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RevPAR is an acronym that stands for Revenue Per Available Room and is defined as:
"A performance metric in the hotel industry, which is calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate. It may also be calculated by dividing a hotel's total guestroom revenue by the room count and the number of days in the period being measured." (from Answers.com)
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In other words, RevPAR is a measure of how much direct rooms revenue is generated given a finite amount of inventory (rooms available to rent) expressed as a nightly rate.
As a simplified example, a one hundred room hotel that is 100% booked and charges $150 per night will have a RevPAR of $150 (See blog post Is RevPAR the Best Measure of Performance? for more information).
Logic would lead one to believe that a full hotel at a lower rate would generate more revenue than a partially empty hotel that is charging a higher rate, especially since comparable hotels with lowered rates are stealing market share from the same category hotels with higher rates. But is this really true?
The study, Why Discounting Still Doesn't Work: A Hotel Pricing Update, was conducted in cooperation with Smith Travel Research (STR) and gathered data from 6,913 comparable hotels between 2001 and 2004. The study, via extensive research concluded that, regardless of volatility (hurricanes, 9/11 terrorist attacks, recession, etc.) in the hotel industry, while discounting does indeed increase occupancy rates, overall revenues are actually higher in hotels that do not discount despite having a lower occupancy rate.
The study states that when a comparable hotel decreased their rates below that of their competitors, their occupancy rates did rise above those that held steady with higher rates. However, the revenue generated from increased occupancy rates due to the lower nightly rate did not result in a higher RevPAR than those that did not discount. Conversely, it held true that those that held their rate integrity actually produced higher RevPAR (compared to those that discounted) despite a decreased number of occupied rooms.
How is this possible? Let's take a look at a simple example with Hotel A and Hotel B who compete in the same competitive set, have the same number of rooms and initially charged the same room rate. Here's the setup:
# Available Rooms: 100
Original Room Rate: $150
Original Occupancy Rate: 90%
If both Hotel A and Hotel B had the above starting data, their ADR would be $135.
Now, let assume a negative market condition exists, such as a recession, and occupancy rates started to fall. As a result, Hotel A decreased its room rate to $100 and was able to capture enough market share through a lower price and stealing market share from Hotel B to completely fill the hotel to 100% occupancy . Hotel A's ADR would then be $100.
Hotel B, who maintained their $150 per night room rate experienced a decline in occupancy rate due to market conditions then exacerbated by potential guests opting to book at the lower priced, comparable Hotel A. Let's say the occupancy rate declined from the original 90% to 75%. Even though 25% of Hotel B's rooms are empty, by not discounting their room rate they still maintain a higher RevPAR ($112.50) than Hotel A, who did discount.
For this example, if we look at straight top line room revenue after discounting, Hotel A generated $10,000 in revenue for one night fully booked with 100% occupancy at $100 ADR while Hotel B generated $11,250 in room revenue by maintaining price integrity at $150 but suffering from a 75% occupancy rate.
So according to Cornell University's study, discounting doesn't work. But can we make that blanket statement and have it be true in all cases every time? I assert that there is some room for discounting and still maintain a certain level of top line room revenue, but very little discounting.
The way I see it, hotel Revenue Analysts whose properties participated in the study were either asleep at the wheel or couldn't convince hotel executives that having empty rooms isn't necessarily a bad thing. The news around the water cooler that room rates were going to be reduced to increase occupancy rates should have sent the hotel Revenue Analyst running for her abacus to figure out the price point and occupancy rate at which discounting no longer becomes a competitive advantage.
The right information to give the executives who are determined to discount rates would be the analysis that charts room revenue relative to price movements and subsequent occupancy rates. Of course, the effect on occupancy rates would be a projected outcome that directly resulted from the decrease in room rate, but if tracked and adjusted diligently (daily or even hourly) it should be fairly accurate. Then the analyst should determine at what price point there is diminishing return. With this type of analysis in hand, executives would be better prepared to price rooms appropriately to maximize RevPAR rather than simply focusing on increasing occupancy rates.
However, given the study that tells us that discounting doesn't work, why would hotels even consider discounting? I assert that the top tier hotels who are able to sustain impeccable service levels and differentiate themselves on quality and perceived value do not need to discount at all.
This line of thinking was validated by a study the Four Seasons conducted as a result of the work Ms. Enz and Ms. Canina conducted. Four Seasons did not waver on price integrity. They did experience lower occupancy rates but was able to maintain revenue levels. Their secret? They found that by staying true to their company values and by providing the unparalleled service and quality for which the Four Seasons is known, discounting wasn't necessary. That is, after all, Four Season's competitive advantage.
The bottom line? For most hotels, don't be afraid of having a certain level of empty rooms because discounting doesn't work. My hospitality gem for you is to know exactly what "a certain level of empty rooms" means to your hotel and understand what discounting will do to your occupancy rate and resulting RevPAR before deciding to discount - or not discount!
What did you think about this Hospitality Gem? Do you see the value in maintaining price integrity? Please leave a comment below or feel free to contact me at davidknight825 @ yahoo.com with your comments, queries or feedback!
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