service, and any other charges related to rooms. Exclude revenue from other sources such as food and beverage, spa services, or conference rooms.
Number of Available Rooms: This is the total number of rooms that could have been sold during the same period. It typically does not include out-of-service rooms (e.g., under renovation) or rooms that are not intended for guest use.
To illustrate the calculation, let's say you have a hotel with 100 rooms, and during the month of September, your total room revenue was $50,000. You would calculate RevPAR as follows:
RevPAR = $50,000 / 100 rooms
RevPAR = $500 per available room
So, in this example, your hotel's RevPAR for the month of September is $500 per available room.
RevPAR is a valuable metric because it allows hotel operators to assess how efficiently they are utilizing their available rooms to generate revenue. A higher RevPAR indicates better revenue generation per room, which is typically a positive sign for the hotel's financial performance. However, it's important to consider other factors like occupancy rate and average daily rate (ADR) alongside RevPAR for a more comprehensive analysis of a hotel's performance.
What is the difference between RevPAR and ADR?
RevPAR (Revenue Per Available Room) and ADR (Average Daily Rate) are both critical performance indicators in the hotel industry, but they serve different purposes and provide different insights. Here's a breakdown of the differences between the two:
Definition:
RevPAR: Represents the average revenue generated by each room in a hotel, regardless of whether the room was occupied or not during a specific period.
ADR: Represents the average revenue earned from each room that was actually sold or occupied during a specific period.
Components:
RevPAR: Is a function of both the hotel's occupancy rate and its average daily rate (ADR). It integrates room revenue with room availability.
ADR: Is purely about the rate and does not factor in the percentage of rooms occupied.
Insight Provided:
RevPAR: Gives a comprehensive picture of a hotel's revenue-generating capability, taking into account both its pricing strategy (rate) and its ability to fill rooms (occupancy).
ADR: Focuses strictly on the pricing strategy, reflecting the average rate at which rooms have been sold. It doesn't account for rooms that went unsold.
Usage:
RevPAR: Useful for assessing the overall operational performance. A hotel might have a high ADR, but if many rooms remain unsold, RevPAR will be affected negatively.
ADR: Useful for assessing the pricing strategy and its effectiveness in generating revenue from room sales.
Influencing Factors:
RevPAR: Influenced by both the hotel's pricing (rates) and its ability to sell rooms (occupancy).
ADR: Influenced by the hotel's pricing strategy, competitor prices, demand, room types sold, and any packages or promotions.
Example:
If a hotel has high occupancy but low rates, the ADR might be lower but could still result in a decent RevPAR because of the volume of rooms sold.
Conversely, a hotel might have a high ADR due to premium pricing but may struggle with lower occupancy, affecting its RevPAR.
In summary, while ADR focuses on the average rate obtained from sold rooms, RevPAR provides a more holistic view by combining room pricing with occupancy, reflecting the overall revenue performance of a hotel. Both metrics, when used together, provide a comprehensive understanding of a hotel's revenue management effectiveness.
What is the average RevPAR for Hotels?
The average RevPAR (Revenue Per Available Room) for hotels can vary significantly based on several factors, including:
- Geographic Location: Different regions, countries, or cities have varying average RevPAR values based on their demand, supply, tourism appeal, and economic factors.
- Hotel Category: Luxury or five-star hotels will generally have a higher RevPAR compared to budget or economy hotels.
- Seasonality: RevPAR can fluctuate based on the high or low tourist seasons for a particular location.
- Economic Conditions: Economic booms or recessions can significantly influence travel patterns and, consequently, hotel RevPAR.
- External Factors: Events, conventions, or crises (e.g., pandemics or natural disasters) can cause spikes or drops in RevPAR.
- Competitive Landscape: The presence of new hotel chains, alternative accommodations (like Airbnb), or the closure of major hotels can influence RevPAR.
Here are some general insights on RevPAR:
- In the U.S., after the impact of the COVID-19 pandemic, the hotel industry saw a significant decline in RevPAR in 2020. However, there was some recovery in 2021, with RevPAR values varying widely by city and region.
- Globally, popular tourist destinations, major cities, and business hubs generally reported higher RevPAR compared to lesser-known or rural areas.
- Asia Pacific, Europe, and North America typically have higher RevPAR compared to regions like Africa and the Middle East, although there are exceptions within each region.
To get the most recent and detailed average RevPAR values:
- STR (Smith Travel Research): A leading source for hotel data, STR provides detailed reports and analyses, including RevPAR figures for various regions, countries, and cities.
- Local Tourism Boards or Hotel Associations: Many countries or cities have local tourism boards or hotel associations that periodically publish statistics, including RevPAR.
- Industry Publications: Magazines and websites dedicated to the hospitality industry, like "Hotel News Now" or "Hospitality Net," often feature articles or reports with updated RevPAR figures.
For the most accurate and up-to-date RevPAR figures, I'd recommend referring to one of the sources above or conducting a fresh search online.
How to use RevPAR in Hotel Projections?
Using RevPAR (Revenue Per Available Room) in hotel financial projections is essential for revenue management and forecasting. RevPAR offers a snapshot of a hotel's financial health and potential profitability by combining occupancy and room rate data. Here's how you can use RevPAR in hotel projections:
Historical Analysis:
- Begin by analyzing the hotel's historical RevPAR data. This gives a baseline for future projections.
- Look at monthly or even weekly data to identify seasonality trends.
Market Analysis:
- Examine RevPAR trends in the local market, region, or similar destinations. Platforms like STR provide comprehensive market data.
- Compare the hotel's RevPAR to competitors. If there's a gap, identify reasons and strategies to close it.
Setting Goals:
- Based on historical and market data, set realistic RevPAR goals for the coming period. This could be an increase or maintaining the status quo, depending on circumstances.
Demand Forecasting:
- Predict future occupancy rates based on historical trends, future events, market conditions, and marketing strategies.
- Incorporate external factors like new competitors, infrastructure projects, or events that might affect demand.
Rate Strategy:
- Based on predicted occupancy and desired RevPAR, adjust room rates.
- Utilize dynamic pricing strategies, like yielding rates during high demand or offering promotions during low demand, to optimize RevPAR.
Scenario Planning:
- Create multiple projection scenarios, such as best-case, likely, and worst-case. This prepares the hotel for various eventualities.
- For each scenario, forecast the RevPAR and its impact on revenue.
Operational Adjustments:
- Use projected RevPAR to plan operational aspects like staffing, inventory, and maintenance. For instance, if a dip in RevPAR is expected, you might look into cost-saving measures.
Marketing & Promotion Strategies:
- If projections indicate a potential decline in RevPAR, devise marketing campaigns or special promotions to boost bookings.
- Tailor marketing strategies based on predicted demand and RevPAR goals.
Regular Monitoring:
- Continuously track actual RevPAR against projections.
- Adjust strategies in real-time if there's a significant deviation.
Feedback Loop:
- After the projected period, analyze how accurate the projections were. Understand deviations to refine future projections.
Capital Expenditure and Expansion:
- If consistent growth in RevPAR is observed and predicted, it can be used as a basis for making decisions about expansions, renovations, or other major investments.
Remember, while RevPAR is a critical metric, it should not be used in isolation. Consider other key performance indicators, like ADR, total revenue, GOPPAR (Gross Operating Profit Per Available Room), and NREVPAR (Net Revenue Per Available Room), to make comprehensive and informed projections.
