Running an accommodation business of any size is no easy feat, but small property owners in particular have unique challenges as they juggle everything from pricing to housekeeping on a day-to-day basis.
NB: This is an article from Little Hotelier
In an increasingly competitive sector, many B&Bs and boutique hotels are turning to revenue management to drive performance and profit growth. If you don’t get on the revenue management bandwagon soon, you risk falling behind the pack.
In this article, we’ll run through the three key revenue metrics for B&Bs, why you need them and how to calculate them, as well as offer our expert advice on how to improve your performance in each area.
Revenue management is the art of managing rates and availability while keeping an eye on all the different key performance indicators (KPIs).
Big hotels and groups usually have dedicated revenue managers to create effective revenue management strategies. Small players like you don’t have this luxury – but that doesn’t mean it has to be the chink in your armour. B&B operators can be just as savvy when it comes to the numbers; all you have to do is know your formulas.
Knowledge is power and your property can learn to use available information to effectively manage your revenue strategy.
So, what revenues can you expect as a bed and breakfast host? The answer varies a great deal, depending on:
- The number of guest rooms in your B&B
- The seasonal (or not seasonal) nature of your locale
- The length of time you’re in operation
- How creatively you promote your business
- How hard you want to work!
There are hundreds of metrics, formulas and key performance indicators in the revenue management world, but we don’t want to overwhelm you, so this article focuses on the essentials. Here are the three success metrics you must use to see how well your small property is doing:
- Average room rate (or average daily rate)
- Occupancy rate
- Revenue per available room
Now, let’s learn about them!
Key metric 1: Average room rate / average daily rate
The average room rate, more commonly referred to as average daily rate (ADR), is a measure of the average rental income of a paid and occupied room during a specific time period.
So, why do you need to know your ADR?
ADR is one of the most critical metrics because it measures the average price that a guest pays per room at your hotel. It allows you to measure and compare the room revenue generated during a specific period of time versus the amount of room revenue paid for by guests and the volume of occupied rooms at the property.
By understanding where your ADR is at during peak seasons and slow seasons, you can create promotional campaigns that can help drive traffic and increase revenue during these periods. It also provides insight into how you stack up against the local competition. This in turn allows you to maximise your income during the peak times of the year and manage your assets during the quiet seasons.
Average room rate formula
Average daily rate is a powerful metric, so one might assume that a complex formula is used in order to come up with this pivotal number. Surprise! It’s actually pretty simple.
The formula to calculate your average daily rate is:
Rooms revenue earned / Number of rooms sold
Of course, when you are using this formula, you need to exclude any rooms that are complimentary or rooms that are currently being occupied by staff members.
If using the formula isn’t your thing, you can use our free calculator to quickly and easily calculate the ADR for your small hotel.
Hotel cost per room calculation
Unfortunately, revenue management is not all about revenue – you also need to monitor your costs. Knowing the average costs incurred per occupied room enables you to make more informed pricing and marketing decisions.
Variable costs may range from $12AUD per room night for a budget property to more than $75 per room night for a luxury hotel.
Here are 6 variable costs to consider:
- Staff costs – If you employ cleaning staff, you need to take these costs into account. To most accurately calculate average labour expense per occupied room, take the total labour plus benefits expense for a time period and divide it by the number of rooms serviced.
- Cleaning supplies and amenities – Determine the average cost to replace “consumable” amenity items such as soap and shampoo. These costs might range from $1 to $20 per room depending on your level of service and how “luxurious” your offering is. Don’t forget to calculate the average cost of cleaning supplies and chemicals per room cleaned, too.
- Laundry expensed – Cleaning the bed and bath linens after each stay comes at a price. Calculate the average laundry costs per occupied room by adding up the labour, laundry chemical, and utility costs incurred and dividing by the number of rooms occupied for that period.
- Utilities – Guests use lights, watch TV, take hot showers, run the heating or air conditioning, recharge electronics, and more. For this reason, the utility expense per occupied room will need to be estimated.
- Allocation toward renovations – You might plan to refurbish your rooms every four to seven years, so it’s a good idea to consider that investment well in advance. Allocate an average of 3% of the room rate generated toward a capital expenditure budget for room renovations. Therefore, a $100 room will cost you $3 in capital expenses per night that it is occupied.
- Booking fees and commissions – While not housekeeping-related expenses, these are variable costs that you will incur if you sell your rooms through OTAs or other distribution channels.
5 tactics to increase your average daily room rate
The key to increasing your ADR is implementing pricing strategies that allow you to increase the revenue you generate from each individual guest. This includes upsell and cross-sell offers.
Complementary offers that will enhance guests’ experience include shuttle transfers, room upgrades, equipment hire, and tours and activities.
