Glossary

Average Collection Period
Average Payment Period (APP)
Average Rate Index (ARI)
Average Room Rate (ARR)
Average Spend Per Customer
Average Treatment Rate (ATR)
Benchmarking
Booking Curves
Cost per Occupied Room (CPOR)
Cost of Sales Ratio
Current Ratio
Demand Calendar
Displacement Calculations
EBITDA
EBITDAR
Forecasting
Gross Operating Profit (GOP)
Gross Operating Profit per Available Room (GOPPAR)
Gross Profit Ratio
Labour Cost Ratio
Market Penetration Index (MPI)
Market Segmentation
Net Profit Ratio
Net Revenue Per Available Room (NRevPAR)
Occupancy Rate
Operating Profit Ratio
Price Positioning
Profit Per Available Room (PROFPAR)
Rate Fences
Revenue Per Available Room (RevPAR)
Revenue Per Available Seat Hour (RevPASH)
Revenue Per Available Square Meter (RevPAM)
Revenue Per Available Treatment Hour (RevPATH)
Revenue Per Occupied Room (RevPOR)
Spa Revenue Per Occupied Room (SRevPOR)
Stay Controls
Spa Utilization Ratio (SUR)
Total Revenue Per Available Room (TRevPAR)
Total Revenue Per Client (TRevPEC)
Unconstrained Demand

Average Collection Period

Average collection period is the amount of time required for a business to receive payments from clients. It can be thought of as the time that elapses between the date that a credit sale is made and the date that the full amount is collected from the customer. It is usually calculated in terms of accounts receivable (AR). A shorter average collection period is viewed more favorably than a longer one, as this signals that a property collects payments faster.

What is Average Collection Period For?
Average collection period is calculated so that a hotel or resort property can be sure they have enough cash on hand to meet its financial obligations. It is also used to calculate the effectiveness of a property’s credit granting policy and collection efforts.

Benefits of Average Collection Period
Managing the average collection period is an essential tool for hotels to manage efficient operations. It allows revenue managers to evaluate credit terms and determine whether they are too strict or too lenient.

Limitations of Average Collection Period
While most hotels or resorts will seek to shorten their average collection period, there is a downside to this strategy. A very short average collection period can signal that the property’s credit terms are too strict. In some cases, this can cause guests to seek out competitor’s with more lenient collection terms.

How is Average Collection Period Calculated
Average collection period is calculated by dividing the number of days in a calendar year (365) by the accounts receivable turnover ratio. This ratio is determined by dividing credit sales for the year by the average amount of accounts receivable for that same year.

Example of Average Collection Period Calculation
Average Collection Period = Average Accounts Receivable / (Annual Credit Sales / 365) Average Annual Accounts Receivable = $50,000 Total Annual Credit Sales = $500,000 Number of Days in Year = 365 Average Collection Period = $50,000 / ($500,000 / 365) = 36.5 This indicates that an average of 36.5 days elapsed between when credit sales were made and when the full amount is collected from customers.

Average Payment Period (APP)

Average payment period (APP) is the length of time a hotel, resort, or company takes to pay off credit purchases. It is used for accounting purposes to track when payments are due so that no penalties or excess interest are accrued. It does not have an effect on the company’s working capital. Because of this, APP has little to no effect on a company’s valuation during a merger or acquisition. APP is also known as days payable outstanding (DPO).

What is Average Payment Period For?
APP is used to help companies manage cash flow. When APP increases, cash should also increase, although the amount of working capital stays the same. By lowering APP, companies can more effectively keep suppliers happy and work to negotiate trade discounts.

Benefits of Average Payment Period
Calculating APP helps accounting departments know when they need to take action to pay creditors. Knowing APP and working to decrease this metric helps companies keep suppliers happy and necessary supply relationships intact.

Limitations of Average Payment Period
Market trends can have an effect on APP. When the trickle-down effect of payments is working as it should, APP can naturally increase. Companies need to strike a balance between maintaining supply relationships and pushing to increase APP as much as possible to increase cash flow.

How is Average Payment Period Calculated
APP is calculated by first dividing total annual credit purchases by the number of days in a calendar year (365). The result of that calculation is then divided into average accounts payable. Average accounts payable is calculated by adding beginning accounts payable to closing accounts payable and dividing by 2. Average Payment Period = Average Accounts Payable / (Annual Credit Purchases / 365) Average Accounts Payable = (Beginning Accounts Payable + Closing Accounts Payable) / 2

Example of Average Payment Period Calculation
Beginning Accounts Payable = $148,000 Closing Accounts Payable = $160,000 Average Accounts Payable = ($148,000 + $160,000) / 2 = $154,000 Average Accounts Payable = $154,000 Annual Credit Purchases = $1,500,000 Calendar Days = 365 Average Payment Period = $154,000 / ($1,500,000 / 365) = 37.47 For the calculation above, the company’s average payment period is 37.47 days.

Average Rate Index (ARI)

The Average Rate Index (ARI) is a property management performance metric that compares Average Daily Rate (ADR) with the property’s competitive set for a given period of time. A property’s competitive set includes other brands and competitors with a similar target market. The competitive set (comp set) is obtained by calculating the Average Daily Rate (ADR) for a group of competitors. If a property’s ADR is equal to the aggregate ADR of its competition, it is historically believed that the property is achieving “fair share.”

What is Average Rate Index For?
Calculating Average Rate Index helps a property compare its rates with competitor’s rates. These comparisons help them make decisions to lower, raise, or hold room rates for selected periods. An ARI greater than 1 indicates that rates are higher than the competition on average. An ARI lower than 1 suggests that rates are lower than the competition on average.

Benefits of Average Rate Index
Knowing ARI helps a property decide when to adjust rates to achieve higher or lower occupancy rates and/or maximize booking revenue. For instance, a property might decide that lowering rates will help increase occupancy and overall revenue or a given period. Similarly, ARI might also indicate that the best strategy for a period is to raise rates and achieve higher revenue even if occupancy falls for that period.

How is Average Rate Index Calculated
Average Rate Index is calculated by comparing a property’s Average Daily Rate (ADR) against a range of competing properties. An ADR for these competing properties must be calculated before dividing a property’s ADR by the ADR for all competing properties. Some properties multiply the resulting calculation by 100 to achieve the final ARI. In that case, 100 signals that a property’s ADR is equal to the average ADR of competition. Higher than 100 signals that ADR is higher than competition on average and lower than 100 signals that ADR is lower than competition on average.

Example of Average Rate Index Calculation
Property ADR = $150 Aggregate Competitor ADR = $120 ARI = $150 (Property ADR) / $120 (Aggregate ADR of Competition) = 1.25 This calculation suggests that a property’s ADR is 25% higher (on average) than the competition.

Average Room Rate (ARR)

Average Room Rate (ARR) is a hotel KPI that measures the average rate of an available room. As opposed to Average Daily Rate (ADR) which measures what rate a room might earn on any given day, ARR measures the average rate of rooms available over a longer period of time. It can be calculated for monthly, quarterly, or annual averages. It can also be thought of as the average price that a guest pays per room at a hotel. Accordingly, ARR is an important metric for measuring the financial performance of a property.

What is Average Room Rate Used For?
The purpose of calculating ARR in hotel revenue management is to compare room revenue generated for a specific period against room revenue paid by guests during that same period. It is also used to compare against how many rooms were actually occupied during that time so that hotels can better understand revenue generated versus costs of operation.

Benefits of Average Room Rate
Calculating ARR for longer periods allows revenue managers to track long-term rate trends. This allows hotels to optimize their future pricing and maximize hotel revenue. This is helpful during peak and low seasons when hotels are planning seasonal campaigns and promotional packages.

Limitations of Average Room Rate
Average room rate does not account for costs of operation. Pricing decisions made solely based on ARR will not account for the daily costs associated with operating the room and property as a whole.

How is Average Room Rate Calculated
ARR is calculated by dividing total room revenue by the number of rooms sold (or occupied).

Example of ARR Calculation
Total Room Revenue (for selected time period) = $2,000,000 Total Number of Rooms Sold/Occupied (for selected time period) = 6,000 ARR = $2,000,000 (Total Room Revenue) / 6,000 (Total # Rooms Sold) = $333.33

Average Spend Per Customer

Average spend per customer is a metric that is most commonly used in hotel food and beverage operations. But it can also be applied to other areas of hotel operations and services. It gives revenue managers an idea of how much each customer spends on varying products and services during their stay, on average. It is also sometimes referred to as Average Spend per Head.

What is Average Spend Per Customer For?
Average spend per customer is used to help hotel and property managers better understand customer behavior. It can take a marketing department the same amount of time to generate a customer, regardless of how much that customer spends. So calculating average spend per customer helps managers target different customer demographics to increase average spend per customer.

Benefits of Average Spend Per Customer
The major benefit of calculating average spend per customer is a better understanding of customer behavior. When broken down by sales channel, time of day, day of the week, product type, or other factors, average spend per customer gives managers a much more holistic picture of how consumers behave at a hotel or resort property.

Limitations of Average Spend Per Customer
The limitations of this metric includes the fact that only successful purchases made for amounts over $0 are included. Also, any refunds or chargebacks issued are typically not deducted when this metric is calculated. Additionally, any revenue made through subscription services are not included in this KPI.

How is Average Spend Per Customer Calculated
Average spend per customer is calculated by dividing the total sales revenue made to date by the total number of customers to date.

Example of Average Spend Per Customer Calculation
Total Sales Revenue To Date = $560,000 Total Number of Customers To Date =1600 Average spend per customer = $560,000 (Sales Revenue) / 1600 (# of Customers) = $350

Average Treatment Rate (ATR)

Average Treatment Rate (ATR) is most relevant for spa or wellness operations in a hotel or resort property. It can apply to spa operations within a hotel or from an independent operator. It determines the average rate for treatments that guests receive in the spa. It can also be used to calculate the average spa revenue per occupied room in a hotel or resort. ATR helps with revenue management because it gives a clearer picture of overall spa performance across the variety of treatment packages offered.

