18 Methods for Measuring and Improving Hotel Performance – Part 2

Tags: #hotelperformance, #criticalmetrics, #KPIs, #ADR, #ARR, #Occ, #LOS, #RevPAR, #RevPOR, #TrevPAR, #NRevPAR, #ARPA, #ARPAR, #GOP, #GOPPAR, #CPOR, #EBITDA, #MCPB, #ROAS, #DRR

This is the second part of article series of “18 Methods for Measuring and Improving Hotel Performance” and we continue reviewing them in this article:


9- Average Revenue Per Account (ARPA)


ARPA = (Monthly) Recurring Revenue / Total Number of Accounts

Average revenue per account, or ARPA, is a revenue management key performance indicator used to show the average amount of revenue generated per customer account, over a particular period. It is usually calculated on a monthly or yearly basis and the time period was chosen can easily show hotel owners the average revenue value of existing customers, or the value of new customers. ARPA is calculated by dividing monthly recurring revenue by the total number of accounts.

This can help to show business growth, or when performance declines, which may be an indicator that prices need to be adjusted, or that more customers need to be attracted.

One potential limitation of the KPI is that it measures revenue on a per account basis, rather than on a per-user basis. Although the metric is sometimes referred to as average revenue per user, this is not an entirely accurate description of what the metric shows, because some users may actually have more than one account.


10- Adjusted Revenue Per Available Room (ARPAR)


ARPAR = (ADR – CPOR + additional revenue per occupied room) x Occupancy

ARPAR is adjusted revenue per available room. It is a great metric to measure the performance of revenue management and the overall effectiveness of the hotel’s pricing policy. ARPAR is similar to RevPAR, except that ARPAR takes into account revenue and costs per occupied room. Costs per occupied room that greatly influence ARPAR and hence profitability include cleaning, energy usage, water usage, internet and TV, supplies such as toiletries, etc. There are several costs that can be subtracted from the revenue generated by each occupied room, as reflected in the ARPAR formula.


11- Gross Operating Profit (GOP)


GOP = Gross Operating Revenue - Gross Operating Expenses

It defines the level of operational profitability of a hotel. It is a KPI which alludes to the Hotels profits before subtracting all of their operating expenses.


12- Gross Operations Profit Per Available Room (GOPPAR)


GOPPAR = Gross Operating Profit (GOP) / Number of Available Rooms

GOPPAR is gross operating profit per available room and is a helpful measurement for hotel owners looking for a general picture of their properties’ performance as it looks at all rooms regardless of if they are occupied or not. While GOPPAR is a strong indicator of performance across all revenue streams, it includes room variables, such as internet bills and hotel furniture costs, that hotel managers have little control over.

GOPPAR allows you to view the value of your hotel as an asset at any time - together as an operating business, management efficiency and real estate property.

13- Cost Per Occupied Room – CPOR


CPOR = Total Rooms Departmental Cost / Total Rooms Sold

Cost per occupied room helps you determine how efficient your property is per sold room. To determine CPOR you divide total gross operating profit by total rooms available. Gross operating profit is your Net Sales minus Cost of Goods Sold minus Operating Expense, which includes selling, general and administrative expenses. CPOR gives you the ability to see how profitable each room is while taking into consideration your expenses, both variable and fixed (labour, rent, etc.)

Managers and owners should use this metric to track how efficient their properties are over time. RevPAR and ADR help you determine if you’re selling enough rooms at the best price, and CPOR will help you maximize property’s efficiency.


14- EBITDA


EBITDA = Total Revenue – Expenses (excluding interest, taxes, depreciation and amortization

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is an increasingly important KPI. It is used to demonstrate the day-to-day operating profitability of a hotel, after removing variables like interest rates from financing, tax rates set by different governments and different takeover histories, as these factors can distort results. Therefore, it is especially useful when comparing the financial performance of businesses in different regions or industries. It is calculated by subtracting all other expenses from total revenue.

