In the world of business, there are essentially two ways to increase profitability: either by increasing revenue or by decreasing costs. And there are a variety of strategies and tactics that business owners can employ toward those ends, but the end goal of any of them is to either increase cash flow or reduce expenditures.
Each of those strategies or tactics, moreover, have their limitations. After all, at the end of the day, there is only so much potential market demand out there, and overhead costs can only be reduced so much before a business has to close its doors.
The hotel industry, of course, is no exception. Any given property can accommodate only so many guests at a time, and must also offer certain basic amenities to attract those guests and remain operational. But as much a hotel’s operating costs are overhead, that doesn’t necessarily mean those costs are fixed.
Indeed, several key hotel KPIs are designed specifically to measure costs and expenditures. The more a hotel reduces its operating costs, the more those KPIs improve. And no hotel overhead is as recurring and significant as energy costs. After all, energy is what allows hotel operators to quite literally keep the lights on. So by employing smart energy management technology and strategies, hotel operators can improve up to 8 of their core KPIs, and optimize their profitability.
Energy Costs: Overhead & Opportunity
Energy represents such a significant overhead cost because it’s a recurring one. For instance, a property can be mortgage or debt free, but the energy bills will continue to accrue as long as the hotel keeps its lights on, heats and cools its rooms, and continues to offer guests any number of basic amenities. It’s no surprise, then, that electricity can comprise as much as 60 percent of total utility expenditures.
Just because energy is a recurring overhead, however, doesn’t necessarily mean that it’s a fixed one. Not only will the price per kilowatt hour fluctuate according to any number of market factors, but hotel operators can also manage and optimize their consumption of energy through smart management systems, such as Verdant EI.
To begin, hotel operators can install smart thermostats and occupancy sensors that monitor and respond to fluctuations in occupancy in real-time. That being said, not all smart thermostats are created equal, and commercial options lack features required by larger commercial properties. For instance, Verdant’s machine learning algorithm allows hotel operators to collect data from occupancy sensors and compare it against additional variables, such as historical thermodynamics and local weather patterns, and uses that insight to optimize energy consumption on an ongoing basis.
Indeed, smart energy management technology that monitors and optimizes energy consumption costs has been shown to reduce hotel energy costs by up to 20%, and also generates some of the fastest payback periods in the industry (between 12-24 months). The ROI from investing in a smart energy management system is so significant, in fact, that it can even increase resale value of a hotel property.
For instance, in the first 12 months of installing Verdant’s EMS thermostats, the Holiday Inn Bridgeport Connecticut saved over $45,000 in energy costs, recouping their entire investment in the first year alone. The property is also expected to generate a 700% ROI over 8 years.
It’s also worth noting that Verdant EI can also integrate with many popular smart lighting systems. Specifically, Verdant’s line of occupancy sensors can interface with third party lighting systems, and ensures that lighting energy consumption is also optimized according to variables such as real-time occupancy patterns and time of day. This also allows hotel operators to monitor and optimize both HVAC and lighting energy consumption through a single platform, while at the same time meeting the demands of many increasingly energy efficient building codes like Title 24 or IECC 2015 & 2018.
Cost Cutting KPIs
With operational costs having such variable effects on hotel profitability, the industry has access to no less than 8 KPIs that factor in costs when measuring hotel performance. Each of these KPIs are essential hotel revenue management tools and, in turn, can be improved by implementing energy management solutions that reduce energy consumption while improving guest experience at the same time.
1. Cost per Occupied Room CPOR
Cost per Occupied Room (or CPOR) is a hotel KPI in that it helps hotels measure profitability by calculating the average cost of a guest’s occupancy. Essentially, reducing CPOR is key to increasing profitability. More specifically, by reducing CPOR, hotel operators can increase RevPAR and GOPPAR, which are also essential hotel KPIs for measuring a property’s overall profitability (more on these below).
So insofar as reducing CPOR is one of the quickest ways hotel operators can increase profitability, energy management has a direct impact on this KPI. After all, every guest will consume so much energy within the confines of their room, so anything hotel operators can do to optimize guest energy consumption will improve their property’s CPOR.
Smart energy management technology is particularly pertinent here. While occupancy sensors and smart thermostats respond in real-time to room occupancy, energy management algorithms use AI and machine learning to anticipate occupancy, ensuring that a room is heated or cooled to a guest’s preferences before they return to their room or even check-in. The result is not only optimized energy consumption, but an improved guest experience.
2. Gross Operating Profit (GOP)
Simply put, Gross Operating Profit (or GOP) is a KPI that measures a hotel’s performance after adjusting for operating expenses. It’s easy, then, to see how energy costs would have a direct impact on a hotel’s GOP.
Gross Operating Profit is a particularly useful hotel KPI for period comparisons and should be calculated regularly (whether it’s month-over-month, quarter-over-quarter, or year-over-year). A hotel property’s GOP can also be compared to both the reported GOP of competitors, as well as industry averages. This allows hotel operators to establish accurate benchmarks and set realistic performance goals.
Of course, insofar as energy consumption is a core operating expense (i.e. overhead), it directly affects a hotel’s GOP. Essentially, the more a hotel operator can reduce energy consumption, the more they can increase their Gross Operating Profit. So smart energy management solutions (such as smart thermostats, occupancy sensors, and the algorithms that monitor them) help hotel operators begin to improve GOP from the first day that they’re installed.