What is Average Treatment Rate For?
Average Treatment Rate (ATR) is used to calculate the average rate guests pay for treatment at the property’s spa or wellness center. Because many spas offer different treatment packages, ATR helps revenue managers better understand the overall performance of spa operations within a hotel or resort property.

Benefits of Average Treatment Rate
Analyzing spa operations can be complex because of the variety of treatment packages offered. Calculating ATR gives revenue managers a reliable metric for analyzing overall spa performance without having to calculate the profitability of each individual treatment offered. ATR is a great indicator of spa performance and it helps revenue managers more effectively analyze and apply dynamic pricing to spa treatment services.

Limitations of Average Treatment Rate
ATR can be greatly impacted by a spa’s variety of treatment services. Average duration of services and various pricing packages also influence ATR. The adoption of fluctuating pricing in the spa industry, had made ATR a more accurate and meaningful metric for revenue management.

How is Average Treatment Rate Calculated
ATR is calculated by dividiing total treatment revenue for spa operations by the total number of treatments sold.

Example of Average Treatment Rate Calculation

Total Treatment Revenue = $15,000 Total Number of Treatments Sold =$300 ATR = $15,000 (Total Treatment Revenue) / $300 (Total # of Treatments Sold) = $50

Benchmarking

Benchmarking uses a number of hotel KPIs to make comparisons against competing hotels. Examples of KPIs used in hotel benchmarking include prices, level of service, product offerings, location, and distribution channels. Some competitors may compete on all factors at all times. Others may only compete in a few segments and for different times, such as peak holidays or weekends. In addition to using benchmarking to make comparisons with competitors, a hotel can use internal benchmarking to compare its own internal operations and processes. Benchmarking can also be used to make functional comparisons within a broad industry or generic comparisons to similar businesses, regardless of industry.

What is Benchmarking For?
Benchmarking is a technique for hotel revenue management. It allows a hotel to compare itself against competitors. Specific comparisons can be made based on hotel rates, products and services, and more. The most obvious use for benchmarking is to make rate comparisons, but revenue managers can also compare overall value offered by competitors versus the value offered by their hotel or property.

Benefits of Benchmarking
Benchmarking can be used to make specific changes that help a hotel or property compete better with other hotels. In addition to helping hotels compete over attracting bookings, it also helps them at the operations level. For example, by allowing hotels to compare how their employee salaries and benefits plan stacks up against the competition, helping them to attract and retain employees. It can also benefit a hotel by helping managers better understand regional price differences, insurance coverage, and more. Overall, the greatest benefit of benchmarking is to give revenue managers more data that can be used to improve overall efficiency.

Limitations of Benchmarking
Benchmarking only provides a complete picture if all appropriate line items are being used for comparisons. If larger line items are left out, benchmarking won’t provide a clear picture of market competitiveness, and results of benchmarking won’t lead to opportunities to improve operations. There is also no universal process for benchmarking, which can cause difficulties in comparing hotel properties against one another.

How is Benchmarking Calculated
Benchmarking first requires calculating the right KPIs for your hotel. Examples include Average Rate Index (ARI), Fair Market Share, and Revenue Generation Index. There is no universally accepted method for benchmarking. Each hotel must decide the objective factors it will use to make comparisons.

Example of Benchmarking
An example of benchmarking in the hospitality industry is hotel star ratings. These ratings provide benchmarks for comparing across properties according to quality. It is a good benchmark for guests to provide feedback on their hotel experience. However, they can vary greatly from country-to-country and there is no uniform standard on which these ratings are based.

Booking Curves

Booking Curves are visual representations that display how hotel bookings occur over a certain period of time. These curves are usually displayed in graph form and can include several data items, including room pickup, bookings, and availability. The data that is compiled to create a booking curves graph is usually calculated using a hotel’s Property Management System (PMS).

What are Booking Curves For?
Booking Curves provide a better visual tool for revenue managers. By converting data from pick-up reports into graph form, managers can make better decisions to improve hotel operations and increase revenue.

Benefits of Booking Curves
Displaying the data used to create Booking Curves in graph format gives hotel revenue managers an easy way to visualize how room bookings materialize over time. A booking curves graph is another tool for revenue managers to make data-driven decisions to improve hotel efficiency. Booking Curves can also be used to compare from year-to-year or month-to-month. This helps revenue managers develop new marketing strategies that can improve hotel revenue. It also helps with forecasting expected pick-up rates, occupancy, and availability for future dates.

Limitations of Booking Curves
Booking curves contain room pick-up data for all cancellations as well as complete stays. This must be taken into account when using a booking curves graph to make decisions on room rates, seasonal promotions, and other hotel management factors. Failure to account for cancellations can cause revenue managers to make inaccurate assumptions on booking futures. One possible mistake would be overbooking if managers underestimate demand based on past cancellations caused by an unforeseen, random event.

How are Booking Curves Calculated
A booking curves graph typically has ‘Days Before’ on the horizontal axis and ‘Rooms Sold’ on the vertical axis. Data from your Property Management System (PMS) is used to plot points on the graph and a connecting line helps managers see larger trends in the data.

Cost per Occupied Room (CPOR)

Cost per occupied room (CPOR) is a formula used to calculate the average cost of a guest occupying a room. It is a key performance indicator that helps hotels understand profitability. As a hotel lowers its CPOR, it can increase profits per available room and/or become more competitive. Reducing CPOR is one of the quickest ways a property can increase its profit margins. Examples of line items used to calculate the cost of an occupied room include housekeeping, laundry, heating and air conditioning, Internet, cleaning supplies, and anything else related to keeping a room ready for guests.

What is CPOR Used For?
CPOR helps properties calculate the average costs of renting out a room. This cost directly impacts a property’s profit per available room (PROFPAR). Comparing CPOR to PROFPAR allows hotels to track and measure their overall efficiency. It also provides insights into strategies that can improve financial performance.

Benefits of CPOR
Understanding CPOR helps revenue managers measure costs, evaluate whether those costs are reasonable, and develop strategies to reduce them. And by reducing CPOR, hotels can increase RevPAR and GOPPAR, which are essential hotel KPIs for measuring a property’s overall profitability.

Limitations of CPOR
CPOR is just one of many hotel KPIs used in revenue management. While reducing CPOR is an effective strategy to increase margins without altering prices or developing new revenue streams, it does not provide direct insight into a hotel’s financial performance.

How is CPOR Calculated
CPOR is calculated by dividing the total costs of room operations by the number of rooms sold. This can be calculated for different periods, including daily, monthly, and annually.

Example of CPOR Calculation
Total Cost of Room Operations Department = $10,000 Number of Rooms Sold = 160 CPOR = 200,000 (Total Cost of Room Ops) / 165 (# of rooms sold) = $62.50

Cost of Sales Ratio

Cost of sales ratio applies directly to the cost of goods sold. It provides a metric for comparing a hotel’s expenses from sales activity against total revenue. It is an important hotel KPI used to give revenue managers a better idea of how a hotel’s food and beverage operation performs. Profitable food and beverage operations should seek to fall in the 25 to 35 percent range for this metric.

What is Cost of Sales Ratio For?
Cost of sales ratio is used to examine food and beverage operations in a hotel. Understanding the profitability of a hotel’s food and beverage operations allows revenue managers to make decisions that can improve operational efficiency and increase profitability. Cost of sales ratio is usually calculated on a monthly basis. Regular monitoring of a hotel’s cost of sales ratio is essential to keep a property on a profitable trajectory.

Benefits of Cost of Sales Ratio
By measuring the relationship between selling costs and the end value of the sale, revenue managers can see how much actual revenue is gained per sale. It also provides data on how much of the final value from sales goes back to covering costs that a hotel takes on to make a sale.

How is Cost of Sales Ratio Calculated
Cost of sales ratio is calculated by dividing the total costs of goods sold by total sales. The final calculation is typically multiplied by 100 to give revenue managers a percentage ratio. The total cost of goods sold factors in variable costs and fixed overhead expenses.

Example of Cost of Sales Ratio Calculation
Total Costs of Goods Sold = $50,000 Total Sales = $150,000 Cost of Sales Ratio = ($50,000 (Cost of Goods Sold) / $150,000 (Total Sales)) x 100 = 33.3%

Current Ratio

Current ratio applies to hotel liquidity. It is a metric that is often considered by investors and analysts to determine a hotel’s ability to maximize current assets on its balance sheet. A hotel’s ability to maximize these assets plays a huge part in its ability to satisfy current debt obligations and other payables. It is also sometimes known as the Working Capital Ratio.

What is Current Ratio For?
Current ratio is used to measure a hotel or property’s ability to cover short-term financial obligations. These obligations are typically due within one year. Current ratio compares a hotel’s current assets to its current liabilities. Current assets are defined as those that are currently cash or will be turned into cash within a year or less. Current liabilities are defined as those that will be paid in a year or less.

Benefits of Current Ratio
By comparing a hotel’s current assets to its current liabilities, investors and analysts can better understand a hotel’s ability to cover short-term debt using the assets it currently possesses. A current ratio that is at or above industry average is considered acceptable. A current ratio lower than the industry average signals that a hotel or property is at higher risk of distress or default.

Limitations of Current Ratio
Current ratio is difficult to compare across industry groups. It is also subject to overgeneralization of specific asset and liability balances. In some cases, current ratio calculations also fail to account for pertinent trending information that would skew the ratio in one direction or another. Investors and analysts also must obtain accurate information on industry averages in order to make useful comparisons to a hotel’s specific current ratio.

