What’s the problem with a RevPAR-only hotel performance focus?
NB: This is an article from HotStats
Imagine you’re trying to bake a world-class cake. You’ve picked out the best ingredients, tossed them in a bowl, and … you’re done, right?
Of course not.
The ingredients going into the batter tell you very little about how your cake will turn out. The way ingredients mix, along with the baking temperature, and which tastes and textures are left after you bake all contribute to the final product.
The same problem is at the heart of RevPAR-only strategies. RevPAR may touch on the basic ingredients for a profitable hotel operation, but it doesn’t even start to account for expenses, operational efficiency or how much money is left over at the end of the day.
That means relying on RevPAR alone can cause major problems for hotel decision makers. Luckily, there’s a much more reliable recipe for hotel profit. In this article, we examine the critical flaws of RevPAR-only hotel strategies and dip into better metrics for measuring financial performance.
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What’s Wrong with RevPAR-Only?
RevPAR has long been the single source of truth for many hoteliers. What’s wrong with this approach? Unfortunately, RevPAR only tells a small part of the story. Here are a few reasons RevPAR is an unreliable metric to use on its own:
RevPAR Doesn’t Measure Financial Performance
The most obvious problem with RevPAR is that it’s being used incorrectly. In many cases, it’s held up as a marker of financial health. That’s a massive mistake.
RevPAR only shows how much money is coming in on a per-room basis. It doesn’t begin to touch on any of the money that’s spent throughout the course of a day. It also ignores how much money is left after the hotel operations are up and running.
Why does it matter?
If a hotelier or investor uses RevPAR to make decisions, they’re essentially shooting in the dark. If the hotel operation is burning through cash quickly or costs are outgrowing revenue, it doesn’t matter how high RevPAR soars. Income has to turn into profit to indicate a hotel’s true financial health.
RevPAR Is an Incomplete Revenue Figure
Revenue does serve a purpose. For instance, hoteliers may need to measure demand or see how much they can afford to invest in auxiliary programs. Revenue can also help a hotelier nail down the right hotel revenue mix to increase profit. Even so, RevPAR isn’t the best way to measure revenue.
That’s because it only accounts for the amount of room-related cash coming in. It doesn’t recognize the money that’s generated by food and beverage (F&B) services, golf courses, spas, parking or other hotel operations.
What are some better alternatives to RevPAR?
For one, total revenue per available room (TRevPAR) is a more complete revenue figure than RevPAR is because it accounts for all of the hotel’s revenue streams. Hoteliers can take insights a step further by breaking down departmental revenue and comparing it as a percentage of TRevPAR. This analysis reveals where revenue is coming from, so decision makers can see what programs need more attention.
RevPAR Distracts from Hotel Progress
Perhaps the most severe effect of a RevPAR-only strategy is the way it hides opportunities. When hoteliers are hyperfocused on RevPAR, they can easily skip over chances to pull in more money.
For instance, if RevPAR numbers stay steady for years, it may look like there’s no need to adjust hotel operations. Unfortunately, if labor costs rise or it becomes more expensive to offer a service, profit could be flying out the window.
By examining more complete hotel metrics, hoteliers can shed light on areas where money is slipping away. Maybe an F&B service is spending too much on products. Perhaps maintenance for the golf operation is too expensive to run. At the same time, there may be new money-making opportunities that are bubbling just below the surface.
In all instances, RevPAR does little to shine light on new opportunities for more profit or highlight areas where cutbacks are needed.
Is There a Better Way to Measure Hotel Performance?
The good news? There are deeper metrics that can help hoteliers build a profit-centered performance strategy and reveal a hotel’s true financial health. One of the best metrics out there for measuring hotel performance is gross operating profit per available room (GOPPAR).
GOPPAR measures a hotel’s profit on a per-room basis. Because it highlights the money that makes it to a hotel’s bottom line, it tells a more complete story about a hotel’s financial condition.
Beyond working better as a benchmarking tool, GOPPAR helps hoteliers see what tweaks, cutbacks and investments are promoting more profit. That makes it valuable for hoteliers who want to grow profit in the long run.
Track More Complete Metrics, See More Profit
RevPAR-focused hotel performance strategies may set hoteliers up for disaster, but hoteliers still have more complete benchmarking data at their disposal. With the right hotel benchmarking metrics, hoteliers can measure a hotel’s true financial status, improve operations and correct for higher returns. That all combines for the perfect recipe for higher hotel profit.