One Reason Why You Shouldn’t Be Googling “RevPAR vs ADR”
There are myriad acronyms in the glossary of hospitality financial analysis, but two in particular haunt hotel managers like a specter: ADR (average daily rate) and RevPAR (revenue per available room).
NB: This is an article from Hotstats
Although ADR measures the effectiveness of rooms rate management, RevPAR reflects how rate and inventory interact to generate rooms revenue. Continued growth in both these metrics is often an illusory quest: Increased rates might lead to falling occupancy numbers, which can negatively affect overall rooms revenue if rooms go unfilled.
So, in the RevPAR versus ADR contest, which is the better measure of financial performance? Google can offer more than 40,000 results for this query in less than a second. However, this is not the right question to ask. When searching for the best financial performance indicator, instead Google: “What is GOPPAR?”
Both RevPAR and ADR reflect only top-line results and are circumscribed to the rooms department. This is an incomplete financial picture in two ways: 1. It does not take into consideration all of the other revenue centers in the hotel. 2. It provides no information about the costs and expenses that are incurred in the course of generating revenue and keeping the operation running.
Although the rooms department is generally a hotel’s most important revenue generator (at around 65 percent of total revenue in full-service hotels), it doesn’t make all other revenue streams negligible. There are plenty of revenue-generating opportunities in F&B, health club, spa and other operated departments that hoteliers can’t afford to disregard. Moreover, the increasing costs of sales (mainly through OTA commissions) and labor expenses now require hotel managers to be more painstakingly aware of their bottom line than ever.
GOPPAR (gross operating profit per available room) reveals a hotel’s whole financial picture. It’s an indicator of the efficiency and profitability of the operation—how much money per available room is generated and kept after accounting for all expenses. This metric is important to hotel managers and owners alike, because it reflects their operation’s profitability structure.
The math involved in the calculation of GOPPAR is very straightforward: Simply subtract gross expenses from gross revenue and divide by the number of available rooms. The practice of consistently benchmarking GOPPAR allows hoteliers to identify areas for improvement, as well as best practices. Moreover, tracking GOPPAR over time is a good method for assessing different revenue-management strategies, by establishing the costs associated with each additional dollar of revenue. But, most importantly, during times of economic expansion, it’s easy to get lost in the RevPAR and ADR frenzy, and let expenses slowly creep up. Having an in-depth understanding of an operation’s profitability structure through GOPPAR benchmarking makes hoteliers more agile in their ability to respond to changes in the business environment when downturns hit.
RevPAR and ADR are good performance indicators when it comes to understanding the top line, but they are not enough to depict the financial reality of a hotel. It’s not a matter of RevPAR versus ADR, but rather, a change in paradigm. As technology makes strides in the collection and processing of data, it’s time for hoteliers to take advantage of more complex indicators, such as GOPPAR, and incorporate them into their tracking and benchmarking efforts.