3. Gross Operating Profit per Available Room (GOPPAR)
Gross Operating Profit per Available Room (GOPPAR) is one of the most important KPIs for hotel operators. GOPPAR helps hotel managers adjust revenue against the costs incurred in generating that revenue, and allows them to factor operational costs into their forecasting. As such, it provides better insight into hotel performance than the more commonly used RevPAR — which doesn’t take into account operating costs.
Whereas RevPAR is calculated either “by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate, [or] by dividing a hotel’s total room revenue by the total number of available rooms in the period being measured,” GOPPAR takes things a step further by subtracting hotel expenses from the hotel’s total revenue, and dividing the difference by the number of available rooms. In other words, GOPPAR takes into account the operational costs that are incurred by virtue of occupying a room and generating that revenue.
Consequently, energy consumption costs have a direct impact on a hotel’s GOPPAR. After all, every hotel guest will adjust room climate-setting to their preferences, consuming whatever kilowatts per hour are required to attain their desired guest experience. So smart energy management technology can not only optimize energy consumption and reduce energy costs, but also maximize guest experience by anticipating and regulating room temperatures according to guest needs.
4. Gross Profit Ratio
Gross Profit Ratio is a KPI that hotel operators use to compare a property’s gross profits to its net sales revenue. The higher a hotel property’s Gross Profit Ratio is, the more profitable it is. Gross Profit Ratio can not only be used for comparing hotel performance between two periods (e.g. year-over-year), but can also be compared against competitors’ ratios to measure a property’s performance within a greater market.
Insofar as energy management technology can reduce operating costs, then, it has a direct impact on Gross Profit Ratio. After all, the lower a property’s energy costs, the higher its gross profits will be, and so the higher its Gross Profit Ratio will be.
5. Net Profit Ratio
Net Profit Ratio expands on Gross Profit Ratio by further adjusting for certain costs. Specifically, Net Profit Ratio adjusts for taxes paid by a hotel property to provide a more accurate picture of the ratio between net profits and net sales. So whereas a higher net profit ratio is indicative of more efficient hotel performance, a lower ratio signals a need to improve hotel operations.
Similar to its gross profit counterpart, Net Profit Ratio is also used to compare hotel performance between two periods (e.g. profitability year-over-year) and is also directly impacted by energy management. Indeed, not only does reducing energy costs increase net profits, but also reduces the taxes paid on those energy costs.
6. Net Revenue per Available Room (NRevPAR)
Similar to how GOPPAR expands on RevPAR by factoring in operating costs, Net Revenue Per Available Room (NRevPAR) also expands on RevPAR. Specifically, whereas RevPAR measures a property’s gross room revenue, NRevPAR measures a property’s net room revenues by adjusting for distribution and operating costs.
Insofar, then, that energy costs are incurred at the room level, energy management can have a direct impact on NRevPAR. The better equipped rooms are equipped with energy management solutions, such as smart thermostats and occupancy sensors, the lower energy costs will be at the room level, and the higher net revenues will be.
7. Operating Profit Ratio
A hotel’s Operating Profit Ratio is designed to measure the relationship between the operating profit earned that a property earned and the net revenue generated by a property. And while operating profit should be calculated before interest and taxes, net sales should include both cash and credit sales.
Operating Profit Ratio is a hotel KPI that hotel managers use to evaluate how efficiently a property manages costs incurred through its operations. Specifically, it shows how profitable a hotel property is after paying all its variable operating costs.
This KPI can not only be used to compare performance between hotels, but also compare hotel performance between two different accounting periods. In doing so, Operating Profit Ratio allows hotel managers to analyze how a property’s operational efficiency has improved or deteriorated, and energy management directly affects that efficiency. Not only can energy management technology improve energy consumption and cost efficiencies, but it can also mitigate their potential deterioration.
For instance, the Remote Management features of Verdant’s EI energy management system include HVAC diagnostic alerts whenever the HVAC equipment isn’t performing within required parameters. This allows maintenance staff to identify and address issues before they reach critical levels, and unnecessarily inflate operating costs.
8. Profit per Available Room
A final hotel KPI impacted by energy management is Profit Per Available Room (PROFPAR). Simply put, PROFPAR measures hotel profit earning for each available room on the property, and is calculated using operating profit, which accounts for changes in room revenue and operating expenses.
As such, PROFPAR is a valuable KPI for evaluating sales growth and management’s ability to control operating expenses. PROFPAR is most commonly used to assess the profitability of group sales — i.e. whether to accept a group booking based on average ancillary spend on other hotel amenities or services. It also helps hotel revenue managers determine whether to compromise on their Average Daily Rate (ADR) in favor of a more lucrative group booking at a lower room rate. As a hotel KPI, PROFPAR is also widely used by hotel chains for measuring whether or not a specific property is effectively generating its share of profit.
Again, energy management impacts PROFPAR inasmuch as it can positively impact profitability by reducing operating costs. For instance, by identifying which hotels are not keeping pace with the profitability of other properties in their portfolio, a hotel chain can then invest in a energy management solution to improve their performance and bring them in line with those other properties.
The Cost Benefit of Energy Management
When optimizing hotel performance and maximizing profitability, hotel operators must consider ways to both increase revenue and decrease costs. Any given approach, moreover, must not be considered in a vacuum. Indeed, just as maximizing bookings to full occupancy can needlessly inflate operating costs and erode profits, cutting costs without regard for their impact on amenities and guest experience can compromise a property’s reputation and future bookings.
Energy management solutions, however, offer hotel operators a way to both reduce costs while improving guest experience. Energy consumption is optimized around real-time occupancy requirements, and the efficiencies afforded to hotel operators extend well into their financial performance. Indeed, smart energy management systems represent an investment in both immediate and long-term profitability.