Here are some ideas:
1. Packages and extras
Package deals have more perceived value, and many guests will select the bundled option versus the standard room rate if it’s presented to them enticingly enough. One idea is a “local experience” which includes a customised tour for guests, a gift pack of local goods, and passes to a must-see attraction. Or, depending on your target market, perhaps you could offer a champagne breakfast and high tea package to make your guests’ stay just a little bit fancier.
Another way to incentivise travellers to spend a little more when they book is by adding optional extras. Consider offering an airport shuttle or early check-in/late check-out for a reasonable price. A little bit inconvenient for you, but majorly convenient for your guests.
This is simply about letting your guests know what options are available to them. If it’s out of sight, it’s out of mind!
By the same token, be creative about how you position your rooms and rates. Rather than charging more for a certain room that automatically comes with dinner and a car park, sell these as extras that can be added onto any room.
Placing your features as extras will mean guests can spend more on things they’d prefer without feeling like they have to book a more expensive room.
In saying that, last minute arrivals and walk-in guests should always be charged at a higher rate.
2. Upsell opportunities
Use your front desk or other designated area to take advantage of point-of-sale opportunities such as car rental or tickets to events and tours. This not only brings in revenue but also enhances the guest experience.
Whatever the product may be, give guests something to remember their time with you and add a new revenue stream by making some of your products available for purchase. For example, sunscreens, shampoos or even towels for the beach. (This might even prevent them from ‘accidentally’ packing your bathroom towels in their bags before check-out!)
B&B guests also appreciate authentic experiences and local goods, so they are likely to purchase a souvenir from you if they know it was created by a nearby artist or entrepreneur.
If you have staff, train them to upsell. If a customer has booked a basic room advise your staff to encourage guests to spend more on arrival.
This is where being a small hotel comes in handy, because you get to know your guests on a personal level and this makes upselling seem less commercial. For example, let’s say a couple arrives at your property and as are chatting they mention it’s their anniversary. That’s your opportunity to strike! If you have a honeymoon suite, offer to upgrade them for a special rate, or suggest the romance package for a discount.
You want your guests to get the most out of their stay with you, and sometimes this can result in a little extra revenue for you. It’s a win-win!
3. Implement a referral program
Satisfied customers should be encouraged to refer their friends and family to stay at your property. Offer your potential guests incentives such as a promotion code which can be redeemed at the time of booking on your website.
A post-stay email can also be set up to automatically send to your guests after they leave, with a specific promotion code and discount. Remember: word of mouth is often the most powerful marketing tool.
4. Welcome pets
Many travellers would love to travel with their furry companions. If possible, make your small hotel pet-friendly so you not only attract a different segment of travel customers, but can be in a position to charge a little extra for your rooms.
This could be a great point of difference for your property, and is a way to give guests that “home away from home” feeling – not to mention it saves them having to sort out pet-sitters or spending a lot of money on kennels while they’re away.
5. Offer discounts for extended stays
Your ADR will increase significantly the longer an individual guest stays at your property. In order to encourage longer stays versus quick weekend visits, you may want to offer extended stay discounts.
Many people stay at small hotels for the weekend. You could encourage them to stay longer by offering 30% off their third night, or you could offer guests a 20% discount if they book for seven nights or more.
This increases your occupancy and boosts your revenue per customer.
Key metric 2: How to calculate occupancy
High occupancy rates are key to ensuring solid financial performance for your B&B. All small property owners want to book their hotel to capacity.
Why? If a room is sitting empty for the night, you quickly lose revenue and you miss an opportunity to continue to grow your business.
Room occupancy formula
The occupancy rate of your B&B is the number of rooms you have filled as a percentage. When you have a lot of booked rooms you have a higher rate, whereas a lot of empty rooms means a lower rate. You can look at this figure by day, week, month, or even longer. The rate will be different depending on the length of time you consider.
Calculated your occupancy rate by dividing the total number of rooms occupied by the total number of rooms available times 100, e.g. 75% occupancy.
Room occupancy calculator
Want to do it this easy way? Use our free calculator!
Hotel room night vs. hotel bed night
Room occupancy gets more specific when you consider bed nights. Warning: this section is more advanced, so read on if you dare…
A room night is the number of rooms occupied on a given night, whereas a bed night includes the number of guests in those rooms. So, as opposed to the standard occupancy rate we just covered, where a room is the unit of measure, a bed night calculates the number of beds in the entire hotel with the nights each of them are booked.
As an example, let’s say your hotel has 10 rooms, each with 2 beds. If 5 separate people book 5 rooms for all 30 days in the month of April, your hotel had a room night occupancy of 50% for April. However, there are 20 beds spread out over these 10 rooms. If these same 5 single and separate people booked the 5 rooms for all of April, the bed night occupancy would be only 25%, because 5 beds were used out of a possible 20 for April.
