Move over RevPAR, there are finally new and better hotel performance metrics in town.
While top-line metrics like Revenue Per Available Room (RevPAR) remain widely used benchmarking measurements across the hotel industry, there has been a collective push from hoteliers over the past few years to standardize the use of bottom-line metrics like Gross Operating Profit Per Available Room (GOPPAR) that more accurately portray the health of a hospitality business.
From operators looking to compare hotels in their portfolio, to owners benchmarking against their comp set, to investors looking to truly evaluate a hotel’s potential returns, more hoteliers are looking beyond RevPAR and searching for a true indicator of a business’s profitability.
“Really everyone in the industry is moving toward profitability as a new measurement,” says Joseph Rael, senior director of financial performance at STR, one of the industry’s leading providers of market data on the hotel industry worldwide. Rael was instrumental in the launch of STR’s Monthly P&L Report in March 2020, which just so happened to be a pivotal time for hoteliers to gain more insight into the true health of their businesses.
For the time being, RevPAR continues to be a standard measurement that most hotel data analysts can access and understand. But, there are many limitations to RevPAR as a standalone metric that make it less useful in certain circumstances.
Of course, top-line metrics like Occupancy, ADR and RevPAR don’t take into account the various costs of running a hotel business. A hotel might have a high RevPAR but still not be profitable if its expenses are high. Another limitation of RevPAR is that it only considers room revenue, without taking into account other increasingly important revenue streams such as food and beverage, spa, or conference and event space.
Therefore, it is important for hoteliers to take the next step of calculating costs and expenses and subtracting them from the top-line revenue numbers to arrive at more descriptive profitability metrics, which will give them a more complete understanding of a hotel’s financial performance.
Top-Line vs. Bottom-Line Metrics
A hotel’s revenue can be high, but if the costs of running the hotel are also high, then the profit may be low or even negative. Conversely, a hotel may have lower revenue but higher profit if it is able to control its costs and expenses effectively.
Measuring profit allows hoteliers to understand the true financial health of their business and make informed decisions about pricing, operations and investments. Profitability ratios such as gross profit margin, operating profit margin and net profit margin provide insights into the efficiency and profitability of a hotel’s operations.
“The great thing about P&L (Profit and Loss) data is that it’s a true indicator of whether or not you’re making the right decisions,” says Steve Hennis, a hotel data analyst and International Society of Hospitality Consultants board member. “That’s not only true for operators, but even investors can look at P&L data to determine whether to buy, sell or renovate a property. It brings all parties to a level playing field.”
As part of STR’s Monthly P&L program, the four main performance metrics are:
- TrevPAR – Total Revenue Per Available Room
- GOPPAR – Gross Operating Profit Per Available Room
- EBITDA PAR – Earnings Before Interest, Taxes, Depreciation and Amortization, Per Available Room
- Total Labor Cost
To determine these numbers, STR unpacks revenue and expenses across each department in a hotel, collecting nearly 150 data points on a monthly basis. Other benchmarking tools such as Kalibri Labs and Hotstats are also calculating expense data to give hoteliers numbers that are more reflective of “net revenues.”
For example, Kalibri Labs examines the total revenue collected by a hotel from each booking, as well as various calculations that deduct different sales and marketing costs that were required to achieve that revenue:
- Hotel Collected Revenue reflects the topline revenue a hotel collects on a booking, which does not include transaction costs or commissions expenses.
- COPE Revenue (Contribution to Operating Profit and Expense) reflects the remaining revenue after removing all direct acquisition costs such as commissions, transaction fees and channel costs.
- Net Revenue reflects the bottom-line revenue after additionally removing Sales and Marketing expenses.
Challenges to the metrics still remain, of course. For example, some hotel groups may choose to outsource or centralize their sales and marketing efforts, while others keep those costs at the property level. These differences aren’t always accounted for in the analysis, which can skew the data.
Also, many hotel groups remain skeptical when it comes to publicizing their P&L level data. Should they provide GOPPAR figures in a public forum like on stage at a conference, there would certainly be more pressure to announce those figures in their quarterly earnings reports, Hennis suggests.
Nonroom Revenue Analysis
In addition to factoring in expenses and costs, another way hoteliers have evolved their profit optimization strategies is by incorporating analyses of non-room revenue, or data from all the other ancillary revenue sources at a hotel other than rooms.
Total revenue management involves analyzing and managing all revenue streams, including room revenue, food and beverage revenue, spa revenue, conference and event revenue, etc., to identify opportunities to increase revenue and profitability.
By taking a holistic approach to revenue management, hoteliers can make informed decisions about pricing, marketing and distribution strategies that optimize revenue across all channels and revenue streams. Total revenue management allows hoteliers to leverage technology and data analytics to gain a more comprehensive understanding of their customers and their behaviors.
In Hospitality Net, Anders Johansson, CEO of Demand Calendar, recently outlined four challenges to adopting a total revenue strategy:
- Diverse revenue streams: Hotels often have multiple revenue streams, which can make consolidating and analyzing financial data across the entire business challenging.
- Data consolidation: Consolidating financial data from multiple hotels, systems and software applications can be complex and time-consuming, especially if the data is not standardized or easily accessible.
- Real-time data access: Financial data may not always be readily available or up-to-date, making it difficult for management to make timely informed decisions.
- Different locations and currencies: If portfolios are spread across multiple countries, financial reporting and analysis can become more complex due to fluctuating exchange rates.
STR’s Monthly P&L Reports take many of a hotel organization’s ancillary revenue sources, such as F&B, Golf, Spa, and Meeting Space into account, and even provide payroll benchmarking for each.
“The throughline among all that is this notion around Total RevPAR,” says hospitality consultant Adam Mogelonsky. “Hoteliers aren’t yet seeing the need to align their cross-departmental performance to ensure we’re capturing the most revenue from a guest across all the various revenue sources within a hotel.
“It comes down to getting all the data in one place, which is very tough to do within each hotel’s technology architecture.”
A Comprehensive View
One example of a tool to aggregate data from all a hotel’s various ancillary revenue sources is Datavision by MDO, which extracts data from all the revenue systems across a hospitality enterprise to create a single, comprehensive data warehouse with deeply customizable views and reports.
With Datavision, hoteliers can connect and ingest the data hoteliers need into customizable reports and dashboards. Through comprehensive integrations with industry-leading systems, hoteliers can access a 360-degree view of data across all their properties’ or portfolio’s revenue streams, including PMS, POS, Spa, Golf, Labor, Back Office, Comp Set, Web Analytics, Guest Survey, Guest Spend Analytics and more.
While RevPAR remains a useful metric for measuring a hotel’s revenue performance, it should be considered alongside other metrics to gain a more comprehensive understanding of a hotel’s financial performance.