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Profit Management vs Revenue Management, what hoteliers need to measure?

Jan 9, 2020  By 

Your property bottom line is defined and measured for success if you as the property revenue manager implement a good revenue management strategy with the help of other departments in your property. The strategy of implementing good revenue management has been tried and approved of success is true through the regular revenue management measurement, but there is another and more efficient way to influence your property yields. We call the strategy profit management which determines a property's net revenue after taking into consideration the costs of acquisition by channel, opportunity costs, and target audiences.

For hotel owners looking to grow their business, a robust revenue management strategy is of the utmost importance, helping to optimize business results. However, under the broader revenue management umbrella, many smaller strategies can help to facilitate growth, which turns to be the profit management, even in a competitive environment; it is possible to make changes that will increase your bottom line profit. By using creative and proactive solutions, you can reduce your operating costs and increase revenues without disrupting your day-to-day operations.

At its most basic level, RM is about a hotels ability to segment its consumers and price and control room inventory differently across this segments.—in essence practicing some form of price discrimination. In many instances, using RM in the hotel industry has shown and approved that it can increase revenue by 2 to 5 percent. The high fixed cost and low variable cost typically associated with the hotel industry means that a large portion of this revenue increase flows directly to the bottom line. As an owner or manager, you must understand what RM is, how it works, how it is typically organized, and how you measure its success. In addition, you must know the right questions to ask to help ensure that your property reaches its revenue potential, needless to mention that in the role to encompass all revenue stream and that meant understanding how to turn on and turn off business. Basic Revenue Management such as applying the length of stay restrictions or restricting channels came into play but perhaps more importantly, Revenue Managers started to be seen as a central role and one, which sales and marketing should look to for support.

Revenue Managers started to play an integral role in all decision-making i.e. which packages marketing wanted to promote; when Pay per Click campaigns were released; which display ads were required; which corporate contracts sales actually allowed; which sales channels and OTAs the Sales team signed up for; which GDS channel was used; control of offline marketing; which tour groups were taken ……..etc , the list could go on and on, but one stop should be raised, up to when the revenue manager will be focus on revenue stream, it is time to understand how revenue manager can look into profit management and not only revenue management .

Common Revenue Management Strategy and Calculation

While forming revenue management strategies or budgeting across the hotel industry, executives and decision-makers make assumptions about the following factors that need to be achieved

1. Hotel Occupancy level
2. Hotel ADR and RevPAR
3. Key performance index vs Competitive Set
4. Market segments / Customers
5. Channel Acquisition Costs.

In a perfect revenue management world, we all go back and use the basics of it “selling the Right product (Rooms or F&B) to the Right Customer at the Right Time at the Right Price on the Right Distribution Channel “.

Let us examine how to calculate revenue and profit management at the same time as the below example:-

Here, the opportunity costs of selling a room to a group versus on OTA 2 is $20. This assumes that the room night that would have sold for $80 to a group would have sold on OTA 2. However, an analysis of the opportunity costs between channels will help you make databases decisions around how much time and energy to spend on your various channels and how much profit can be generated.

Determining opportunity costs associated with each channel will also allow your property to take informed risks. There are no guarantees that your most profitable channel will distribute rooms as successfully as less-profitable channels, simply a carefully considered profit management strategy will help your property optimize channels, attract the right customers, and simply put, make more money, noting that the payoff of integrating a total revenue management strategy can be great, leading to heightened revenues across all your hotel's services and products. In the end, it is all about understanding your guests (data management), your segmentation and to place the
reasons for implementing total revenue management at the center of your decision-making process.

After your understanding of the different type of cost, you already calculate how to set your pricing strategy based on your cost, now knowing your break-even point is important as well because it tells you how much revenue (sales) your hotel has to generate to cover expenses, it is that golden number your hotel must surpass to make a profit. Anything above this amount will provide you with extra cash to reinvest in your business and/or pay your salary. Therefore, revenue managers will need to consider all revenue streams and have a better understanding and inclusion of cost factors than they have in the past. Alongside traditional operating costs of the hotel, revenue managers will need to calculate and include their distribution costs, this is the point where the revenue manager turn to profit management, and a valid question might arise: Which skills do revenue managers need in order to make effective decisions in an operational environment that will maximize both revenues and profits over different demand periods?

What is Revenue and Profit Management Role?

