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Revenue Management versus Profit Management

Revenue Managers today are taking a much broader view on the business and not just solely on accommodation revenue.  Average room rate, occupancy and RevPAR may still be key measurements of a hotel’s business performance, however, additional metrics, such a TrevPAR and GOPPAR provide a much more holistic view of the business and the associated costs. 

Whilst RevPAR (Revenue Per Available Room) will measure the performance of accommodation revenue, by taking the net rooms revenue divided by the total rooms available, is this enough to measure the hotel’s performance?

RevPAR = Total Rooms Revenue / Total Rooms Available
or
RevPAR = Average Rate x Occupancy

If RevPAR has grown from last month or from the previous year, and corresponds to its market, it does not take into consideration the cost of sale and may not necessarily be profitable.  For example, a room sold at £150.00 via an on-line travel agent at 20% commission will have a positive impact on RevPAR, however, is not as profitable as a room sold at £130.00 directly at the hotel.

GOPPAR (Gross Operating Profit Per Available Room), on the other hand, considers all costs as it takes the total net revenue, less costs divided by the total rooms available.

GOPPAR = Total Revenue – Departmental and Operating Expenses /Total Rooms Available

Using GOPPAR as a measurement takes into consideration all factors and is a way to monitor growth in variable expenses such as in room amenities, linen and distribution costs, and also the additional income from any ancillary spend such as food & beverage or spa.  If for example, you took the decision to increase commission through a particular distribution channel, this would be reflected in GOPPAR but not RevPAR.  Equally, if food costs were to increase, again this would impact GOPPAR as an indicator and not RevPAR.  By using GOPPAR as a KPI, this can measure profit management trends within the hotel.

Revenue Management vs Profit Management

Does size really matter?
In some cases, room’s revenue may only contribute a percentage of the overall revenue mix for a hotel with substantially large conference and banqueting facilities, and in this case, RevPAR would only reflect a proportion of the hotels revenue performance, disregarding all other sources of incremental revenue.

Also, assuming that a 350 bedroomed hotel on the same street as a 100 bedroomed hotel will have a lower RevPAR, based on a common sense approach that their occupancy will be lower:

Rooms Available

Average Room Rate

Occupancy

RevPAR

Hotel A

350

£80

60%

£48.00

Hotel B

100

£80

70%

£56.00

If hotel A generated more in departmental revenues than Hotel B and given the two hotels have similar direct expenses and the quantum of overheads is the same, Hotel A will make more money than Hotel B despite having a poorer RevPAR.

As GOPPAR accounts for all operating expenses (most of which both fixed and variable).  The fixed portion mainly associated with the size of the hotel, whilst the variable relates to volume of business attributed to the hotel.  Whilst a larger hotel would incur higher fixed costs than a smaller hotel, in similar markets conditions, a smaller hotel is likely to have higher expenses on a per room basis, due to economies of scale.

RevPAR or GOPPAR?
RevPAR is just one piece of the performance puzzle as it indicates the performance of a hotel in terms of inventory management, however, it does not provide a cost indication of a hotel.  GOPPAR on the other hand, provides a deeper indication of a hotels profitability by measuring controls and efficiencies on a per unit basis which is a more robust measure, especially when comparing hotels of different size.

RevPAR remains a strong and widely used KPI within the industry, however, revenue optimization and the use of GOPPAR are equally as important to the overall success of a hotel.  Revenue management remains the best way to maximise profitability and any actions taken to increase RevPAR should translate into improved profit. 

Having good revenue management practices in place in your hotel together with a clear strategy will avoid leaving money on the table.  Octopus Revenue offer an affordable and fully flexible revenue management solution for hotels, making hotel revenue management support accessible to all hotels who may not have this skill level available to them. 

Whether you require general advice on revenue management for hotels, a more in depth consultancy service, or development of your team through revenue management courses and revenue management training, Octopus Revenue will provide you with revenue management solutions to suit your requirements and your budget.  Call 0191 301 7656 or visit the website.

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