How is Current Ratio Calculated
Current ratio is calculated by dividing current assets by current liabilities. Examples of current assets include cash, accounts receivable, and inventory expected to be turned into cash within a year or less. Examples of current liabilities include accounts payable, wages, taxes payable, and current long-term debt.

Example of Current Ratio Calculation
Current Assets = $60,000,000 Current Liabilities = $75,000, 000 Current Ratio = $60,000,000 (Current Assets) / $75,000,000 (Current Liabilities) = 0.8

Demand Calendar

A Demand Calendar is a hotel revenue management tool that shows multiple demand indicators. It helps managers more accurately evaluate market situations in order to make decisions on prices, promotions, and more. Common metrics used to create an accurate Demand Calendar include the previous year’s RevPAR, groups or events booked in the past year, demand level indicators (from current and past year), bank and school holidays, and any additional demand indicators deemed “exceptional.”

What is Demand Calendar For?
Creating a Demand Calendar is a recommended step for revenue managers to take even before creating a hotel budget. It creates a picture of how past events have impacted hotel demand and allows forecasting for how future events will have similar or different impacts on demand. A Demand Calendar can help identify how much revenue each pertinent event brings to a hotel or property.

Benefits of Demand Calendar

A hotel’s Demand Calendar can be integrated with its current on-the-books and pick-up reports. By doing so, revenue managers can obtain a much broader picture of how hotel or property demand is trending. It is also a useful tool to identify how specific school or bank holidays (both domestically and internationally) affect hotel demand. This information gives a hotel the ability to specifically target these holidays with special offers or promotional packages.

Limitations of Demand Calendar

A Demand Calendar must be updated regularly in order to provide accurate insights. Ideally, the calendar is updated each time an event that impacts demand is identified. Many hotels update their demand calendars at least once every week. A Demand Calendar must also account for demand exceptions. These exceptions can be considered outliers until the event is repeated and can be reasonably counted on as having a significant impact on demand.

How is a Demand Calendar Created
A Demand Calendar is organized by months and days. Pertinent data is plotted on the calendar for managers to see a visual representation of all the factors that impact hotel demand. There are a number of layouts that can be used to create a demand calendar. The visual layout that works best for a given hotel depends on the specific factors used to create the calendar.

Displacement Calculations

Displacement Calculations are used in hotel revenue management cost-benefit analysis. They are a calculation of the value of a group bookings versus the value of transient (or walk-in) bookings. Making these calculations requires day-to-day analysis of how a hotel’s TOP accounts (tour operators, corporate, consortia, and IDSs) are producing.

What are Displacement Calculations For?
Displacement Calculations allow revenue managers to identify market segments that are not adding to the hotel’s bottom line. Most hotels need to keep a certain number of rooms available at transient rates. This allows the hotel to accept last-minute bookings at a higher rate than they’d otherwise accept other bookings. It is important for revenue managers to calculate the value of group bookings versus private bookings because, in some cases, accepting a group booking for a specific date range can actually result in negative revenue.

Benefits of Displacement Calculations
Understanding the costs and/or benefits of group bookings versus transient bookings helps revenue managers block out a certain segment of rooms at walk-in rates. Displacement Calculations also provide a clear economic analysis of whether or not a hotel should accept a group booking in specified date range.

Limitations of Displacement Calculations
The value of any hotel booking goes beyond room rates. Other factors that must be accounted for include expected food and beverage revenue spending, meeting room rentals, spa spending, and any other spending that creates profit for the hotel. Useful Displacement Calculations must take this other spending into account, and must also factor in expected costs to provide managers with accurate numbers for comparison.

How are Displacement Calculations Calculated
Revenue managers can perform Displacement Calculations by subtracting positive revenue on non-constrained dates from revenue displaced on identified dates. Displacement Calculations are usually made to evaluate specific scenarios like the example below.

Example of Displacement Calculations
In this scenario, the managers are asking the following question: “Should we accept a group booking of 20 rooms for one night at $200 each or keep these rooms available for regular corporate and business guests at a nightly rate of $300?” For the group booking, the hotel expects room revenue of $4,000 (20 x $200) plus an expected $2,000 in revenue from other spending (food and beverage, meeting room rental, etc.). That factors in operating costs and puts expected positive revenue on those dates at $6,000. If the hotel turns away the group booking, they can reasonably expect to fill 16 of those rooms based on their average occupancy rate of 80%. They can expect a nightly room revenue of $4,800 (16 x $300) plus an additional expected $1600 in other spending revenue (based on their average of $100 per corporate/business guests). So they could reasonably expect positive revenue of $6,400 if they don’t accept the group booking. In this calculation: Positive Revenue on Non-Constrained Dates = $6,000 Revenue Displaced on Identified Dates = $6,400 Expected Revenue If Group Booking Accepted = $6,000 – $6,400 = $-400 So, in this scenario, accepting the group booking would result in a net loss of $400 for the hotel.

EBITDA

EBITDA is an acronym that stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a good indicator of a hotel’s financial performance and allows revenue managers to compare hotel profitability against competitors or sister properties.

What is EBITDA For?
EBITDA is used to evaluate the profitability of a hotel’s operations. It is specifically used to analyze the profits of the products and/or services sold at a hotel property. EBITDA is sometimes used as a more reliable calculation for profitability in place of simple earnings or net income.

Benefits of EBITDA
EBITDA is an effective indicator of a hotel’s financial performance because it does not account for the impacts of financing and accounting decisions or tax environments. It gives revenue managers a useful metric for comparing a hotel property with other properties owned by the same chain. It also allows for comparisons against industry averages. Furthermore, it can provide managers with a shortcut to estimate availability of cash flow to cover long-term debt payments on assets.

Limitations of EBITDA
EBITDA calculations can be limiting because they don’t include the costs of capital investments, such as property and equipment. For this reason, using solely EBITDA to evaluate profitability can be misleading.

How is EBITDA Calculated
EBITDA can be calculated in two ways. The first is by subtracting expenses from revenue. In this case, expenses do NOT include interest, taxes, depreciation, and amortization. The second is by adding net income, interest, tax expenses, and depreciation and amortization together.

Example of EBITDA Calculation
In this example, we’ll use the latter of the two formulas mentioned above. EBITDA = Net Income + Taxes + Interest Expense + Depreciation and Amortization (D&A) Net Income = $2,000,000 Taxes = $325,000 Interest Expense = $6,000 Depreciation and Amortization (D&A) = $3,000 EBITDA = $2,000,000 (Net Income) + $325,000 (Taxes) + $6,000 (Interest) + $3,000 (D&A) EBITDA = $2,334,000

EBITDAR

EBITDAR stands for Earnings Before Interest, Taxes, Depreciation and Amortization, and Restructuring or Rent Costs. Like EBITDA, it is a key metric for evaluating a hotel’s profitability and performance. However, EBITDAR is more widely used for hotels or properties that have undergone restructuring within the past year.

What is EBITDAR For?
EBITDAR can be used alongside EBIT and EBITDA. It is also a useful KPI for hotels, restaurants, casinos, and other businesses that have unique rent costs. The purpose of EBITDAR is to measure a hotel’s core operational performance. By removing the costs of rent or restructuring, EBITDAR provides a better analysis of the profitability of a hotel’s ongoing operations.

Benefits of EBITDAR
Using EBITDAR in a hotel profitability analysis helps managers reduce variability and focus specifically on costs related to the hotel’s operations. The benefit is a more accurate comparison of a hotel to its peers in the same industry. Another benefit of EBITDAR is that it can be a useful metric for a hotel to obtain financing from a creditor.

Limitations of EBITDAR
EBITDAR can provide a skewed picture of a hotel’s cash flow. Because of the many exclusions, it is also easy to manipulate EBITDAR calculations. Adding depreciation costs to a hotel’s earnings earnings, for example, fails to account for the recurring expenses of capital spending, which can have a large impact on a hotel’s overall working capital.

How is EBITDAR Calculated
EBITDAR is calculated by adding net earnings, interest, taxes, depreciation and amortization, and rent/restructuring costs.

Example of EBITDAR Calculation
EBITDAR = Earnings + Interest + Tax Expenses + Depreciation and Amortization + Rent/Restructuring Costs Net Earnings = $100,000,000 Interest = $30,000,000 Tax Expenses = $22,000,000 Depreciation and Amortization (D&A) = $20,000,000 Rent/Restructuring Costs = $13,000,000 EBITDAR = $100,000,000 (Earnings) + $30,000,000 (I) + $22,000,000 (T) + $20,000,000 (DA) + $13,000,000 (R) = $185,000,000 (EBITDAR)

Forecasting

Forecasting is a way for hotel managers to predict a number of key market indicators and customer behaviors, and is done using models that range from basic to very complex. It is also a strategic management tool for managers to gather more knowledge on visitor demographics and behaviors, as well as market trends. Forecasting models, moreover, can span any date range specified, including annual, monthly, and weekly forecasts.

What is Forecasting For?
The purpose of forecasting is to make future predictions that are as accurate as possible. These predictions can then be used to set room rates, schedule promotions, and manage group bookings. Depending on the design of your forecasting model, hotels can predict arrivals, departures, number of nightly guests for a specified date range, and more. Forecasting in the hotel industry is used for everything from anticipating room bookings to predicted housekeeping costs.

Benefits of Forecasting
One major benefit of forecasting is identifying potential periods of low demand in advance. When a hotel knows that it might have challenges filling rooms during a particular period, it can adapt new strategies and identify proactive solutions to meet those challenges.

Limitations of Forecasting
In many respects, the accuracy of a forecast depends on the design of the forecasting model used.

How are Forecasting Models Created
Forecasting models can account for a number of factors. In a basic forecasting model, commonly used metrics include the number of rooms on the books, occupancy rate on the books, and expected pick up (number of anticipated bookings between current date and forecasted date). These metrics can be used to anticipate the number of room bookings and forecast occupancy rate for that date range. A more advanced forecasting model will provide a more detailed breakdown of the metrics mentioned above. For example, rooms on the books will be broken down by guest demographic, and room pickups will include forecasting room nights and the average room rate.

