Revenue Management in the hospitality industry and its main ratio, RevPAR or Revenue per available room, is the main calculation to know the financial status of a hotel, since it allows us to know how many rooms we have occupied and how much money we have earned for each one of them, in a certain period of time. RevPAR is the way to measure the effectiveness of our commercial and pricing strategy and how close or far we are from achieving profitability in a hotel. The two basic formulas used to calculate this data are described in this article.
Revenue Management is the process of understanding, anticipating, and influencing consumer behavior with the goal of maximizing revenue from a perishable product or service such as hotel rooms, airline tickets, etc.
RM is, to sell the right product, at the right price, at the right time.
What is RevPAR?
Revenue per available room or RevPAR, which is the abbreviation for Revenue Per Available Room, is a ratio commonly used to determine financial performance in the hotel or hospitality industry. It always refers to a specific period (weekly, monthly, quarterly, annually, etc.). This is basically calculated using two pieces of information: the occupancy and the average rate, it is undoubtedly one of the most important indicators of the good economic condition of a hotel.
To calculate the occupancy of a hotel a very simple formula is used:
% Occupancy = # Occupied
Rooms # Available Rooms
The average rate or Average Daily Rate (ADR) is calculated as follows:
Average daily rate = Income from room sales
# Rooms sold
There are two ways to calculate the RevPAR, both give the same result.
The first one is:
RevPAR = It_
ΣHt
Where
• It: Total income generated by the rooms in a period t. Here sales taxes, discounts and in some cases also income from Room Service and Minibar are included or subtracted, in order to obtain more exact figures.
• ΣHt: Total number of rooms available in a period t. That is, the rooms of the establishment or chain multiplied by the number of nights in period t minus the unavailable rooms (that is, those that cannot be made available to the public due to renovations, repairs, use of the house, etc..).
Alternatively, it can be calculated as follows
RevPAR =% Ot * ADR
Where
•% Ot: Percentage of occupancy over the total available rooms of the establishment or chain in period t.
• ADR: Average Daily Rate, average daily rate.
Example:
Consider the following results for Hotel XY:
Number of rooms: 1000
Average daily rate: € 90
Average daily occupancy: 75%
Total Revenue for rooms: ((1000 rooms x € 90 / room x 75% occupancy) x 90 nights): € 6.075.000, -
If we use the first formula, we can calculate the RevPAR for Hotel XY:
RevPAR = € 6,075,000, - = € 67.50
90,000, -
If we use the second formula:
RevPAR = € 90 per night x 0.75 = € 67.50
So we can conclude that Hotel XY has generated approximately a Revenue of € 67.50 per day.
What is the importance of RevPAR:
RevPAR is by far the most important of the ratios used in the financial management of the hospitality industry. Because its calculation includes both the occupancy percentage and the average rate, through it you can have a clear image of how well a hotel is occupying its rooms, as well as how much it is able to charge for them in a certain period of time.
It should be taken into account that RevPAR, by definition, is calculated based on the number of rooms, therefore a hotel may have a higher RevPAR than another, but even so its total income or Revenue may be lower than that of another hotel that has more rooms.
Bibliography
Haley, M. (2004), Revenue Management, It really should be called profit management,
Kamath, V. (2008), Revenue Management techniques in hospitality industry, a comparison with reference to star and Economy Hotels,
