RevPAR, GOPPAR, ProfPAR: Which metric should I analyze?
Everyone is familiar with RevPAR and its significance in the hospitality industry, but is it still the preeminent tool for assessing hotel financial performance?
Back to Basics - How is RevPAR Calculated?
Revenue per Available Room, or RevPAR, is considered the most crucial ratio commonly used to measure financial performance in the hospitality industry. The metric is a function of both room rates and occupancy.
In fact, it provides a useful insight into how well a company is filling its rooms and how much it can charge. There are two ways to calculate RevPAR; the first formula is:
Total Room Revenue in a Specific Period, Net of Discounts, Sales Taxes and Meals
Number of Rooms Available at the Same Time
Alternatively, the same figure can be calculated as follows:
Average Daily Room Rate (ADR) x Occupancy Rate
It is worth noting the difference in the calculation of ADR and RevPAR, as hotel general managers adjust their RevPAR measure by placing part of their room inventory out of service to increase the RevPAR index.
Few hotel chains prohibit the use of the “out of service” function unless authorized by head office to avoid a misleading RevPAR figure; ADR is calculated by taking the total gross room revenue and dividing by the number of occupied rooms, while RevPAR is calculated by taking the total gross room revenue and dividing by the total available room nights (minus out of service rooms).
RevPAR identifies how a hotel combines two strategies: maximizing rooms sold and maximizing the average room rate to maximize total room revenue.
If a hotel’s sales strategy focuses only on one of these measures, it can miss significant opportunities to maximize total room revenue with the other measure.
RevPAR requires a hotel to be evaluated on its ability to manage and maximize both rate and occupancy measures. It is therefore useful because it provides market trends that can be used to extrapolate future performance.
The pitfalls of an excessive reliance on RevPAR
Despite the importance of RevPAR, demonstrated in the day-to-day operations of hotels, in the competitive set (STR*) as a commonly used performance comparison information, in annual reports, in the preparation of annual operating budgets and in forecast discussions, the pitfalls inherent in this performance indicator make it a poor representation for the complex hospitality sector.
In fact, professionals and academics have expressed the danger of an over-reliance on RevPAR, as it only measures total room revenue generation, while ignoring the revenues obtained in other areas of the hotel, such as restaurants, sales of in-room products and services, gift stores, property operating costs and other factors that can directly affect the profits shown on the hotel’s income statement.
Thus, they advocate the concept of GOPPAR / ProfPAR, which reflects the total underlying operating profit of a hotel.
*STR stands for Smith Travel Research. Hotels registered with STR share their performance data, such as occupancy, ADR (average daily rate) and RevPAR. STR uses this data to develop indices for the measures mentioned above, in order to compare the performance of registered hotels with their respective competitive sets.
ProfPAR and GOPPAR Give a Clearer Picture
ProfPAR (profit per available room) or GOPPAR (gross operating profit per available room) provide a clearer picture of a hotel’s operating performance and bottom line that is not revealed in RevPAR.
GOPPAR helps hoteliers analyze the results of cost-cutting measures, how well the operation sustains them over time even when market conditions improve, and how these measures affect the property’s bottom line.
Thus, GOPPAR is a more accurate indicator of the effectiveness of an operation.
From the point of view of ownership, GOPPAR / ProfPAR takes into account sales growth and management skills in controlling operating costs/expenses. It shows owners what their assets are worth at any given time and allows them to make balanced decisions about renovations, capital expenditure, closures and so on.
Thus, GOPPAR / ProfPAR explains management’s ability to generate enough revenue and profit for owners to achieve their ROI (return on investment). A hotel is really two assets in one; a real estate asset and a profitable business in operation.
Therefore, GOPPAR / ProfPAR becomes a way of evaluating a hotel's true commercial performance.
At the hotel level, GOPPAR / ProfPAR are crucial for many departments; revenue managers need to look at this figure to make better, smarter and more profitable decisions; executive housekeepers must know how their roles impact this figure; the financial controller needs to know the GOPPAR trend to provide the best assessment of what makes or doesn’t make the property valuable.