Gross Operating Profit (GOP)

Gross Operating Profit, or GOP, is a hotel KPI that signals the property’s profits after subtracting operating expenses. It is a useful indicator of the profitability of a hotel’s operations and should be calculated regularly for comparisons to the previous year’s GOP. A hotel’s GOP can also be compared to reported GOP for competitors and metrics for industry averages.

What is Gross Operating Profit (GOP) For?
GOP is used to calculate a hotel’s profits before accounting for the indirect costs associated with the production of those profits. Examples of those costs include interest payments and tax. Some examples of expenses included in a calculation of gross operating expenses include costs of goods sold, costs of raw materials, rent, housekeeping costs, food and beverage costs, and other overhead expenses — which other hotel KPIs such as GOPPAR do account for.

Benefits of Gross Operating Profit (GOP)
GOP is a valuable KPI for hotels to evaluate year-to-year operational performance. One of the major benefits of calculating Gross Operating Profit (GOP) is for the purpose of internal comparison. For example, the GOP for the previous year can be compared to the GOP for the current year to give revenue managers an idea of whether operational efficiency has improved or declined.

Limitations of Gross Operating Profit (GOP)
All the expenses that are necessary to keep a hotel running must be included in the calculation to achieve effective accuracy. However, these expenses do not include all of a hotel (or company’s) costs. Some critics argue, then, that the GOP isn’t an accurate measurement of a company’s profitability because it fails to account for all the costs incurred by the business.

How is Gross Operating Profit (GOP) Calculated
GOP is calculated by subtracting Gross Operating Expenses from Gross Operating Revenue.

Example of Gross Operating Profit (GOP) Calculation
GOP = Gross Operating Revenue – Gross Operating Expenses Gross Operating Revenue = $4,380,000 Gross Operating Expenses = $1,460,000 GOP = $4,380,000 (Revenue) – $1,460,000 (Expenses) = $2,920,000

Gross Operating Profit per Available Room (GOPPAR)

Gross Operating Profit per Available Room (GOPPAR) is an important KPI that helps hotels adjust revenue against the costs incurred in generating that revenue. It is used in hotel revenue management to maximize a property’s profitability by factoring operational costs into its forecasting. Some examples of operation costs taken into account when calculating GOPPAR include energy consumption, housekeeping, Internet, laundry, and food and beverage. By factoring in these operational costs, GOPPAR provides a more complete picture of operating costs per room, allowing hotel operators to more accurately calculate overall profitability.

What is GOPPAR Used For?
GOPPAR is used to forecast the profitability for available rooms during a given time period. It compares room revenue to actual costs incurred over that time period. This provides insight into the GOP of an available room during that period. That number can then be used to forecast profitability projections of the entire property for that period.

Benefits of GOPPAR
Calculating GOPPAR is an effective profit maximization strategy because it accounts for a broad scope of hotel operational criteria. With that understanding, hotel operators can calculate the overall performance of a property, and make adjustments accordingly. By accounting for all the factors that impact Gross Operating Profit, properties can make more impactful changes to increase profitability.

How is GOPPAR Calculated
GOPPAR is calculated by dividing annual Gross Operating Profit (GOP) by the total number of rooms available per year. It also involves prior calculations, such as subtracting total operating costs from total revenue to get GOP and multiplying the number of rooms in the property by 365 (number of days in a year). 256

Example of GOPPAR Calculation
Let’s use a 100-room hotel that makes $10,000,000 in annual revenue and has annual operating costs of $200,000. Number of Rooms = 100 Number of Rooms Available Per Year = 36,500 Total Revenue = $10,000,000 Total Expenses = $2,000,000 GOP = $10,000,000 (Total Revenue) – $2,000,000 (Total Expenses) = $8,000,000 GOPPAR = $8,000,000 (GOP) / 36,500 (# of rooms/year) = $219.18

Gross Profit Ratio

The Gross Profit Ratio is a profitability ratio that allows managers to compare gross profits to net sales revenue. It requires calculations of gross profits and net sales, and the final ratio is usually expressed as a percentage.

What is Gross Profit Ratio For?
Gross Profit Ratio is a profitability ratio used for comparing a hotel’s gross profits and its net sales revenue. In general, a higher ratio signals better profitability. The Gross Profit Ratio can be compared to last year’s ratio to determine hotel performance year-to-year. It can also be compared against competitor ratios to determine performance within the industry.

Benefits of Gross Profit Ratio
Gross Profit Ratio is a useful metric to help revenue managers understand how it can change prices on a hotel’s products or services. The ratio provides a guideline for how much a hotel can afford to decrease prices without incurring a loss. Gross Profit Ratio also gives revenue managers the benefit of making annual comparisons. An annual improvement in Gross Profit Ratio is a good indicator of a hotel’s financial improvement.

Limitations of Gross Profit Ratio

The Gross Profit Ratio only accounts for a hotel’s variable costs. It does not include some important fixed costs, such as rent paid, marketing expenses, and employee salaries, like some other KPIs do — i.e. GOPPAR, RevPAR, and Labour Cost Ratio.

How is Gross Profit Ratio Calculated
Gross Profit Ratio is calculated by dividing gross profit by net sales. Some managers prefer this ratio expressed as a percentage, in which case the result of the above division is then multiplied by 100.

Example of Gross Profit Ratio Calculation
Gross Profit Ratio = (Gross Profit / Net Sales) x 100 Gross Profit = $2,300,000 Net Sales = $9,550,000 Gross Profit Ratio = ($2,300,000 (GP) / $9,550,000 (NS)) x 100 = 24.08%

Labour Cost Ratio

Usually expressed as a percentage, Labour Cost Ratio provides revenue managers with a key performance indicator to compare labour costs to hotel revenue. It shows the amount of labour costs required to produce each dollar of sales. Employee salaries or wages are generally a large percentage of total labour costs. Other examples of labour costs include medical insurance, workers’ compensation insurance, pensions contributions and related taxes, and life insurance.

What is Labour Cost Ratio For?
Hotel managers regularly calculate and observe labour cost ratios to find opportunities to save on salary costs. It is also used for identifying major inefficiencies in labour costs. As the labour cost ratio for a hotel decreases, it can be seen as increasing the efficiency of its labour force. In other words, a lower labour cost ratio is viewed favorably for a hotel’s bottom line.

Benefits of Labour Cost Ratio
The major benefit of calculating the labour cost ratio for a hotel is to see if the hotel is overspending on employee wages or salaries. These ratios can be broken down by department to further analyze labour costs, as well as identify areas in which the company can reduce these costs.

Limitations of Labour Cost Ratio
Employee satisfaction plays a large role in creating a healthy guest experience at a hotel, and also impacts employee productivity — i.e. how much value employees produce per wage/salary dollar paid. Therefore, managers must assess many other methods of increasing sales revenue before solely focusing on reducing labour costs.

How is Labour Cost Ratio Calculated
The Labour Cost Ratio is calculated by dividing labour costs by total sales. The result is then multiplied by 100 to represent the final ratio as a percentage.

Example of Labour Cost Calculation
Labour Cost Ratio = (Labour Costs / Total Sales) x 100 Labour Costs = $840,000 Total Sales = $20,260,000 Labour Cost Ratio = ($840,000 (Labour Costs) / $20,260,000 (Total Sales)) x 100 = 4.15%

Market Penetration Index (MPI)

Market Penetration Index (MPI) is a key hotel performance metric that measures how a hotel’s occupancy rates compare to those of its competitors. More specifically, it compares a hotel’s average occupancy rate to the average occupancy rate of similar hotels in your industry. It is also sometimes referred to as a hotel’s market share.

What is Market Penetration Index (MPI) For?
MPI allows hotel managers to analyze how a property is performing based on industry standards as well as competitors with similar offerings. Instead of managers simply focusing on internal improvements to its occupancy rate, MPT allows hotel managers to assess whether their occupancy rate is above, below, or near average for its region.

Benefits of Market Penetration Index (MPI)
One of the major benefits of calculating your Market Penetration Index is in setting room rates. Understanding how you stack up against industry averages will allow you to set more competitive prices in order to increase occupancy rates. Another benefit of MPI is that hotel operators can preselect competing hotels and/or properties that they want to compare against, rather than simply comparing against industry averages. This allows hotels to make more specific comparisons if they’re looking to be more competitive amongst particular market segments.

Limitations of Market Penetration Index (MPI)
The main limitation of Market Penetration Index pertains to the competitive set that a hotel chooses for comparison. If this set isn’t an accurate representation of the market or the property’s true competition, it can skew the index and lead to inaccurate price decisions.

How is Market Penetration Index (MPI) Calculated
MPI is calculated by dividing a hotel’s occupancy rate percentage by the average market occupancy percentage. Many revenue managers then multiply the resulting number by 100 to obtain a whole number percentage. An MPI of 100% means that a hotel is receiving an appropriate (or full) market share of bookings. And while an MPI below 100 means that a hotel is receiving less than its expected market share, an MPI above 100 signals that a hotel is receiving more than its expected market share (based on the competitive set the hotel is comparing itself against).

Example of Market Penetration Index (MPI) Calculation
MPI = (Hotel Occupancy % / Market Occupancy %) x 100 Hotel Occupancy % = 56% Market Occupancy % = 74% MPI = (56 / 74) x 100 = 76%

Market Segmentation

Market Segmentation is a necessary element to apply several other hotel revenue management principles. It is useful for identifying different consumer segments in order to customize marketing initiatives to target those groups. One of the more common general examples of market segmentation is breaking guests down into those traveling for business purposes versus those traveling for leisure.

