In the previous article we explained that having many rooms occupied does not necessarily mean a hotel is getting the best possible performance.
So how can we tell whether our strategy is working?
There are many metrics in Revenue Management, but there are three fundamental concepts that every hotelier should know: occupancy, ADR and RevPAR.
Occupancy
Occupancy shows what percentage of the available rooms have been sold.
If a hotel has 50 rooms and sells 40:
Occupancy = 80%
It is an important metric, but analysing it in isolation can lead us to the wrong conclusions.
A hotel can reach 100% occupancy and still have missed out on revenue if it sold too cheaply.
ADR
ADR — Average Daily Rate — represents the average price of the rooms sold.
For example, if a hotel sells rooms for a total of €4,000 and has sold 40 rooms:
ADR = €100
This metric tells us the average price at which we are selling our inventory.
But again, we need to analyse it alongside other variables.
A very high ADR with very low occupancy does not guarantee a good strategy either.
RevPAR
Here comes one of the most widely used metrics in Revenue Management: RevPAR, or revenue per available room.
It can be calculated by multiplying:
ADR × occupancy percentage
If we have:
ADR: €100
Occupancy: 80%
Our RevPAR would be:
€80
RevPAR lets us look at price and occupancy together, giving a much more complete view of how the available rooms are performing.
What should a hotel aim for?
There is no perfect occupancy percentage and no ideal ADR that applies to every hotel.
It will depend on many factors:
- location;
- category;
- season;
- type of customer;
- competition;
- events;
- costs;
- destination demand.
That is why Revenue Management is not about chasing a specific number.
It is about observing how these metrics evolve and comparing them with our history, our budget, the market and the expected behaviour of demand.
A hotel that measures its results properly can spot opportunities that would otherwise go unnoticed.
And that information is what later makes better pricing decisions possible.