Total revenue is the cornerstone of an effective revenue management strategy.
It reflects the overall financial health of a hotel and determines how like it is to succeed in the long term. Your ultimate objective as a hotel or revenue manager is to continuously improve your total revenue rate so that you can develop a profitable business strategy that promotes growth.
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In this post, we are going to explain what the total revenue definition is, and how you can calculate total revenue in your hotel. We will also share a few examples of additional revenue metrics you should be tracking in order to develop a total profitability approach to revenue management.
Total revenue definition
Let’s start by looking at a basic total revenue definition.
Total revenue is the total income that your hotel generates from all its revenue streams. It takes into account your room revenue, but it also includes the revenue you generate from your ancillary services. This includes your hotel bar and restaurants, room minibars, concierge services, in-room entertainment, spa, function rooms, meeting rooms, childcare services, tickets for tours and events, extended check-outs, and hotel merchandising, to name a few.
Taking a total profitability approach to your revenue management strategy by including all these additional streams in your calculations is a highly effective way of boosting your overall revenue and profits. This is because the most profitable guests are not necessarily the ones who are willing to pay the most for a room – it’s also those who are willing to pay more for services.
Instead of focusing exclusively on your RevPAR and ADR, you should implement a holistic strategy that promotes these ancillary services. This not only helps you generate more revenue, but it also increases the lifetime value of a guest. Essentially, this is because the more high-value ancillary services you are able to offer your guests, the better all-round experience they are likely to have at your hotel.
How do you calculate total revenue?
Now that we’ve looked at the total revenue definition in detail, let’s take a look at how you can calculate it.
There are a number of KPIs you need to measure to calculate your revenue.
Basic formulas for calculating your room revenue include:
- ADR: your average daily rate. This is your room revenue divided by your total number of sold rooms
- RevPAR: your revenue per available room. This is your total room revenue divided by your total available rooms.
- GOPPAR: your gross operating profit per available room. This is your gross operating profit divided by your total available rooms.
When it comes to total revenue, most hoteliers use the Uniform System of Accounts for the Lodging Industry (USALI) to define their various revenue streams. This system helps you compare your revenue between different operations and departments.
According to USALI, all services within a hotel can be categorised as follows:
- Room sales
- Food and beverages, including revenue generated from room service, restaurants, bars, minibars, meetings, and functions.
- Revenue from other operational departments, including health spas, recreational activities, business centres, and in-room entertainment, amongst other revenue streams.
- Miscellaneous revenue generated from other indirect sales, such as gift shops.
Once you’ve categorised all your revenue streams and determined your revenue per business area, you can calculate your total revenue.
The formula for calculating your total revenue is simple:
total revenue = (average price per sold service) x (total number of sold services)
Examples of additional revenue metrics
Because the total revenue definition takes into account each and every revenue stream in your business, you should also include the following additional revenue metrics in your revenue management strategy. These formulas will help you quantify the value of all your ancillary services so that you can determine which guest segments are spending the most on your services. This will help you identify which segments of your market you need to target in order to attract more high-value guests to your hotel.
This is your total revenue per available room, regardless of whether or not rooms are occupied. This metric takes into account all revenue generated from all your available rooms including both room revenue and revenue from your ancillary services:
total revenue / number of available rooms
This is your revenue per available square metre. It takes into account your total revenue, including services, in relation to the total space available in your hotel:
revenue / available square metres
This is your total revenue per occupied room or occupied space. It takes into account your total revenue, including services, in relation to your sold rooms and rented spaces:
total revenue / number of occupied rooms or spaces
This is your revenue per available seat hour. It reflects the revenue that you have generated from a specific operation or activity, usually in relation to F&B, taking into account available seats and your opening hours:
F&B revenue / (available seats x opening hours)
Focus on improving the guest journey
Once you have conducted all your calculations and you are clear on your revenue rates for each operation in your hotel, you can use your business intelligence data to identify which guest touchpoints generate the most total revenue for your business. Then you can work on strategies to improve these stages in the guest lifecycle and boost your total revenue.
It’s also important to understand your guest segmentation and measure how each guest profile behaves during the pre-stay, stay and post-stay stages. In other words, you need to calculate your entire customer lifetime value (CLV).
Here are a few metrics that will help you calculate your CLV
- RevPAC: Revenue per available customer. How much money is a guest spending on their stay, including room rate, add-ons, and ancillary services.
- Repeat Customer Rate: The number of guests that return to your hotel.
- Net Promoter Score (NPS): How satisfied your guests are with their overall stay. This is established by sharing surveys with guests after they have checked out. Using the results, you can then divide your guests into three groups based on their satisfaction with your service: detractors, passives, and promoters. The more promoters you identify, the more satisfied your guest segments are and the more likely they are to become loyal, returning customers that repeatedly add to your total revenue.