What is Market Segmentation For?
Market Segmentation is used for more accurately creating marketing campaigns and materials for different customer demographics. It allows revenue managers to create offers that are more accurately matched to the needs and budgets of varying consumer groups. Market segmentation is also used to identify individual bookings from group bookings.

Benefits of Market Segmentation
Market Segmentation is very important to understanding booking trends for hotels. Some examples of factors used in market segmentation include length of stay, no show ratio, booking lead time, booking value, cancellation rate, seasonality, and specific days of the week of stays. The most common categories for market segmentation are price, product, and distribution channel.

Limitations of Market Segmentation
The growth in popularity of online bookings has made it more difficult for hotels to accurately segment customers. Source segmentation is easiest if a hotel has an online analytics system in place. Otherwise, tracking distribution channels for online sales can be a challenge.

How is Market Segmentation Performed
Market Segmentation can be performed based on a large number of factors. For example, a hotel might want to segment internet bookings from walk-ins. Similarly, hotel managers or operators might also want to segment corporate groups from individual travelers. Some other examples of hotel segments that can be used to differentiate the purpose of guest visits include weddings, special events, conferences, and incentive-based trips. Hotel managers can also segment guests by bookings through seasonal promotions, indirect bookings through travel agencies, corporate bookings through tour operators, direct bookings over the phone, overbookings from other nearby hotels, and other factors.

Examples of Market Segmentation
Here are a few more examples of market segments: – Public via the Best Available Rate on your website – Special Event Packages During Holidays or Festival Season – Government Negotiated Rates – Corporate Dynamic Rates – Complimentary Bookings Bookings Through Offline Campaigns in Print Publications.

Net Profit Ratio

The Net Profit Ratio is a profitability ratio used by hotel revenue managers to understand profitability after certain costs. It is a KPI that removes taxes to provide a more accurate picture of the relationship between net profits and net sales. A higher net profit ratio signals a more efficient hotel management. A lower ratio means that managers should look for opportunities to improve hotel efficiency. Net Profit Ratio is often reported on a trend line so that managers can compare a hotel’s performance over time.

What is Net Profit Ratio For?
Generally, a hotel should calculate its net profit ratio at least once per calendar year. This allows it to make annual comparisons and evaluate whether or not the hotel is improving its overall profitability. Annually calculating Net Profit Ratio also allows managers to compare their hotel to industry averages, as well as the ratio they’ve previously budgeted for.

Benefits of Net Profit Ratio
The main benefit of using Net Profit Ratio as a KPI is that it reveals the amount of remaining profit after factoring in operational costs such as production, administration, financing, and income taxes. In conjunction with an analysis of how a hotel is efficiently utilizing its working capital, Net Profit Ratio is one of the most useful KPIs for revenue managers to evaluate a hotel’s overall performance.

Limitations of Net Profit Ratio

A significant limitation of Net Profit Ratio as a KPI is that it should not be used as a measure of a hotel’s cash flow. This is because it does not include non-cash expenses, such as accrued expenses, amortization, and depreciation. It is also better used as a short-term metric because it does not account for a hotel’s actions to maintain long-term profitability.

How is Net Profit Ratio Calculated
The Net Profit Ratio is calculated by dividing net profit after tax by net sales. The final ratio is expressed as a percentage by multiplying the result by 100.

Example of Net Profit Ratio Calculation
Net Profit Ratio = (Net Profit After Tax / Net Sales) x 100 Net Profit After Tax = $3,250,000 Net Sales = $36,550,000 Net Profit Ratio = ($3,250,000 / $36,550,000) x 100 = 8.89%

Net Revenue Per Available Room (NRevPAR)

Net Revenue Per Available Room (NRevPAR) is a comparison metric similar to RevPAR, but whereas RevPAR looks only at a property’s room revenue, NRevPAR takes into account all net revenues for a hotel or property. Looking at net revenue, moreover, means that NRevPAR also takes costs into account, such as travel agency commissions,transaction fees, and distribution and operating costs.

What is Net Revenue Per Available Room (NRevPAR) For?
NRevPAR is used as a KPI for revenue managers because of how it overcomes the limitations of RevPAR. NRevPAR allows revenue managers to make more accurate comparisons of past revenue management strategies by allowing for “apples to apples” comparisons by accounting for fluctuating costs that RevPAR does not.

Benefits of Net Revenue Per Available Room (NRevPAR)
NRevPAR offers more transparency into hotel performance than other KPIs because it accounts for net revenues, rather than looking only at revenue as a percentage of sales (such as with RevPAR). This additional transparency makes it a better KPI for planning revenue strategies and promotions for a hotel property. Essentially, NRevPAR allows revenue managers to better analyze a hotel’s ability to generate revenue through room sales, and the costs that those rooms incur. At the same time, it also accounts for the number of rooms actually available, and the distribution costs associated with those rooms.

Limitations of Net Revenue Per Available Room (NRevPAR)

The major limitation of NRevPAR lies in the difficulty of accurately calculating the many different types of distribution costs, transaction fees, and commissions. It also fails to indicate revenue generated through other sources and is not useful in determining actual hotel occupancy rates.

How is Net Revenue Per Available Room (NRevPAR) Calculated
NRevPAR is calculated by first subtracting distribution costs from room revenue. The resulting number is then divided by the total number of available rooms to achieve the final result.

Example of Net Revenue Per Available Room (NRevPAR) Calculation
NRevPAR = (Room Revenue – Distribution Costs) / Available Rooms Room Revenue = $2,225,000 Distribution Costs = $1,465,000 Available Rooms = 380 NRevPAR = ($2,225,000 (Room Revenue) – $565,000 (Distribution Costs)) / 245 (Available Rooms) = $2,000

Occupancy Rate

Occupancy rate is a hotel KPI that measures the number of rooms occupied in a hotel at a given time, and compares that to the total number of rooms available on the property. It is displayed as a percentage.z Occupancy rate highlights how much of the available space in a hotel is actually being utilized by guests. It gives a broad overview of how a hotel is performing and allows managers to place other key hotel KPIs in appropriate context.

What is Occupancy Rate Used For?
Occupancy rate is used to determine a hotel’s performance. By tracking occupancy rate, hotels can more accurately determine the Average Daily Rate of rooms, forecast future trends for low and peak seasons, and apply other revenue management practices.

Benefits of Occupancy Rate
Without first understanding occupancy rate, most other key hotel KPIs can’t be understood meaningfully. For example, hotels still incur some operation costs for unoccupied rooms. So comparing occupancy rate with average daily rate and costs of room operations allows revenue managers to make decisions that increase a hotel’s overall profitability.

Limitations of Occupancy Rate

Increasing hotel occupancy rate is a favorable outcome, but managers may have to reduce room rates to achieve 100% occupancy. Some hotels may achieve maximum profitability at a 75 or 80 percent occupancy rate, based on other key metrics. A 100% occupancy rate doesn’t always equate to maximum profits.

How is Occupancy Rate Calculated
Occupancy rate is calculated by dividing the number of rooms sold by the number of rooms available. As a KPI, it can be calculated for any given period revenue managers are interested in, such as weekly, monthly, and annually.

Example of Occupancy Calculation
Total Number of Rooms Sold = 180 Total Number of Rooms Available = 300 Occupancy Rate = 180 (# of Rooms Sold / 300 (# of Rooms Available) = 0.6 x 100 = 60%

Operating Profit Ratio

Operating Profit Ratio is a hotel KPI that measures the relationship between operating profit earned and the net revenue generated by a property which is also labeled net sales. Net sales should include both cash and credit sales. Operating profit should be accounted for before interest and taxes. The ratio is a profitability ratio that is expressed as a percentage of sales.

What is Operating Profit Ratio For?
Operating Profit Ratio is used to evaluate the efficiency of a hotel in managing the costs and expenses associated with business operations. It shows how much profit a property makes after paying all variable operating and production costs. It can also be used to compare one hotel against another, and identify top performing hotels within an industry segment. Using Operating Profit Ratio as a trend analysis between two different accounting periods, managers can analyze how a hotel’s operational efficiency has improved or deteriorated.

Benefits of Operating Profit Ratio
This profitability ratio allows revenue managers to compare operating profit earned to revenue earned from operations. It also allows managers to identify areas where a hotel is falling behind or outperforming the competition. A high ratio can indicate elite management of hotel resources while a low ratio may indicate operational flaws and improper management. A low ratio tells managers that profits generated from operations are not enough when compared to total revenue from sales.

Limitations of Operating Profit Ratio

While Operating Profit Ratio is a key metric for identifying operation flaws or inefficient resource management, it doesn’t necessarily identify areas for improvement. Discrepancies between operating profit and net sales can be the result of a variety of factors, such as geography, hotel size, promotions, and business model.

How is Operating Profit Ratio Calculated
Operating Profit Ratio is calculated by dividing operating profit by revenue from operations (net sales). The result is then multiplied by 100 to be expressed as a whole number percentage. Operating Profit includes gross profit and other other operating income minus other operating expenses. It can also be calculated by adding net profit before taxes and non-operating expenses minus non-operating incomes. Revenue from operations, or net sales, should include cash and credit sales minus sales returns.

Example of Operating Profit Ratio Calculation
Operating Profit Ratio = (Operating Profit / Revenue from operations) x 100 Operating Profit = $1,000,000 Revenue from operations (net sales) = $5,000,000 Operating Profit Ratio = ($1,000,000 (Operating Profit) / $5,000,000 (Net Sales)) x 100 = 20%

Price Positioning

Price Positioning is a determination of where a hotel’s prices stand in comparison to prices at similar properties. Price positioning can be used to evaluate daily room rates, holiday rate promotions, spa and food and beverage prices, and more. Some of the most common strategies for price positioning include penetration pricing, skimming pricing, equal pricing, and surrounding pricing.