EBITDA is useful for large businesses, especially those with a large number of assets, and is also popular among companies with significant debts. This is because it shows creditors the amount of money available to pay interest and demonstrates potential profitability when accounting and financing decisions are removed.

On the other hand, it is also possible to manipulate the metric to make a hotel look more profitable than it actually is, meaning the KPI may not present an accurate picture of true financial performance.


15- Marketing Cost Per Booking (MCPB)


MCPB = Actual Production of a channel / Total cost of acquisition

This metric track actual production versus the cost of each Sales & Marketing (S&M) channel. Therefore, it measures ROI. It illustrates the cost of acquisition, which is a huge factor in computing gross profits. The goal is to explore each and every channel to create demand, awareness, increase booking, and thus increase revenue. However, there needs to be the perfect mix across all channels with the best, most affordable solutions. Hotels cannot overspend on a marketing channel to simply obtain customers, there needs to be a balance between acquisition costs and profit.

Calculation: Each channel carries a wide range of distribution costs that can run from 10% to 50% of revenue. These costs are subtracted from the total booking amount to get the MCPB.


16- Direct Revenue Ratio (DRR)


DRR = Direct Booking Revenue / 3rd Party Booking Revenue

This metric measures the percentage of online revenue coming in direct hotel channels versus expensive third-party channels.

In order to maximize profitability, you need to get at least 40% of revenues from an own hotel website/booking engine. Travel agent bookings and other third-party bookings come at a high price and decrease overall profit.


17- Website Conversion Rate


As a hotel’s digital front door, a website influences guests’ impression more than any other marketing activity. According to one research, 97% of visitors to a hotel’s website leave without making any reservation. This means on average 2-3% of total website visitors make a booking directly. This metric calculates the number of unique website visitors that convert into bookings. Revenue originates from potential guests researching a property online.

Converting a higher percentage of visitors is critical to reducing the cost of revenue and MCPB. The conversion rate also provides insight into how a visitor interacts with their website and what measures can be taken to capitalize on visitors’ interest.


18- Return on Ad Spend (ROAS)


Return on Ad Spend = Total Revenue Actualised / Total Spend

Return on ad spend (ROAS) is one of the easiest revenue-based metrics to measure. It is simply the total revenue generated for a specific marketing channel (like PPC) divided by the total spend on that vertical.

Let’s try to clarify this with a simple example; If you spent £10,000 on paid search in January and generated £40,000 in revenue, our ROAS for paid search is £40,000 / £10,000 = £4

So, it means that for every £1 spent, we generate £4 in revenue. For some businesses a £4:1 ratio is outstanding. Others will need £10:1 to remain profitable. The difference is mostly based on the profit margins of the product or service you are selling. At a basic level, big margins mean that you can afford a low ROAS and small margins mean you need advertising costs to be low (on a percentage basis) so your goal will be a higher return on ad spend.


Goals and job role will help hoteliers determine which metric (or combination of metrics) makes sense for them. Whatever the case, the goal remains the same: increase revenue and profits while decreasing costs.


Understand demand patterns. Since hotel demand is essentially inelastic, it is important for hoteliers to thoroughly understand customer consumption patterns. By understanding demand patterns, hoteliers can then implement strategic pricing policies that allow them to charge more than their competitors and still fill rooms. Understanding demand also means that hoteliers don’t have to aggressively discount rooms during slow demand months (potentially eating into profits if costs outweigh revenue) since they will be covered by revenue brought in during peak season.


This concludes my article on “18 Methods for Measuring and Improving Hotel Performance” series. I have added downloadable free Excel file on our "Resource Hub" which called “Revenue Management KPI Calculations” and its easy calculation samples for your use. Please visit hospitalitycode.com/resource-hub to download.


Please follow me on www.hospitalitycode.com for my articles on various areas of Hospitality business, trends and interpretation methods.

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