Occupancy has been seen main criteria of success I hospitality business for a long time (still exist in some cases). I used to look at a hotel during the evening time to observe the number of guest room lights, lively lobby and restaurants and event spaces to determine a busy and successful hotel in old times.
It is still the common metric however, it is not the most important metric when it comes to maximising revenue and profit. You have to consider both “CPOR - Cost per occupied room” and “RevPAR – Revenue per available room” as key drivers of success which provides a balanced approach to operating a successful hotel. If you want to contribute better on the bottom line, some of the indicative metrics for revenue managers to focus on would be ARR/ADR – Average Room Rate which fluctuated by demand, Boking pace (not necessarily occupancy), CPOR and additional incremental revenue potential.
Traditional Occupancy, RevPAR type of metrics are important but not enough as it only shows the rooms and does not consider the bottom line. Therefore, we all need to be more aware and diligent of CPOR, GOPPAR and cost per acquisition metrics. The combination of all of the above-listed metrics make up GOPPAR and our industry continue to evolve from narrow occupancy, RevPAR into more broad metrics such as GOPPAR and cost per acquisition metrics.
Let’s explore this little deeper with an example. Assuming you are running a 250-room hotel with two possible scenarios; Option-1 focuses on occupancy to get 100% with the rate of £80 and Option-2 focuses on rate by achieving 80% and £100 ADR.
As we see here both scenarios make the same revenue and even RevPAR. However, things get interesting when you apply Cost per occupied room. Considering that we sell 50 more rooms in Option-1, it costs additional £1,000 daily to manage your hotel and consequently £365,000 annual. So, even if you make the same revenue, Option-2 will provide annual additional £365,000 profit on the bottom line.
If you have a good demand and running high rate and high occupancy strategy, you make more money and profit and nothing to complain about. However, bear in mind that applying this strategy in the long run, you will have a lot more cost associated with refurbishments and if you cannot invest in than you will find yourself in a run-down hotel and end up selling rooms cheap with high occupancy. This is what happens most of the hotels in the market.
I have given a static business example, however, we all know that nothing is static in hotel business depending on location, venue, demand, seasonality etc dictates how we sell our room stock and finding the balance is important. There are always certain peak days preventing stay through availability, therefore, DOW (Day of Week) analysis really important. Always remember, you could lower your rates during certain city-wide events to sell out, but if you maintain your rates you may reach additional occupancy with a better return but not necessarily peak occupancy.
Impact of shifting Business Mix
To shift from high-volume bookings to high-profit bookings, you should consider shifting the business mix. In an ideal world, you can raise prices across all segments to achieve this but it is not always possible due to several different reasons.
Some rates are contracted for a long-term (cross-year) which you cannot be able to change it and also you do not want to have a risk of losing business from all segments at the same time. Therefore, the right approach is shifting and remixing the business segments.
How do we do that? As I mention above raising the rate is not always the answer. Therefore, you need to choose a low rated segment to start with. Instead of having a low-rated wholesale piece of business, you can try to shift this inventory of rooms to higher rated segments.
Let’s have a look at above example at the same hotel with 80% annual occupancy. In our scenario hotel has higher base business with Discount segment (60%), however, it is also the lowest ADR segment.
If we keep the number of rooms sold is the same and shift 10% of Discount segment business to higher rated and mainly direct booking segment of RACK; occupancy will be static. As you can see on Difference column ADR will increase further +£3.5, RevPAR +£2.8 and Total revenue will also increase further +£255,500 annually.
Discount segment mainly uses 3rd parties while the rack is mainly direct bookings which makes a significant contribution to acquisition cost as there is no commission on direct bookings. This means we will have the same number of rooms to serve, less commission to pay and additional revenue. This makes a significant difference to the bottom line.
It is important to understand the demand potential for each segment and channel, and rather than upsetting different segments chose a battle that you can win and if the things do not go your way, you have a good chance to recover utilising other segments and channels.
In the past, we used to have only our own historical data to analyse, compare and determine demand other than usual city-wide known events and periods. There are several tools available today for revenue professionals to analyse future demands, denials for their hotels as well as their competitors and same category of hotels within the city. They might be able to track Pace, the origin of business, segments and determine the right strategy to fit the business needs while arranging an optimum business mix for their hotels.
Remember, playing with rate and occupancy is the oldest game in the books and as your competition watching your rates closely, they can easily detect your strategy changes and counter-act to damage you and get a bigger piece from the pie. When you optimise your business mix with a right one, no one will detect the change and without they notice you will gain a bigger piece of your market share pie.
Hospitality Code Business Management and Consultancy provide hotel owners, management companies and investors with professional strategic management services, creating a value-adding customisation of deployment including total revenue, operations, reputation and financial management solutions as well as training, consulting, pre-opening, redevelopment and renovation services for hotels, restaurants and high-end residential units.
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