Understanding Hotel RevPAR

30th Dec 2011

NB: This is an article written By:  William Reed

Everyone’s heard about RevPAR, but do you really know exactly what it is?

RevPar is one of the most important measurements in the hotel industry today. RevPAR is an acronym that stands for Revenue Per Available Room. This is different from average rate in that it is a measure that divides revenue by the number of available rooms, not the number of occupied rooms. It is a measure of how well the hotel has been able to fill rooms off season, when demand is low even if rates are also low, and how well they fill the rooms and maximize the rate in high season, when there is high demand for hotel rooms.

For instance, a hotel with 500 rooms will have 182,500 available rooms in a year (500 rooms times 365 days in a year). If that same hotel ran a 75 percent occupancy, it would have 136,875 occupied rooms that same year (182,500 available rooms multiplied by 75 percent). Let’s say in a given year that this hotel has room revenue of $27,375,000. Its average rate would be $200 ($27,375,000 divided by its 136,875 occupied rooms). The hotel’s RevPAR would be $150 because the revenue would have been divided by the 182,500 available rooms. RevPAR is a better measurement because it shows how well the hotel was able to fill rooms (regardless of price) in low-demand periods, and how well they did filling rooms at the highest rate possible when demand is high.

What is the difference, you ask? A hotel could have sold all its rooms during the peak and shoulder seasons at $200 to get an average rate of $200, and left the hotel completely empty off season when it needs occupancy to pay for fixed expenses (salaries, debt service, etc.) when it could have sold some rooms at a value rate of $100 each.

Who looks at RevPAR? A lot of people, including hotel owners, lending institutions, and management companies. The biggest reason that it is so important is that hotel owners use it as a benchmark to see which hotel management company (Four Seasons, Ritz, Fairmont, Starwood, Marriott, et al.) produces the highest RevPAR in a given market. This helps them to select which company they hire to manage their hotel.

How does this affect meeting planners? As a meeting planner, you will benefit by understanding your meeting’s effect on a hotel’s Rev PAR – depending upon whether you book it at Hotel X or if you book it at Hotel X’s competitor – which will make you a better negotiator.

Consider if you will the effects the following scenarios would have on RevPAR:

1. A meeting planner is booking a 1,000-room-night meeting in high season. Both Hotel X and Hotel Y are asking for $225 per room. Both hotels know that there is so much demand in the city over these dates (from leisure and business travelers, who will pay $300 per room) that they will sell out regardless of whether the group books at their hotel. In serious negotiations, Hotel X remains firm at $225 while Hotel Y lowers its rate to $200 so that it still stays above its average rate goal.

The meeting planner selects Hotel Y. What has happened to each hotel’s RevPAR, assuming that both hotels had already had $27,375,000 in room revenue that year?

Hotel X’s RevPAR for the year has been helped by the group’s selection of its competitor (can this be true?) because it can sell all its rooms to other customers paying $300 (it knows it will sell out because it is high season). This hotel sold those rooms at $300 each to other customers, so its revenue on these rooms was $300,000 ($300 multiplied by 1,000 room nights). This gives them $27,675,000 in total revenue, which, when divided by the same 182,500 available rooms, gives it a RevPAR of $151.64.

By “winning” this business, Hotel Y will not look so good when its owner compares its RevPAR to its competitor, Hotel X, because it will lose revenue for each of the rooms sold to the group at $200 when it could have sold them for $300 to someone else. By booking the meeting, it will add $200,000 to its revenue, for a total of $27,575,000, which, when divided by the same number of available rooms of 182,500, gives it a RevPAR of $151.09.

2. Now, let’s say the same meeting planner is interested in holding, in addition to the meeting held in high season, a meeting of the same size in a month when there is little or no demand. Both hotels know that if they do not sell those rooms to the group, they will sit empty. Hotel X says it will do the meeting for $125. Hotel Y agrees to match their price at $125. The meeting planner decides to “reward” Hotel Y with this meeting because Hotel Y gave the group the lower rate in high season in spite of what it did to the hotel’s RevPAR.

Now, even though Hotel Y had a lower RevPAR by booking the first meeting, it will have a higher RevPAR overall because it has captured revenue when the rooms would have sat empty, which more than makes up for the revenue shortfall it experienced in high season. It will add $125,000 to its room revenue, for a total of $27,700,000, which, when divided by the same available rooms of 182,500, gives it a RevPAR of $151.78.

How does this help you? If you are finding it hard to get rates lowered in peak season, you might want to reassess the value of those off-season meetings. They could be bargaining chips that will help you get a lower rate during high season if you award them to a hotel during its low-demand times, because it will make them look better in RevPAR. If this meeting planner decided to place the off-season meeting into Hotel X because it couldn’t afford it during high season and now its rates are comparable, it would really make Hotel Y’s RevPAR look bad for being cooperative in lowering their rates in high season! In this case, the annual RevPAR would be as follows:

Hotel X: $152.33

Hotel Y: $151.09

While this may seem like a small difference, remember that this is only one customer. Imagine the differences after all 52 weeks of a year and hundreds of different customers.

Once you understand how RevPAR works, you’ll have a powerful tool for rewarding hotel partners who are flexible with you in a seller’s market by giving them your low-season business in return for high-season flexibility.

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