What is Price Positioning For?
Price Positioning is used to evaluate whether changes to a hotel’s daily rates are needed. The decisions made after determining price positioning can help a hotel or property keep its rates competitive. The goal of successful price positioning is to make consumers recognize your product and/or service as unique and clearly distinct from the competition.

Benefits of Price Positioning
A clear Price Positioning strategy helps revenue managers improve consumer value perception of a specific hotel or property. Evaluating a hotel’s position relative to its competitors tells revenue managers whether your prices are above, below, or at industry average. It also helps managers perform price comparisons for specific seasons or during relevant promotions.

Limitations of Price Positioning

The limitations of Price Positioning depend on which strategy a hotel opts to choose. For example, skimming and penetration pricing are limited because they rely on capturing consumer attention in the short-term. Consequently, a hotel cannot use skimming or penetration as a long-term Price Positioning strategy. Furthermore, the limitation of surrounding pricing is that a hotel must be able to provide that additional value in terms of facilities, services, or amenities. And the limitation of equal pricing is an inability to break in due to aggressive competition.

How is Price Positioning Determined
Hotel revenue managers typically use a matrix to display price positioning. There are several strategies a hotel can take with its price positioning. Penetration pricing is used most frequently in newer hotels. It is a strategy to set prices among the most affordable in the market. As its name suggests, it is used for new hotels and properties to penetrate a new market and can be effective if it doesn’t drive down market rates overall. Equal pricing sets hotel rates at values comparable to the competition. When using this strategy, other factors in a hotel’s value proposition are often used to further attract consumers. Surrounding pricing is a strategy that puts your most affordable room rates among the cheapest on the market. However, your most expensive room rates are then set closer to the same rates offered by your surrounding competitors. When using this strategy, a hotel must offer additional value through facilities, amenities, or services that competitors aren’t offering. Skimming pricing is a strategy that sets rates above the highest rates of a hotel’s competitors. Hotels that charge the highest rates often achieve increased profitability. However, the hotel must clearly offer more value than its competition and consumer reviews must back this up for this strategy to be effective.

Profit Per Available Room (PROFPAR)

Profit Per Available Room (PROFPAR) is a calculation of hotel profit earnings for each available room on the property. The calculation is made using operating profit, which accounts for changes in room revenue and operating expenses. For hotel owners, PROFPAR is a good metric for evaluating sales growth and management’s ability to control operating expenses.

What is Profit Per Available Room (PROFPAR) For?
Many hotels are calculating PROFPAR to assess profitability of group sales. In some cases, it can be used to assess whether to accept a group booking based on average ancillary spend on other hotel features, services, or amenities.

Benefits of Profit Per Available Room (PROFPAR)
PROFPAR is more common amongst hotel chains. It is a beneficial metric for tracking whether or not a hotel or property is effective in generating its share of profit. PROFPAR also helps revenue managers determine whether or not to sacrifice their Average Daily Rate (ADR) for a more lucrative group booking at a lower daily rate.

Limitations of Profit Per Available Room (PROFPAR)

Because PROFPAR is calculated using operating profit, it is not subject to all the limitations of RevPAR, such as a failure to account for operating expenses. However, PROFPAR (like RevPAR) doesn’t account for profits earned from other hotel services or amenities. This means that any strategic decisions made to improve hotel profitability shouldn’t be made solely based on a property’s PROFPAR.

How is Profit Per Available Room (PROFPAR) Calculated
PROFPAR is calculated by dividing a hotel’s operating profit per year by the number of daily available rooms per year.

Example of Profit Per Available Room (PROFPAR) Calculation

PROFPAR = Operating Profit Per Year / Daily Available Rooms Per Year Operating Profit Per Year = $3,465,000 Daily Available Rooms Per Year = 2,500 PROFPAR = $3,465,000 (Operating Profit Per Year) / 2,500 (Daily Available Rooms Per Year) = $1,386

Rate Fences

Rate fences are rules that are applied to specific room rates. They are set by revenue managers to prevent customers who are willing to pay higher amounts from having access to promotions or discounts. From the consumer’s perspective, certain rules will apply to a reservation in order to complete a booking at a certain rate. Rate fences allow hotels to offer different rates to new clients than to existing or returning clients.

What are Rate Fences For?
Rate fences are used to help revenue managers differentiate and optimize products and/or services. For example, a hotel might offer special holiday rates to attract new customers. But a hotel can set rate fences so that existing or returning clients are unable to book a room at the same special rates as new customers. This is how a hotel can use a “flash sale” to attract new customers while not giving away all of its rooms to customers that are willing to pay a standard rate.

Benefits of Rate Fences
Rate fences allow revenue managers to increase room yield and optimize revenue. They can also be used to protect room inventory during high demand periods and to generate more long term stays. Other benefits of setting rate fences include avoiding revenue loss from last-minute cancellations, increasing demand potential with conditional discounted offers, targeting specific niche markets, and offering promotional campaigns through targeted sales channels.

Limitations of Rate Fences

One of the challenges of setting Rate Fences is that customers must perceive the restrictions placed on their bookings as acceptable. Revenue managers must balance the need to protect a hotel’s interests with the potential to allow customers to book at lower-than-average market rates.

How are Rate Fences Determined
There are two main types of Rate Fences: physical and non-physical. Non-physical Rate Fences can be further broken down into multiple categories, such as fences based on customer demographic, fences based on transactional characteristics, and fences based on controlling availability.

Examples of Rate Fences

Here are some examples of the most common types of Rate Fences: 1. Physical Rate Fences a. Room Location b. Room Size c. Room View d. Amenities 2. Fences Based on Transactional Characteristics a. Time of Purchase b. Quantity of Purchase c. Location of Purchase 3. Fences Based On Buyer Characteristics a. Age b. Industry Affiliation c. Purchase Frequency 4. Fences Based On Availability a. Geographic Criteria b. Distribution Channels

Revenue Generation Index (RGI)

A Revenue Generation Index (RGI) is a useful metric for comparing hotel revenue to the average RevPAR of the competition. Because it uses RevPAR as its primary KPI, an RGI also accounts for occupancy rates.

What is Revenue Generation Index (RGI) For?

An RGI is used to determine whether or not a hotel is earning its fair share of revenue. Comparisons are made against a chosen competitive set that usually consists of hotels or resort properties with similar offerings.

Benefits of Revenue Generation Index (RGI)

Calculating RGI allows revenue managers to determine if a hotel is receiving a good share of market revenue when compared against its competitors. It is a great way to evaluate whether a hotel is falling short of, remaining on target of, or exceeding expected market share.

Limitations of Revenue Generation Index (RGI)

RGI is calculated using a specific competitive set. The hotels that a revenue manager decides to use to make these comparisons can have a large impact on the resulting RGI. As such, the competitive set used to determine ‘average market RevPAR’ should be chosen carefully.

How is Revenue Generation Index (RGI) Calculated

An RGI is calculated by dividing your hotel’s RevPAR by the average hotel market RevPAR. 

 

When RGI is equal to 1, your hotel’s RevPAR is equal to the average market RevPAR.

When RGI is greater than 1, your hotel’s RevPAR is higher than the average market RevPAR. 

When RGI is less than 1, your hotel’s RevPAR is lower than the average market RevPAR. 

Example of Revenue Generation Index (RGI) Calculation

RGI = Your Hotel’s RevPAR / Hotel Market RevPAR

Your Hotel’s RevPAR = $10,000

Hotel Market RevPAR = $12,000

RGI = $10,000 (Your RevPAR) / $12,000 (Hotel Market RevPAR) = 0.83

From this RGI result, we can infer that the hotel in question is currently earning less than its fair market share of RevPAR.

Revenue Per Available Room (RevPAR)

Revenue per Available Room (RevPAR) is a critical metric for hotels to plan for high and low seasons. It helps hotels measure the efficiency of their operations by tracking how well they’re filling available rooms at their Average Daily Rate (ADR). And since RevPAR measures revenue made during a certain period of time, it can be used to compare any given time period against previous periods, and measure the long-term performance of a property.

What is Revenue Per Available Room Used For?
RevPAR is used to evaluate the overall performance of a hotel. Room revenue and occupancy rate are the major criteria that factor into RevPAR. So a marked increase in RevPAR is a signal that average room rates or occupancy rates are increasing.

Benefits of Revenue Per Available Room
RevPAR allows revenue managers to compare revenue for a given period against previous periods. For example, it allows revenue comparisons for the current calendar year against the previous year’s numbers. This helps managers understand long-term performance and forecast future trends.

Limitations of Revenue Per Available Room

RevPAR only allows comparisons of income as a percentage of room sales. This does not factor in additional services offered at a hotel property, such as tour sales, room services, spa bookings, and other upsells. Also, unlike GOPPAR, it does not factor in the operating costs incurred in generating that revenue. RevPAR is also subject to fluctuations resulting from seasonality, economic trends, and consumer preferences. These fluctuations make it a difficult KPI for hotels to track accurately. For these reasons, RevPAR has limitations in terms of determining a hotel’s overall profitability.

How is Revenue Per Available Room Calculated
RevPAR is calculated in one of two ways. Either by multiplying the property’s average daily room rate (ADR) by the property’s occupancy rate, or by dividing total room revenue by the total number of rooms available during the period in question.

Example of Revenue Per Available Room Calculation

We’ll calculate RevPAR using both the multiplication and division methods here. Multiplication Method Average Daily Rate = $200 Occupancy Rate = 80% RevPAR = 30 (ADR) x 0.75 (Occupancy Rate) = $250 Division Method Total Rooms Revenue = $10,000 Total Number of Rooms = 40 RevPAR = 10,000 (Total Rooms Revenue) / 40 (Total # of Rooms) = $250

Revenue Per Available Seat Hour (RevPASH)

Revenue Per Available Seat Hour (RevPASH) is a KPI used by food and beverage outlets in a hotel. It is similar to RevPAR, which is used to evaluate room revenue. RevPASH measures revenue generated by a food and beverage (F&B) outlet per hour based on available seats. It can be calculated daily, weekly, and monthly.