This gets even more complex when you take the nights into consideration. If a hotel with 12 rooms each with 2 beds was booked by 12 separate, single people for 15 each of the 30 days in April, the room occupancy would be 50%, because each room was occupied (100%), but only for 15 of the 30 days (100/2 = 50%). However, if you want the bed night calculation, it would be 25%, because 12 beds were occupied out of the 24 available (50%), and for only 15 of the 30 days in April (50/2 = 25%). Get it?!
4 tactics to increase room occupancy
Good news! There are 4 sure-fire ways to boost your B&B’s occupancy rate.
1. Know your competitive position
It’s important to keep tabs on your competitors’ pricing. Staying on top of what other local properties are charging will give you more context when setting your own rates.
You can also look at any extra services your competitors are offering, as these ‘in-demand’ upgrades can increase your ADR, as we covered earlier.
2. Adjust your rates
The travel industry fluctuates frequently. Leaving your rates the same means you will miss out on major opportunities during business booms and may drive customers away from your door during busts. Track market changes, then reflect them in your own rates.
3. Monitor your occupancy levels and local events
Every destination has a high season, and most have events at different times of year that will increase traffic. If you fail to take this into account, you may miss high-volume windows, causing campaigns to flop and your efforts to amount to nothing.
In line with revenue management best practice, during peak times, as occupancy rates increase, so should your rates.
During low occupancy, know what is going on in your area and prepare a market strategy in advance. This will allow you to advertise to guests already looking for accommodation. For example:
- Partner with local festivals
- Offer special event packages
- Offer to host some events
Monitor when your occupancy rates have been particularity high, then replicate what you did during this time for periods of expected low occupancy. But don’t get too caught up in the glory of the high season, as many B&B managers do!
It’s easy to make the mistake of predicting the same success throughout the year, but don’t get dollar signs in your eyes just yet.
Proper revenue management means taking into account the low times as well before you make any long-term plans. Look into the data surrounding your destination to know when business might drop.
4. Audit your booking channels (or get on them if you’re not already!)
If you advertise your property on online travel agents (OTAs) such as Booking.com or Airbnb, make sure you monitor your performance.
If one site is performing better than another, try to identify the reason and make necessary changes. Sometimes it can be as simple as updating property images or tailoring the wording on your listing to better appeal to the site’s audience.
If you’re not advertising your property on any OTAs, you should seriously consider doing so. OTAs are a rich source of data, especially considering so many people book their stays through a third party (Booking.com processes over 1.5 million room bookings each day!).
With so much business funnelled through OTAs, you can’t afford to neglect them.
Key metric 3: Revenue per available room
Revenue per available room (RevPAR) has long been considered the most important figure to look at when calculating the financial performance of accommodation. It tells you the revenue per available room and creates a relationship between rates and occupancy to understand how your B&B is performing.
Without tracking it, small accommodation providers will find it difficult to know how well they’re doing, and how to improve.
Here’s everything you need to know about RevPAR and how to maximise it at your B&B.
Room revenue formula
It can be calculated in two ways:
- Multiply average daily rate (ADR) with occupancy – this is the most popular method
- Divide the total revenue of a set time period by the number of available rooms in that period
You will calculate your RevPAR according to a specific point in time (day, month, or year), and compare it across the same time periods (for example, RevPAR across Fridays or Christmas holidays).
It’s difficult to say what a “successful” RevPAR is, as it really depends on the market, and is based on demand and other factors.
While it is considered accurate, this example shows us some limitations. If a hotel sells 50 rooms for $20, or five rooms for $200, the revenue is $1000 for a consistent RevPAR of $20. However, this doesn’t mean the net operating income of the hotel will be the same in both cases given how many other factors may come into play.
Total room revenue formula
Given the limited abilities of building strategies based on RevPAR, a new metric has made its way into the industry. Total revenue per available room (TrevPAR) takes a more meaningful look at the profitability of the hotel by taking into account the total revenue of the property including the bar, room service, breakfast etc. It is calculated by dividing total revenue by the number of available rooms.
Given you have the capability to accurately measure your pricing and revenue data, TrevPAR will give you many more options in how to conduct your revenue management strategy.
You can:
- Analyse the geography of your guests – Was the TrevPAR higher or lower depending on the demographic that was staying in a particular month? If, for example, TrevPAR increased with greater numbers of guests from Europe, or more specifically a country in Europe like Switzerland, you can target to increase the share from that market. Did the increase come from your rooms or amenities?
- Analyse other segments – As with the geography, you might look at what is influencing increased revenue and how to capitalise on it. Could it be that women produce more revenue than men, or families more than other leisure groups?
- Analyse the performance of amenities – Was TrevPAR up in summer? Perhaps it’s because you have an outstanding pool area. Was it up in winter? Maybe your heated spa is attracting more guests.
