The Lodging Revenue Paradox

As you have learned in the previous two chapters, all RMs should use relevant data and their insight to make good inventory management, pricing, and distribution channel management decisions. But how do they know if they have done so? The answer will be important to how you assess your own efforts, as well as to the operating statistics others will use to evaluate your performance.

To equitably assess revenue generation in a hotel, occupancy percentage and room rate must be evaluated at the same time. This revenue assessment paradox exists in the lodging industry and is quite similar to the load factor paradox faced by airlines. In both industries, RMs must carefully balance the quantity of product sold (hotel rooms or airline seats) withthe prices charged (ADR or air fares) to optimize revenue. Recall that the formula for RevPAR is:

ADRX Occupancy percentage = RevPAR

Note that this formula permits RMs to simultaneously consider the impact of ADRrelated decisions and Occupancy %-related decisions on their hotels’ revenue generation.

Since the mid-1990s, efforts and strategies designed to maximize RevPAR have been a major focus of lodging property RMs. Interestingly, while property RMs and a good number of management companies use RevPAR to measure their effectiveness, sophisticated hotel owners typically do not. The reasons why are many, but they relate directly to the importance of revenue optimization and profi tability (GOPPAR), not revenue maximization.

 

STAR Reports

In a typical report, the subject (your) hotel’s performance is compared to that of its competitive set, and the subject hotel’s rank (e.g., fi rst in the set, or second, third and so on) on each criteria is listed. Examining a single segment of a STAR report related to hotel occupancy will help illustrate how a STAR performance report can be used to assess your own RM-related performance. To interpret Figure 9.7, assume that your hotel is the 400-room property referred to earlier. Your competitive set is the six similar hotels that you have identifi ed as your competition. In Figure 9.7, the “Property” column refers to your hotel.

The Comp Set column in this STR Trend Report refers to the data from the six hotels you have chosen as your competitive set. The monthly occupancy percentages listed represent the occupancy rates, respectively, of your hotel and the combined (average) occupancy of your comp set.

One of the most important features of a STAR performance report will be your hotel’s index on various criteria. This occupancy, room rate, or RevPAR ratio is calculated as:

Performance of subject of your hotel/ Performance of competitive set hotels = index

For example, if your hotel achieved an occupancy of 70 percent last month, and your competitive set achieved an occupancy of 70 percent, your occupancy index would be computed as:

7 0% occupancy (Subject hotel)/ 7 0% (Comp set) = 100% occupancy index

If, however, your hotel achieved an occupancy of 70 percent last month, and your competitive set achieved an occupancy of 75 percent, your occupancy index would be computed as:

7 0% occupancy /7 5% occupancy = 93.3% occupancy index.

 

Competitive Set Analysis

Lodging industry RMs know that their hotels will perform better than some of their direct competitors and perhaps less well than others. Variations in a brand’s reputation, a hotel’s location, its age, the skills of the workers in its operating departments, and the decision making ability of its revenue management team members all combine to allow some hotels to charge more and to achieve above average occupancy rates. Alternatively, some hotels can charge more, but only at the expense of reduced occupancy levels. Other hotels achieve higher occupancy rates, but only by reducing rates. How a hotel ranks among its competitive set in terms of ADR, occupancy, and RevPAR generation can tell the property RMsmuch about how guests perceive the value proposition offered by their hotels’ pricing structures and how future rate and inventory management decisions should be made. A few RMs discount competitive set reports. They would argue that true success simplymeans meeting the goals they have set for themselves, regardless of the performance of others.

All RMs must be able to read and understand how to interpret the following performance indexes:

· Occupancy Index Analysis

· ADR Index Analysis

· RevPAR Index Analysis

 

Market Share Analysis

A complete competitive set evaluation must also include a market share analysis. For this important assessment, market share refers to the percentage of supply, demand, and revenue accounted for by a hotel property.

The terms supply, demand, and revenue are defined as follows:

Supply: Number of rooms available to sell X Number of days in the period

Demand: Number of rooms sold (excluding complimentary rooms)

Revenue: Total room revenue generated from the sale or rental of rooms

This ratio is calculated as:

Available rooms subject hotel / Available rooms comp set (including subject hotel) = Supply share (%).

Similar calculations are undertaken to compute the subject hotel’s demand and revenue generation

Rooms sold by subject hotel/Rooms sold by comp set (including subject hotel) = Demand share (%).

Rooms revenue generated by subject hotel/Rooms revenue generated by comp set (including subject hotel) = Revenue share (%).

RMs analyzing this portion of a monthly performance report (STR includes this specific report as part of their “Monthly STAR Summary”) could encounter a variety of possible outcomes, each of which may be helpful in evaluating the hotel’s revenue optimization performance.