What is Revenue Per Available Seat Hour (RevPASH) For?
RevPASH is used to measure seat usage in a given F&B outlet. It also measures the revenue generated per available seat hour. Because all F&B visitors don’t always make a reservation before their visit, this metric is a useful way for food and beverage managers to evaluate revenue generated by walk-in guests during opening hours.

Benefits of Revenue Per Available Seat Hour (RevPASH)
RevPASH is a useful KPI for food and beverage managers to get a better understanding of how a hotel’s various F&B outlets are performing. It is also used to plan F&B promotions, labour scheduling, food purchasing, marketing tools, and budgeting during periods of lowest hotel occupancy.

Limitations of Revenue Per Available Seat Hour (RevPASH)

RevPASH does not provide the full picture of an F&B outlet’s financial performance. Food and beverage managers should also evaluate the margins of individual menu items, rather than focusing solely on total revenue.

How is Revenue Per Available Seat Hour (RevPASH) Calculated ?
RevPASH is calculated by first multiplying available seats by opening hours. Then you can divide total outlet revenue by the above result for a final RevPASH calculation. When calculating RevPASH, the number of opening hours you use depends on the time period for which you wish to calculate it.

Example of Revenue Per Available Seat Hour (RevPASH) Calculation

RevPASH = Total Outlet Revenue / (Available Seats x Opening Hours) We’ll make this RevPASH calculation for a weekly period based on a 60-seat restaurant open six days a week for six hours per day. Total Outlet Revenue = $44,000 Available Seats = 60 Opening Hours = 36 RevPASH = $44,000 (Total Outlet Revenue) / (60 (Seats) x 36 (Opening Hours)) = $20.37

Revenue Per Available Square Meter (RevPAM)

Revenue Per Available Square Meter (RevPAM) is a hotel KPI that measures a hotel’s ability to generate revenue from its banquet and conference spaces. Consequently, RevPAM only applied to hotels that rent space for banquets or conferences, and does not include revenue from room charges or breakfast offerings.

What is Revenue Per Available Square Meter (RevPAM) For?
RevPAM is a calculation of the revenue a hotel generates per available square meter when it rents rooms for a banquet or conference. It is a good measurement of the efficiency of a hotel’s sales department in maximizing revenue from banquet and conference sales.

Benefits of Revenue Per Available Square Meter (RevPAM)
RevPAM is a good metric of how well a hotel is utilizing its banquet and conference space. RevPAM can be used in conjunction with other hotel revenue KPIs (such as RevPAR) to better understand the pros and cons of accepting group bookings. Because RevPAM does not include revenue from room charges or breakfast, it can be used to evaluate in-hour conference and banquet guests, as well as guests that aren’t staying at a hotel.

Limitations of Revenue Per Available Square Meter (RevPAM)

RevPAM is not a useful KPI for a hotel that does not regularly rent out its hotel or banquet space. It also does not tell the full story of a hotel’s profitability because it only applies to a hotel’s events department.

How is Revenue Per Available Square Meter (RevPAM) Calculated
RevPAM is calculated by dividing revenue by a hotel’s available square meters of banquet space. For this metric, revenue should not include room charges or revenue from breakfast F&B.

Example of Revenue Per Available Square Meter (RevPAM) Calculation

RevPAM = Revenue / Available Square Meters of Banquet Space (m²) Revenue = $580,000 Available Square Meters of Banquet Space = 2,000 RevPAM = $580,000 (Revenue) / 2,000 (Square Meters of Banquet Space) = $290

Revenue Per Available Treatment Hour (RevPATH)

Revenue Per Available Treatment Hour (RevPATH) is used to measure profitability of spa operations in a hotel or resort property. It measures revenue generated by treatments and accounts for the number of rooms available during normal hours of operation. It is a very useful metric used in yield management for spa managers.

What is Revenue Per Available Treatment Hour (RevPATH) For?

RevPATH works similar to how RevPAR measures the efficiency of hotel room bookings. RevPATH can be used to identify the times of the day (or days of the week) where a spa is bringing in the most revenue. This allows spa managers to design premium products for upsells during high demand periods. It also helps with identifying periods of low demand where a spa can use promotions to drive additional revenue.

Benefits of Revenue Per Available Treatment Hour (RevPATH)

RevPATH is a useful KPI for measuring spa operations because it accounts for spa turnover. Instead of simply looking at total spa revenue, RevPATH helps spa managers identify hours that achieve a higher yield. This helps spas manage their time more effectively and identify opportunities to drive increased revenue.

Limitations of Revenue Per Available Treatment Hour (RevPATH)

One limitation of RevPATH is that different spas will often calculate RevPATH depending on their specific revenue goals. While RevPATH is a very useful internal metric for improving time management in spa operations, it may not be a good KPI for comparing spa operations across different hotels or resorts.

How is Revenue Per Available Treatment Hour (RevPATH) Calculated

RevPATH is calculated by multiplying a spa’s occupancy rate by its average treatment rate. Average treatment rate is calculated by dividing Total Treatment Revenue by the number of Total Treatments sold. Because occupancy rate is usually expressed as a percentage, it can be easier to convert to a decimal and then multiply it by average treatment rate to achieve RevPATH. 

Example of Revenue Per Available Treatment Hour (RevPATH) Calculation

RevPATH = Spa Occupancy x Average Treatment Rate

Spa Occupancy = 70%

Average Treatment Rate (ATR) = $240

RevPATH = 70% (Occupancy Rate) x $240 (ATR) = $168

Revenue Per Occupied Room (RevPOR)

Revenue Per Occupied Room (RevPOR) differs from RevPAR because it accounts for all revenue a hotel earns when a room is occupied. It accounts for optional services guests can purchase at the hotel, as well as any additional sales made during a stay. RevPOR can be measured daily, weekly, monthly, or annually. The choice that a hotel makes largely depends on the types of insights that that hotel is seeking.

What is Revenue Per Occupied Room (RevPOR) For?

RevPOR is used to determine how much profit a hotel earns when a customer enters the hotel. It gives hotel revenue managers a very useful metric for evaluating a hotel’s overall performance when guests actually stay at a property. Because of this, RevPOR can be a more useful metric for hotel revenue management than a KPI like Occupancy Rate.

Benefits of Revenue Per Occupied Room (RevPOR)

RevPOR is an especially useful KPI for evaluating hotel performance during seasonal periods of low demand. While seasonal trends can drive down other KPIs, RevPOR prioritizes an evaluation of how much an average guest spends on hotel products and services. This is a departure from many other KPIs (like RevPAR) that look at the overall number of guests.

Limitations of Revenue Per Occupied Room (RevPOR)

While RevPOR is useful for evaluating how much the average guest spends at a hotel, it can be limited precisely because it does not account for occupancy rates. This means that RevPOR should be used alongside other hotel KPIs when making strategic revenue management decisions. Most revenue managers, for instance, will also tell you that Occupancy Rate is a very key metric for evaluating a hotel’s bottom line, illustrating why RevPOR is limited by not accounting for actual occupancy.

How is Revenue Per Occupied Room (RevPOR) Calculated

RevPOR is calculated by dividing a hotel’s total revenue by the number of rooms actually sold to guests. Total Revenue should account for all revenue from accommodations, breakfast, spa services, bar and mini bar sales, and any additional revenue.

Example of Revenue Per Occupied Room (RevPOR) Calculation

RevPOR = Total Revenue / Total Occupied Rooms

Total Revenue = Room Revenue + Breakfast + Bar + Mini Bar + Spa + Any Additional Revenue

(This calculation is made for annual RevPOR) 

Total Revenue = $3,560,000

Total Occupied Rooms = 51,00

RevPOR = $3,560,000 (Total Revenue) / 51,000 (Total Occupied Rooms) = $69.80

Spa Revenue Per Occupied Room (SRevPOR)

Spa Revenue Per Occupied Room is a KPI specific to hotel spa operations. It helps both spa and hotel revenue managers identify the relationship between spa operations and hotel occupancy. The data used to calculate SRevPOR is pulled from a hotel’s Spa Management System. SRevPOR in the spa industry typically falls between $40 and $70.

What is Spa Revenue Per Occupied Room (SRevPOR) For?

SRevPOR is used to help spa managers optimize time management by allowing them to analyze the differences between internal and external utilization levels. This ultimately helps them make informed changes to a spa’s revenue management strategy. SRevPOR is often used alongside a hotel’s RevPOR calculation.

Benefits of Spa Revenue Per Occupied Room (SRevPOR)

SRevPOR is an effective KPI for analyzing a hotel’s strategic marketing plan. It allows managers to measure the amount of spa revenue being generated per occupied room in the hotel, as well as identify trends based on seasonal demand, promotions, and other factors.

Limitations of Spa Revenue Per Occupied Room (SRevPOR)

SRevPOR can vary greatly depending on seasonality and the specific client mix staying at a hotel in any given period. It can also vary depending on the size of the spa and viability of local business. As such, it should be analyzed in conjunction with factors, such as Occupancy Rate and RevPOR.

How is Spa Revenue Per Occupied Room (SRevPOR) Calculated

SRevPOR is calculated by dividing total spa revenue by the total number of occupied rooms. For the most accurate SRevPOR calculation, spa revenue should only include revenue from treatments, product sales, facility fees, and other ancillary sales.