- Be more accurate with pricing – By taking in the big picture, you can be informed about how much you need to be selling your rooms for and how this should change throughout the seasons.
Common room revenue pitfalls
There are three common RevPAR mistakes that small accommodation providers make; avoid these at all costs!
1. Too much reliance on OTAs
Don’t allocate too many rooms to an online travel agency. They entice travellers with their discounts, and while it will increase your occupancy rate in the short term, you will lose money in the long run because of how much it costs you to service that room.
Learning how to strike a balance between direct and third party bookings is essential.
2. Underselling your rooms
Don’t try to charge less for rooms in an attempt to attract more guests. Instead, increase the perceived value of your room by adding additional extras.
You may find that by charging a higher rate and having fewer guests, you will actually increase your revenue (and service your guests better).
3. Spending too much
Try to reduce waste in your spending, especially when it comes to electricity. There are some ways to reduce your carbon footprint and save money at the same time – all without compromising the guest experience.
Another area to be aware of is breakfast items. Do you find that you’re always over-stocked and much of the bread goes to waste? Assess how much you really need so that the bread doesn’t go in the bin (along with the cash you spent on it).
3 tactics to increase room revenue
1. Implement length of stay restrictions
This is still the best way to increase revenue per room!
- Minimum length of stay (minLOS) can be applied when you anticipate a period of high demand followed by low demand. You accept longer duration stays and reject shorter duration stays for arrival. It helps you to increase occupancy during the slow period that follows (so that stays in the high demand period “spill over” into the less demanding period).
- Maximum length of stay (maxLOS) can be applied when you expect to be able to sell out rooms at higher rates. You don’t accept reservations at specific discounted rates for multiple night stays extending into the sold out period. Guests who want to stay beyond the maximum length of stay period can be charged rack rate for subsequent nights.
It is best to implement minimum LOS restrictions when you are expecting a period of high occupancy so that the period after remains lucrative. This means busy periods will spill over into quieter times.
Maximum LOS should be implemented when you plan to sell rooms at higher rates. You shouldn’t accept discounted rates for multiple night stays during this time, and guests who want to stay beyond max stay can be charged a high rate.
Note that will all of the above, you need to be careful. If there isn’t sufficient demand, or if these tactics are poorly executed, it could have a negative effect on your bottom line.
2. Review room type attributes
See if you can increase revenue by adding new room type levels based on attributes like an an excellent view, a balcony, or a big bath.
3. Enhance your offering
Increase room rates by giving guests access to exclusive perks that increase the perceived value of the rooms. For example, free shuttle to and from the airport, free pram hire, and free breakfast.
More revenue terminology
We did promise not to overwhelm you with metrics, but we couldn’t resist leaving a few more here for you to get familiar with. These are purely descriptive – we’ll give the formulas a rest… for now.
1. Market penetration index
This metric can be used to compare your success to other competing properties in the local market. The market penetration index, or MPI, will indicate your share of the bookings within the market. It allows you to understand how many guests are selecting your hotel versus another, and can help you adjust your marketing strategy to capture a higher volume of your target market.
2. Revenue generation index
The revenue generation index, or RGI, is a metric that allows you to compare your property’s RevPAR with the RevPAR of your competition in the local market. It is calculated by dividing your hotel’s RevPAR by that of the total market RevPAR. If the result is one or greater, you are generating a favourable portion of the market revenue. If it’s less than one, you will want to consider options to help capture a greater share of the total market revenue.
3. Gross operating profit per available room
This is a powerful metric, as it allows you to understand your hotel’s success across all levels. Known in the industry as the GopPAR, it allows you to identify which areas of your hotel generate the most revenue – and does not limit you to your revenue generated per room.
4. Marketing cost per booking
The marketing cost per booking metric, or MCPB, gives you an idea of how much you are spending to generate bookings from individual distribution channels. To calculate this metric, you must identify the distribution costs for that channel and subtract those costs from the booking amount that the guest pays. You will want to focus your efforts on the least expensive distribution channels to maximise profits.
Obviously it’s hard to take on and monitor all of these metrics – particularly if you’re new to revenue management – so it’s important to focus on the ones you can control and impact with new strategies in order to maximise your revenue.
Key Takeaways
- Revenue metrics – specifically ADR, occupancy rate and RevPAR, are critical to understanding your B&B’s performance.
- You don’t need to be a revenue manager to do revenue management. It’s as simple or as complex as you make it. Start with the 3 key metrics and go from there.
- Average daily rate (or average room rate) measures the average price that a guest pays per room at your hotel.
- Occupancy rate is the number of rooms you have filled as a percentage. To get more detailed insights, you can break it down by room nights and bed nights.
- Room revenue, or RevPAR, tells you the revenue per available room and creates a relationship between rates and occupancy. TrevPAR shows you the bigger picture.
- Don’t forget to include your costs!
