Is RevPAR the Best Measure of Performance?

If your job is in any way related to the lodging industry, you've probably heard of RevPAR.  But do you understand how it works? And is RevPAR the best measure of operational efficiency and profitability? Let's take a closer look and give you food for thought to decide for yourself.

RevPAR is clearly one of the most used and most highly relied upon metric in the hotel industry today. RevPAR is an acronym that means Revenue Per Available Room and is essentially a measure of how much revenue was generated given a certain volume of available room inventory. This is different than the average daily rate (ADR) in that it is a measure that divides revenue by the number of available rooms, not the number of occupied rooms as ADR does.

The formula for RevPAR can be derived in two different ways.  The first formula is:

Total Net Room Revenue in Time Period

________________________________________

(# Available Rooms * Days in Time Period)

 

 

Alternately, RevPAR can be calculated as follows:

 

ADR x Occupancy Rate

 



Let's walk through an example. Assume the following:

 

Total Rooms in Hotel: 1,000

ADR (for time period): $150

Occupancy Rate (for time period): 75%

Days in time period: 365

 

Applying the first formula, we first need to determine the Total Net Room Revenue for the time period as:

 

(((# Rooms * Occupancy Rate) * ADR) * # Room Nights in time period)

 

Such that:

Total Net Revenue = (((1,000 * 75%) * $150) * 365) which equals $41,062,500

 

Now apply known values to the first RevPAR formula such that:

 

$41,062,500

__________  =  $112.50

1,000 * 365

 

So for this example, the RevPAR is $112.50

 

 

If we plug the known values in to the second RevPAR formula we arrive at the same conclusion:

 

$150 * 75% = $112.50

 

Using the second formula, we validate the first calculation that the RevPAR is $112.50 for the given time period.

 

Traditional school of thought says that RevPAR is one of, if not THE, most important metric in the hotel industry because it is a measure of how well the property fills available rooms and at what rate.

In my opinion, simply looking at RevPAR as a measure of hotel performance can be misleading.  For example, one could easily mistakenly believe that a hotel with a RevPAR of $115.00 is performing better than the example we used above because clearly $115.00 is better than $112.50, right?  Well, not always. If the hotel with the $115.00 RevPAR only had 500 rooms then the bottom line revenue, and subsequently the income deposited to the owner's bank account, would be much less than our example hotel who's RevPAR was $112.50.

This raises the argument that, while RevPAR is a common benchmark for hotel yield management analysis at the individual property level, other metrics are actually more important in determining the operational performance of a property. Since hotel owners are ultimately interested in net profits and how much revenue is brought  to the bottom line, other metrics deserve some level of consideration when discussing property performance analysis.

Gross Operating Profit Per Available Room (GOPPAR) is one such metric.  It considers profit in relation to the number of available rooms, but also takes into account that a property may generate revenues from other sources such as golf, amenities, F&B, spa, etc. Shouldn't a property's operational performance include all revenue sources and not just rooms?  Many General Managers believe it should since significant expenses are allocated to generating non-room revenue and would give a more global view of a hotel's fiscal performance.  However, the biggest drawback is that unlike RevPAR, GOPPAR revenue sources would vary widely from property to property so an apples-to-apples industry comparison would be difficult at best.

RevPAR has its place in analyzing property performance to be sure. However, to develop a well rounded view of property operational performance, analysts should consider other metrics that speak more directly to the ultimate objective of most businesses - the net revenue dropped to the bottom line that affects stock performance and owners' bank accounts. Is GOPPAR part of that equation? It just might be, but that's for you to ponder.

What did you think about this Hospitality Gem? What metrics do you find useful when evaluating your property's operational performance?  I would love to hear how you got along with this Gem so please leave a comment below or feel free to contact me at davidknight825 @ yahoo.com with your comments, queries or feedback!