The duty manager comes in on Sunday morning pleased with herself. Forty rooms, forty sold, full house on a Saturday in October. The hotel across the square sold twenty two. She had a better night in every sense except the one that pays the mortgage, because her average rate was £78 and theirs was £165.
Hotels are unusual in having three headline performance numbers that are all true at once and all capable of misleading you on their own.
Occupancy is a vanity number until you attach a price
Occupancy is rooms sold divided by rooms available. It is the easiest number to move and the easiest to fake. Drop your rate far enough and you can fill any hotel on any night of the year, including Christmas Day in a business district.
It is also the number that carries cost. Every occupied room has to be cleaned, has linen laundered, consumes amenities and utilities, and generates a share of breakfast. That variable cost per occupied room, often called CPOR in the trade, is the reason the last room sold at a very low rate can contribute almost nothing. If your cost per occupied room is £22 and you sell a room at £29 through a channel taking 18% commission, you have made a pound and given a stranger a night in your hotel.
So occupancy is worth chasing only up to the point where the marginal room still covers its own costs with something left over. Beyond that you are buying a statistic.
ADR tells you what you sold, not what you could have sold
Average daily rate is rooms revenue divided by rooms sold. It describes the rooms you managed to sell, which is a subtly different question from how well you priced.
A hotel with a high ADR and poor occupancy has usually priced above the market and is congratulating itself on the rooms that sold anyway. A hotel with a low ADR and high occupancy has usually priced below and is telling itself it is popular. Both are looking at half the picture.
ADR also hides mix. If your ADR is £120, that could be forty rooms all at £120, or twenty at £85 and twenty at £155. The second business is healthier and more fragile at the same time, and you will not see it in the average. Look at rate distribution occasionally, not just the mean.
RevPAR is the reconciliation, and it is the one to manage
Revenue per available room is rooms revenue divided by rooms available, which is the same as occupancy multiplied by ADR. It is the number that refuses to let you cheat, because it counts the rooms you did not sell.
Take the Saturday above. Forty rooms at 100% and £78 gives a RevPAR of £78. The hotel across the square at 55% and £165 gives a RevPAR of just under £91, from fewer than half the guests, with less than half the housekeeping cost, less breakfast and less wear on the building. The full hotel had the worse night by a comfortable margin, and by the time you account for cost per occupied room it is not close.
The corollary is the rule most operators eventually learn the hard way: occupancy is expensive and rate is free. A pound added to rate flows almost entirely to the bottom line. A room added at a low rate brings a cost with it.
That is also why RevPAR alone should not be the only thing on your report. It says nothing about the profit of the rest of the hotel. Two other measures are worth having:
- TRevPAR, total revenue per available room, which includes food, beverage, meetings and everything else the guest spends
- GOPPAR, gross operating profit per available room, which is the one that survives contact with your cost base
A hotel with a bar that does well and a function room that fills has a very different business from a bedroom only property at the same RevPAR.
Your own history is not a benchmark
Comparing this October to last October tells you whether you improved. It does not tell you whether the market improved more. If RevPAR is up 6% and every comparable hotel in your town is up 14%, you did not have a good year, you had a bad year in a good market.
The trade solves this with a competitive set: a small group of hotels, usually five to ten, that a guest would genuinely choose between when they are considering you. Benchmarking services collect data from participating hotels and report your performance against that set as three indices, where 100 means your fair share:
- Occupancy index, which the industry calls MPI, market penetration
- Rate index, ARI, average rate index
- RevPAR index, RGI, revenue generation index
An occupancy index of 118 with a rate index of 82 is a clear and common diagnosis: you are winning volume by being the cheapest option, and there is rate to be taken. The reverse tells you the opposite. An RGI at or slightly above 100 with both components near 100 is usually the healthiest place to be.
Choosing the comp set honestly is the whole exercise. Operators put aspirational hotels in it and then feel bad, or put weak hotels in it and then feel good. Neither produces a decision. The test is simple: if this hotel were full, would some of its guests have come to me instead.
Two things to watch when you read any index. It is a share measure, so if a large new hotel opens in your set, your index falls without anything in your building changing. And you need enough participating properties for the data to be meaningful; in a small town it often is not, and you are better off with your own booking curve and a careful eye on published rates.
The number that should sit next to all three
None of these say anything about what it cost to get the booking. A room sold at £150 through a platform charging 17% commission yields you £124.50. The same room sold at £135 on your own site, after paying for the advertising that brought the guest, might net more.
Sophisticated operators track net ADR, meaning rate after distribution cost, by channel. It changes decisions. It often reveals that a channel you thought was your worst performer on rate is your best on contribution, or the reverse. It also stops you discounting on your own website to a level that is worse than the platform you were trying to avoid.
Where this shows up in the game
Hotels arrive in Business Baron with the Hotels & Leisure Track, an add-on to the full game, alongside B&Bs, holiday parks and wedding venues. Pricing is a decision you make repeatedly and live with, and a business that teaches its customers to wait for a discount takes a long time to teach them anything else. A full house feels good. The month end shows you what it cost.