Example of Spa Revenue Per Occupied Room (SRevPOR) Calculation

SRevPOR = Total Spa Revenue / Total Number of Occupied Rooms

Total Spa Revenue = $28,000

Total Number of Occupied Rooms = 460

SRevPOR = $28,000 (Spa Revenue) / 460 (# of Occupied Rooms) = $60.87

Stay Controls

Stay Controls are methods for hotels to restrict bookings. They can depend on a variety of factors and are generally based on a hotel’s booking patterns. Essentially, Stay Controls are restrictions that help a hotel realize higher revenue potential.

What are Stay Controls For?

Stay Controls are used by hotel revenue managers to achieve as close to full occupancy as possible, for as many weeks as possible during a calendar year, and into the future. There are many ways for a hotel to place controls on a visitor’s stay, but the specific controls that will be most useful for a given hotel will require an in-depth evaluation of that hotel’s booking patterns.

Benefits of Stay Controls

Stay Controls allow a hotel to maximize revenue potential during seasons of lower demand. By analyzing booking and stay patterns, a hotel can implement controls that minimize periods of low occupancy. In turn, these controls can help a hotel manager identify changes to a hotel’s reservation policy that will ultimately increase hotel profitability.

Limitations of Stay Controls

A hotel’s ability to implement Stay Controls may greatly depend on the regulations of the county, state, or region in which they operate. For example, certain counties may place restrictions on both length-of-stay controls, as well as a hotel’s ability to leverage dynamic pricing. 

Additionally, certain Stay Controls come with risk. As a hotel, building customer loyalty can be just as important as maximizing daily revenue potential. A hotel must weigh the pros and cons of implementing Stay Controls in order to avoid alienating return guests.

How are Stay Controls Identified

Stay Controls should be implemented carefully. While the goal of Stay Controls is to boost hotel revenue, there are a number of ethical and legal questions that can impact a hotel’s bottom line when it comes to implementing Stay Controls.

Examples of Stay Controls

Here are some examples of Stay Controls: 

  • Minimum Length of Stay
  • Maximum Length of Stay
  • A Combination of Minimum and Maximum Length of Stay
  • Dates Closed to Arrival (CTA)
  • Dates Closed to Departure (CTD)
  • Stay-Through Restrictions

Spa Utilization Ratio (SUR)

Spa Utilization Ratio (SUR) is a hotel spa KPI that signals how effective a spa is in selling its treatment hours. It is very similar to how Occupancy Rate evaluates how many rooms are filled in a hotel for a given period.

What is Spa Utilization Ratio (SUR) For?

SUR is used for spa managers to evaluate how efficiently a spa is managing time and utilizing open hours. Much like Occupancy Rate, SUR is evaluated for a given time period. SUR may be calculated daily, weekly, monthly, or annually. Before calculating SUR, a spa must determine the time and space units to be measured.

Benefits of Spa Utilization Ratio (SUR)

The main benefit of SUR is that it helps spa managers identify utilization rates. By analyzing how effectively (or ineffectively) a hotel is selling treatment hours, managers can identify strategies for improving guest usage, as well as plan promotions to maximize utilization during periods of high (or low) demand.

Limitations of Spa Utilization Ratio (SUR)

SUR is most effective when evaluated on a daily basis. It also helps to differentiate services when evaluating SUR because different services translate to higher revenue than others. Spas with very high turnover rates should even consider evaluating SUR on an hourly basis. 

Most spas operate between 35 and 40 percent utilization, so it is also important to consider industry averages when evaluating a hotel’s SUR. This will help you prevent making overly-reactive strategic decisions before considering industry trends.

How is Spa Utilization Ratio (SUR) Calculated

SUR is calculated by dividing the hours of treatment sold by the hours of treatment available. That result is then multiplied by 100 so that the final calculation is expressed as a percentage out of 100.

Example of Spa Utilization Ratio (SUR) Calculation

SUR = (Hours of Treatment Sold / Hours of Treatment Available) x 100

For the below calculation, the following data is used: 

  • The spa has 6 rooms available
  • Spa hours are 9 am to 5pm, 7 days per week
  • This gives a possible total of 336 hours of treatment available during a given week
  • However, for the purposes of this calculation, we’re going to say the spa only sold 280 hours for the week

 

Hours of Treatment Sold = 200

Hours of Treatment Available = 336

SUR = (200 (Hours Sold) / 336 (Hours Available)) x 100 = 59.5%

Total Revenue Per Available Room (TRevPAR)

Total Revenue Per Available Room (TRevPAR) is a hotel KPI that gives a more holistic view of the total revenue generated from all departments. It differs from RevPAR by accounting for more than the revenue generated by only rooms sold.

What is Total Revenue Per Available Room (TRevPAR) For?

TRevPAR is often used as a benchmarking tool for all-inclusive hotels and resorts. It is a more inclusive metric for displaying how effectively a hotel is using its space to generate revenue. It allows managers to see how a hotel is generating revenue regardless of whether or not rooms are sold.

Benefits of Total Revenue Per Available Room (TRevPAR)

TRevPAR can be a preferable metric for board members and accountants because it provides a broader and more generic evaluation of a hotel’s performance. It provides a more comprehensive view of how well a hotel is generating revenue because it includes revenue generated from amenities from room service sales, restaurant sales, bar sales, and more. This bigger picture view allows for more effective pricing adjustments to be made.

Limitations of Total Revenue Per Available Room (TRevPAR)

A hotel’s management board and accountants should be careful making decisions solely based on TRevPAR calculations. The main limitations of TRevPAR stem from how it does not account for costs incurred by the hotel (as GOPPAR does), and it does not factor in Occupancy Rate.

How is Total Revenue Per Available Room (TRevPAR) Calculated

TRevPAR is calculated by dividing a hotel’s total revenue by the total number of available rooms. Total Revenue should include revenue from accommodations, breakfasts, bar sales, mini bar sales, spa sales, and any ancillary sales.

Example of Total Revenue Per Available Room (TRevPAR) Calculation

TRevPAR = Total Revenue / Total Available Rooms

We’re calculating TRevPAR annually in the following section

Total Revenue = $3,080,000

Total Available Rooms = 15,680

TRevPAR = $3,080,000 (Total Revenue) / 15,680 (Total Available Rooms) = $196.43

Total Revenue Per Client (TRevPEC)

Total Revenue Per Client (TRevPEC) is a hotel KPI that can be used to evaluate how much revenue is generated from each visiting customer. It breaks down family and group bookings to provide more information on revenue per customer for those bookings. TRevPEC can be calculated for a selected time period, depending on a hotel revenue manager’s preference.

What is Total Revenue Per Client (TRevPEC) For?

TRevPEC is used for calculating the total revenue generated by each customer. It also accounts for double-occupancy reservations and family occupancy bookings. Since it accounts for these types of bookings, it is one of the more useful hotel KPIs for evaluating whether or not a hotel should offer family rooms or suites during specific demand periods.

Benefits of Total Revenue Per Client (TRevPEC)

TRevPEC can be used in conjunction with RevPAR to make strategic decisions that will help a hotel improve profitability. Understanding TRevPEC and comparing it with visitor demographics can help revenue managers identify market segments that are more profitable than others.

Limitations of Total Revenue Per Client (TRevPEC)

TRevPEC should only be evaluated alongside a thorough understanding of hotel guest demographics. A consideration of TRevPEC without a holistic understanding of guest demographics can result in misguided strategic marketing decisions.

How is Total Revenue Per Client (TRevPEC) Calculated

TRevPEC is calculated by dividing a hotel’s total revenue by its total number of guests. It can be calculated for various time periods. For this KPI, Total Revenue includes revenue from accommodations, breakfast sales, bar sales, spa sales, mini bar sales, and any other ancillary sales.

Example of Total Revenue Per Client (TRevPEC) Calculation

TRevPEC = Total Revenue / Total Number of Guests

This is a calculation of annual TRevPEC*

Total Revenue = $4,285,000

Total Number of Guests = 10,990

TRevPEC = $4,285,000 (Total Revenue) / 10,990 (Total # of Guests) = $389.90

Unconstrained Demand

Unconstrained Demand is part of a hotel’s Demand Forecast. It is a representation of a hotel’s total demand for a given period. It is a useful KPI for revenue management decisions, especially when it relates to maximizing revenue on a hotel’s last remaining rooms available.

There are also many ways to organize data to identify Unconstrained Demand. Hotels should consider implementing manual tools (such as through applications like Excel or hotel management apps) that help with organizing data and identifying periods of Unconstrained Demand. 

What is Unconstrained Demand For?

Evaluating Unconstrained Demand helps hotels identify when that demand exceeds the hotel’s capacity. Identifying these periods will help hotel revenue managers identify when they might need to change revenue management strategies by raising room rates. In other words, identifying Unconstrained Demand helps revenue managers maximize revenue during periods of high demand.

Benefits of Unconstrained Demand

Identifying Unconstrained Demand is essential for determining the value of a hotel’s ‘Last Room Available’. It also helps revenue managers apply any possible length of stay restrictions for periods of higher demand. By capturing, organizing, and evaluating a hotel’s historical guest data, managers can calculate potential Unconstrained Demand.

Using Unconstrained Demand to forecast a hotel’s revenue potential is useful because it allows revenue managers and hotel executives to identify their ‘ideal’ demand scenario.

Limitations of Unconstrained Demand

Unconstrained Demand does NOT account for a hotel’s current capacity. Some might say that a Demand Forecast that places too much value on Unconstrained Demand can be overly optimistic. This is because it does not account for any constraints that might reduce demand, therefore, reduce a hotel’s revenue potential.

How is Unconstrained Demand Calculated

A hotel can implement its own system for calculating Unconstrained Demand. There is no universal system for making these calculations, but a hotel manager can use their existing Demand Calendar to help with these calculations.

Example of Unconstrained Demand

Some examples of data used to calculate Unconstrained Demand include room nights booked, expected pick up, total bookings, and total number of rooms available. Again, managers should designate a specific time period for which calculations of Unconstrained Demand are made.

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