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 revenue management strategy, 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 Net 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 may have a positive impact on RevPAR, however, is not as profitable as a room sold at £130.00 directly at the hotel, on a non-commissionable basis.
GOPPAR (Gross Operating Profit Per Available Room), on the other hand, considers all associated costs as it takes the total net revenue, less costs divided by the total rooms available.
GOPPAR = Total Net 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.
Does size really matter?
In some cases, room’s revenue may only contribute a percentage of the overall revenue mix for a hotel with large food and beverage facilities, spa etc, 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:
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 rooms sold. 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 variable 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 at your hotel, together with a clear revenue management 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 your revenue management strategy, a more in depth revenue management consultancy service, or development of your team through revenue management training, Octopus Revenue will provide you with revenue management strategy to suit your requirements and your budget. Visit our website to see our full range of revenue management services.
