The 100% Occupancy Dilemma for Hotels, what Hoteliers Need to Achieve?

Every hotelier is familiar with and knows that Occupancy is the percentage of available rooms that were sold during a specified period of time. Occupancy is calculated by dividing the number of rooms sold by rooms available. Occupancy = Rooms Sold / Rooms Available

Occupancy is one of the three main indexes used in the science of Revenue Management (along with ADR and RevPAR). The three main misconceptions about occupancy that are still prevailing in the hotel industry are:

• Occupancy should be the target for maximization
• Occupancy should be forecasted either within the hotel budget or forecast.
• Occupancy should be the indicator and trigger for price adjustments.

Correlation between, ADR, RevPAR and Occupancy %

A high ADR isn’t worth much if a hotel is empty. Conversely, high occupancy and a low average rate (heads in beds) rarely maximises an asset’s potential. Therefore, an important KPI is RevPAR, which is the product of occupancy and average rate, expressed as a monetary amount.

While occupancy and average rate both tell a story about a hotel’s performance, the benchmark indicator of that performance is RevPAR which multiplied by the number of rooms available provides rooms revenue – the top line revenue in the most profitable department of a hotel. In other word maximizing the RevPAR, should be the ultimate gold for owners and hotel managers.

While RevPAR indicates the performance of a hotel market, managing for RevPAR involves fundamental and yet complex economics. Price elasticity of demand − or ‘the responsiveness of the quantity demanded of a room or service to a change in its price’− is a measure of desirability. The reality of the hotel business is that too high a price will likely displace demand.

The same applies to the wider market. As a result, revenue managers need to tinker with their pricing policies and tactics to ensure that demand is not displaced, but captured at the highest attainable room rate. This might sound easier than it is. So the aim role of revenue management, is optimizing the intricate relationship between occupancy and average rate.

Pricing Strategy, Length of Stay and Occupancy %

Price and duration stay, or length of stay, are the two fundamental levers for revenue management. Successfully striking a balance between the two by managing length of stay is how you get your hotel closer to full occupancy.

Hotel and revenue managers apply what is called ‘dynamic pricing’ to alter the price point of a room with regard to the demand (booking pace) for a certain future date. The challenging part is that there are different rates available across different segments/accounts/channels and that previous- year performance is a poor indicator of demand in the current year. On top of these, there are factors to consider such as competitor pricing, group bookings/room blocks, seasonality, special events and macro market/economic. In the end it is a thin line that managers must follow in real time, never fully knowing which side they should be.

The Optimum Occupancy

One of the main reasons why RevPAR is more meaningful than occupancy lies in the cost structure of the hotel business. Fixed and variable expenses are the two principal categories of financial liabilities in a hotel operation. Revenues in a high occupancy scenario can help to cover a share of fixed expenses.

However, high occupancy will also increase variable expenses. Revenues in a high average rate scenario might not be sufficient to cover fixed expenses, given the low occupancy. It is in a high RevPAR scenario where an optimum balance between fixed and variable expenses is created.

The cost structure varies from market to market (and hotel to hotel) and thus the optimum occupancy level can vary; however, it will never be at or near 100%.

Very low occupancy levels (50-60%) do not allow hotel management to increase average rates, as properties need to attain their minimum occupancy levels. Given hotels’ occupancy ‘challenge’, corporate accounts are in a stronger negotiating position, given the abundant choice and price competition. High-profile corporate accounts are among the highest-paying guests in hotels, where room rates can be heavily discounted to build occupancy.

Achieve your RevPAR Goal by Controlling your Occupancy

You might experience few slogans widely known in hospitality industry such as “First Come First Serve “which was one of the basics primary strategy in the hotels industry long time ago believing it is still implemented by many hotels, or the other strategy “Heads in Beds”, which was just to fill the hotel rooms regardless the number of nights stay, day of the week arrival ……..etc.

In both cases there were no calculation for average length of stay, how this guest will affect the occupancy level in different days, but with the implementation of Revenue Management there are several different types of length-of-stay controls.

Take Your Chance

One thing you might want to use during a busy period is called a “minimum length of stay.” Let’s say you have four busy nights and that you’re going to have some slow periods, within that time there will be a three to four night (i.e. Sun- Mon- Tues) conference around your hotel, and you already start to receive reservation requests for that period, You’re trying to decide which reservations to accept at the beginning of those four busy nights. If you have people who are willing to stay four nights, you’re going to be a lot more open to having them at your hotel than someone who’s only willing to stay one or even two nights.

Based on your knowledge of the conference schedule and on the books data along with same time last year trend and pick up , Of course, you are trying to leverage length-of-stay controls as a delicate proposition: The last thing you want to do is turn away demand to the point where you end up with empty rooms.

To increase your occupancy rate, you can employ strategies using length of stay restrictions as below:

• Minimum length of stay when you anticipate a period of high demand followed by low demand. You accept longer duration stays and reject shorter duration stays for arrival. It helps you to increase occupancy during the slow period that follows (so that stays in the high demand period ‘spill over’ into the less demanding period).
• Maximum length of stay when you expect to be able to sell out rooms at higher rates. You don’t accept reservations at specific discounted rates for multiple night stays extending into the sold out period. Guests who want to stay beyond the maximum length of stay period can be charged rack rate for subsequent nights.
• Closed to arrival dates when you have very high demand, so you expect to reach maximum occupancy through stayovers as opposed to new arrivals. You don’t accept reservations for arrivals on the day in question, and only allow guests staying through from previous nights.

For better understanding how to control your hotel occupancy level to reach to the maximum revenue, we highly recommend you to examine the Fill Your Hotel simulation, used in eCornell’s course, “Forecasting and Availability Controls in Hotel Revenue Management.