We are all looking for growth, right? And that might be in occupancy, ADR or RevPar. Or perhaps you want to gain market share or improve your position on STR. Well all of these are valuable measurements but are they actually telling you how profitable you are? Are they measuring how successful your rate strategy is? Shouldn’t profitability be your main focus?
In revenue terms the more accurate measurement will always be Adjusted Revenue Per Occupied Room (ARPOR) or better still Average Booking Value Per Available Room (ABVPOR).
Measuring your Cost Per Occupied Room
So as always, lets take this back to basics. Before we start measuring any key metric do we actually understand our Cost Per Available Room? Are you using an industry standard or have you taken the time to understand your own unique detail? And if so, when was the last time you reviewed? As we all know, things change and often considerations like Cost of Commission, calculated over your average number of rooms sold is left static and not re-evaluated regularly. Whilst using an industry standard is at least a starting point, I would recommend you look at your own business in detail. These metrics are usually easy to access and hopefully you will have a system that is tracking this level of detail for you. But just as a very basic starting point, this might help:
- Take the number of rooms you have available to sell in a year
- Assume an occupancy based on your predictions for this year or your trends from last year
- This will then give you the total number of rooms you expect to sell
- As an example: 100 bedroom hotel, open 365 days per year (36500 rooms available), running at an occupancy of 65% means that you predict to have 23725 rooms occupied.
Measuring your Adjusted Revenue Per Occupied Room
The next step is then to determine whether or not you take both fixed and variable costs into consideration. There is an argument for both including and excluding fixed costs – lets look at both sides: Some hotels will take fixed costs into consideration as they want a true ‘nett’. The argument here being that to understand profitability, you need to nett everything down and include all costs to get a true value. But is this fair?
Your fixed costs are by their very nature ‘fixed’. So in real terms no matter what your sales or revenue people do, they can’t influence these expenditures. For example, the hotel may have bank loans, franchise fees or even rate bills and these are all due, no matter whether you have 100 rooms occupied or only 1. So perhaps the fairest way is to only include your variable costs. After all, these are the things your sales team can actually influence.
If you don’t have a revenue system tracking this for you, then some examples of costs you might want to consider:
- Linen & Labour (house-keeping) – I am sure your House Keeper will have these costs for you but don’t forget to take into account multi-night stays when linen might not be changed, therefore costs are reduced.
- Rent / Franchise costs or bank loans
- Wages for contracted staff
- Wages for casual staff
- Commission – (100% of which I suggest is assigned to rooms for ease of calculation)
And don’t forget to apportion only a percentage of these costs (excluding commission) to rooms as the bar/restaurant/spa etc will need to share the burden
Once you have broken down all of these costs – and the above are just a suggestion – then if we go back to the above example: divide this total annual cost by 23725 – and hey presto, you have a realistic cost of sale per occupied room (CPOR).
So now we have the ADR that we sell at and the Cost Per Occupied Room (CPOR), this will give us our ARPOR or Adjusted Revenue Per Available Room – a much better way to judge our profitability.
Measuring your Average Booking Value Per Occupied Room
But shouldn’t we take this one step further? Most of us have outlets – whether that be restaurant or bar, spa or golf. Most our guests will spend while they are with us, so shouldn’t we take that into consideration? And shouldn’t this be a metric that we use to evaluate which market segments are more profitable?
To work out your Average Booking Value Per Occupied Room, take your ADR, less your CPOR and multiply it by the number of rooms occupied.
Let’s take 2 examples:
Rate level 1:
ADR is £100 and the CPOR is £30 which produces demand of 80 rooms
(100-30) x 80 = £5600 which translates to an ARPOR of £70
Rate level 2:
ADR is £120 and the CPOR is £30 which produces a lesser demand due to higher rate, of 70 rooms
(120-30) x 70 = £6300 which translates to an ARPOR of £90
So in example 2, with less rooms sold, you are actually more profitable.
Now lets add Incremental Revenue into the mix:
Rate level 1:
80 rooms spent a total of £3000 in our outlets = £37.50
70 rooms spent a total of £2500 in our outlets = £35.71
Add these to your original figures:
Example 1: £70 + £37.50 = £107.50
Example 2: £90 + £35.71 = £125.71
So in real terms it is better to except less rooms at a higher rate with a strong incremental spend.
Your revenue system should be tracking this kind of detail for you as it will help evaluate which sections of your business are more profitable. Should you actually be taking so many wedding guests or perhaps those short spa breaks are actually more profitable?? You can only gauge this when you have a true picture of not only the rate you are charging, but the cost of your rooms and then the incremental spend per segment.
I hope this helps
And for more advice on all things ‘revenue’ please just email firstname.lastname@example.org