Every hotelier is familiar with and knows that Occupancy is the percentage of available rooms that were sold during a specified period of time. It is calculated by dividing the number of rooms sold by rooms available. Occupancy = Rooms Sold / Rooms Available
Occupancy is one of the three main indexes used in the science of Revenue Management (along with ADR and RevPAR). The three main misconceptions about it still prevailing in the hotel industry are:
- It should be the target for maximization
- It should be forecasted either within the hotel budget or forecast.
- It should be the indicator and trigger for price adjustments.
Correlation between, ADR, RevPAR and Occupancy %
A high ADR isn’t worth much if a hotel is empty. Conversely, high occupancy and a low average rate (heads in beds) rarely maximises an asset’s potential. Therefore, an important KPI is RevPAR, which is the product of occupancy and average rate, expressed as a monetary amount.
While occupancy and average rate both tell a story about a hotel’s performance, the benchmark indicator of that performance is RevPAR which multiplied by the number of rooms available provides rooms revenue – the top line revenue in the most profitable department of a hotel. In other word maximizing the RevPAR, should be the ultimate goal for owners and hotel managers.
While RevPAR indicates the performance of a hotel market, managing for RevPAR involves fundamental and yet complex economics. Price elasticity of demand − or ‘the responsiveness of the quantity demanded of a room or service to a change in its price’− is a measure of desirability. The reality of the hotel business is that too high a price will likely displace demand.
The same applies to the wider market. As a result, revenue managers need to tinker with their pricing policies and tactics to ensure that demand is not displaced, but captured at the highest attainable room rate. This might sound easier than it is. So the aim role of revenue management, is optimizing the intricate relationship between occupancy and average rate.