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INTRODUCTION
How can one hotel be measured against another based on the varying sizes,
product types, location types, and service levels in the industry? This question
has plagued hospitality professionals for years. Measuring performance
is important for investors, owners, and managers. Investors need to
be able to measure an individual hotel’s performance in relation to the
industry as a whole for many reasons—not the least of which is financial
viability. Owners need to know if the hotels in their portfolio are performing
up to expectations. Managers use hotel performance measurements
as a yardstick of their own professional ability.
Each of the groups of people interested in measuring performance
will view the information in different ways. The investors and
owners may prefer to look at “hard data” (i.e., documented numbers).
This is a quantifiable approach. Managers may look at other factors.
Good quantifiable data may be a goal for managers as well, but how
they get there is less quantifiable. The approach they use is qualifiable—
that is, an approach that leaves room for interpretation.
In the end, accurate measurement of hotels involves both quantifiable
and qualifiable analyses. There are two accepted forms of quantifiable
analyses:
rev-par and market share. The qualifiable analyses are based on the goals of
management. How will a hotel’s management achieve reasonable results?
Because a hotel derives most of its profit and revenue from room sales, the
qualifiable approaches center on filling the sleeping rooms. These managers
are said to be either rate driven or occupancy driven.
QUANTIFIABLE ANALYSES
Another thread`s analysis of room cost and profit margin illustrated how the
room
sales component of hotels can be measured. These analyses, though tailored
to the hospitality industry, are not exclusive to the industry. Cost analysis, as
well as profit and loss, apply to almost every industry. The hospitality industry
has developed further tools for the analysis of room sales that are exclusive to
the industry. A method of comparing the room revenue from hotel to hotel is
called rev-par.
Rev-par is defined as revenue per available room. This analysis allows
hotels of different sizes to compare the revenue generated by the sale of sleeping
rooms. Rev-par divides the total sleeping room revenue generated for a
predetermined time frame by the total number of hotel rooms. Rev-par goes
beyond occupancy analysis because it factors in average daily rate.
Rev-par is unique to hospitality. Because of the differing sizes of hotels,
the need to compare performance on an even playing field arose. Factoring in
the size of a hotel allows any hotel in a specific market mix to compare itself to
another. It will be helpful to review again the common hotel-size classifications.
Common Hotel Size Classifications
Classification Number of Sleeping Rooms
Small 1 to 150
Medium 151 to 400
Large 401 to 1,500
Mega 1,501 and over
The hotel size classification is helpful in describing the relative size of a
property. Understanding that hotels of all sizes seek to compare quantifiable
data, the need for rev-par analysis becomes apparent. The following example
shows how rev-par is calculated.
Assume that the ABC Hotel sells a room for an average of $150.00 a
night. In this example, assume that this hotel has 350 rooms.
Rev-par attempts to factor both average daily rate (ADR) and occupancy
into one figure. If the ABC hotel had a 76 percent occupancy on a given night,
the rev-par calculation would begin with these steps:
Step 1—Collection of data
ABC hotel has 350 rooms, an ADR of $150, and an occupancy of 76
percent.
Step 2—Revenue calculation
76 percent occupancy at a 350-room hotel translates into the sale of 266
rooms.
266 rooms multiplied by the ADR of $150 equals total room revenue of
$39,900.
Step 3—Rev-par
Total room revenue of $39,900 divided by the total number of available
rooms (350) equals $114.
Rev-par = $114
Rev-par = (Occupancy × ADR) ÷ Total number of rooms
The ABC Hotel in this example had a rev-par of $114 on this particular
night. Rev-par can analyze the performance of a hotel over any time frame
(nightly, weekly, monthly, or yearly). Rev-par analysis is useful because of the
aforementioned flexibility of comparing different size hotels and their respective
rates. Another example:
Step 1—Collection of data
ABC Hotel has 350 rooms, an ADR of $150, and an occupancy of 76
percent.
XYZ Hotel has 500 rooms, runs an ADR of $120, and a 76 percent
occupancy, which results in a total of 380 rooms being sold.
Step 2—Revenue calculation
The total room revenue for the ABC Hotel is $39,000 ($150 × 266).
The total room revenue for the XYZ Hotel is $45,600 ($120 × 380).
At first glance, a novice may look at the higher room revenue of XYZ and
make the incorrect assumption that it outperformed ABC.
Step 3—Rev-par
The rev-par comparison would show that the rev-par for ABC ($114) is
higher than the rev-par for XYZ of $91.20 ($45,600 divided by 500).
This example shows that with what it had to work with, ABC outperformed
XYZ when ADR and occupancy were factored in.
Market Share
FIGURE 1
Qualifiable analysis
Rate driven management goals may forgo occupancy levels for a higher
average rate. The occupancy driven goals are simply the opposite, they
forgo a higher average rate for greater occupancy.
Each of the qualifiable goals actually uses one of the quantifiable analyses
to support its point of view. The occupancy driven managers will use data
from market share analysis to support their argument. The results of market
share, after all, focus on occupancy. The goal of filling sleeping rooms at the
cost of a higher rate is sometimes referred to as a “heads on beds” philosophy.
The rate driven managers will use rev-par to show how the higher rates
are making better use of each sold room. They will forgo full occupancy for a
better overall revenue picture.
Occupancy driven managers claim that due to opportunity cost, an
unsold room costs the hotel money. Any room sold above room cost generates
some profit. Another benefit to high occupancy, these managers claim, is that
a hotel running at full capacity all the time is more efficient. Employees
become better at their jobs because they get more practice. Material and supplies
can be purchased in greater bulk, which results in volume cost savings.
Rate driven managers claim that reducing sleeping room wear and tear
saves the hotel money in renovation and repair costs. They also claim that the
ROI (return on investment) is better when labor and other costs are compared
to higher average rate performance.
In the end, there is no absolute approach. Neither is right or wrong, each
goal is simply in the “eye of the beholder.”