Ideally, the ultimate goal for any hotel is to increase the top line (sales and revenue) and decrease the expenses (variable and sometimes fixed costs) to get the biggest increase in the hotel's bottom line profit without touching the guest and staff satisfaction. When a hotels occupancy rates and RevPAR rise, it is usually a good indication that management is executing well, and to achieve such a goal the focus needs to be on both revenues and costs. Hotels can boost their bottom line by increasing revenues or decreasing costs, this is why running a successful hotel is an ongoing challenge that requires the combined forces of both management and staff and I would add the hotel customers.

The Most Important KPIs and Metrics

Measuring hotel performance is an extremely important part of the management process. For years, one of the key performance indicators of hotel performance has been RevPAR, This metric, although it is useful, but it is lacking because it does not measure the profitability of your hotel, and not taking into consideration cost, it only consider the top-line performance, If you look at RevPAR from a revenue point of view you could think you are doing really well, but if you are ignoring cost of acquisition then you are just driving the asset into the ground. When analyzing a hotel investment, the priorities should be on net cash flow generated and ROI (return on investment), which stems from profitability and RevPAR only captures half of the equation.

Recently, profitability measures have been picking up steam as useful tools to evaluate hotel performance.

One key to profitability is getting everyone on the same page with your most important hotel KPIs and metrics. There may not be one Holy Grail KPI, but TRevPAR and GOPPAR are two metrics that should be on every hotelier’s radar when it comes to driving revenue and profitability.

TRevPAR ( Total Revenue Per Available Room ) measures the property’s ability to generate revenue across all operating departments and provides insight into the overall revenue story, where TRevPAR focuses on revenues.

TRevPAR is calculated by dividing the total net revenues of a property includes room revenue, food, and beverage (F&B) revenue, and other revenue divided by the total available rooms.

GOPPAR (Gross Operating Profit per Available Room) measures the operation’s ability to convert revenues to operating profit. It gives greater insight into the actual performance of a hotel than the most commonly used RevPAR, as it not only considers revenues generated but also factors in operational costs related to such revenues. It is a particularly useful metric for hotel owners because it gives them an idea of the bigger picture in terms of how valuable their hotel is as an asset.

The formula For GOPPAR is Gross Operating Profit / Available Rooms

NRevPAR (Net revenue per available room), is another revenue management KPI that looks at the amount of revenue generated on a per available room basis. However, NRevPAR focuses on net revenue, which means distribution costs associated with selling a room are deducted from room revenue first before the number of available rooms in the hotel divides that figure. This metric is similar to RevPAR, except that it factors in the net revenues (meaning that it accounts for distribution costs, transaction fees and travel agency commissions).

NRevPAR = (Room Revenue – Distribution Costs) / Number of Available Rooms.

EBITDA (Earnings before interest, taxes, depreciation, and amortization), is an increasingly important KPI used to demonstrate the day-to-day operating profitability of a hotel, after removing variables cost.

By tracking trends in both TRevPAR and GOPPAR, hoteliers can develop strategies based on top- and bottom-line performance measures, which can improve overall profitability, it is important to have an understanding of how the cost of acquisition is measured. This comes back to using analytics tools that encompass different profit centers, hence Hoteliers need to be focused on both the top line — occupancy, ADR, RevPAR, and TrevPAR — as well as the bottom line — GOP, GOPPAR, and EBITDA. Having an understanding of all of these metrics is vital to understand your performance as well as your position in the market.

Remember what gets measured gets done; as regular measurement and reporting keep you focused — because you use that information to make decisions to improve your revenue and profit. Your most critical measurements called KPI – Key Performance Indicators- and by Understanding the difference between a measure and a metric that will help you to simplify your strategy, i.e. a measure is one quantitative number that counts something. e.g. We made $100,000 profit last quarter. A metric gives you more information because it compares the measure to some other baseline. e.g. We made $100,000 profit last quarter, but we made $50,000 more than the same quarter last year.

Regardless of the size of your property or the property type, running these metrics and paying attention to them can significantly improve your performance! No matter which metric is used, the goal stays the same; to increase revenue and profits!

Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com

About Ahmed Mahmoud

Ahmed Mahmoud

Ahmed Mahmoud has more than 15 years experience in hospitality industry and business administration, Ahmed began his career early by holding a variety of management positions with such top hotel chains as Accor Hotels, Hyatt International

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