The Data is Available But What Do We Do With It?
Over the years I have been privileged to work with many highly knowledgeable financial experts, but Ben Campsey, Director of Finance for The Umstead Hotel and Spa in Cary, NC, is truly exceptional. He has created business management and metric tools that really help spa and hotel/resort managers to operate spas that are profitable in and of themselves but also are economic contributors to the “core” business of room and real estate sales. Prior to being at The Umstead, Ben was involved in financial management and development for Canyon Ranch. I asked Ben to share some of the metric tools that have the greatest impact on managing profitable spa ventures. In addition, Ben has defined the terminology that will support consistency and uniformity in measuring a spa’s performance. All too often, spas are asked to measure something but are not given the appropriate definition or formula with the result being that spas are interpreting, collecting or measuring data in different ways; therefore, when trying to do comparison research, the findings are not always accurate or helpful.
Hoteliers utilize ADR as a measurement of revenue per occupied room. The corresponding metric in the spa industry is Average Treatment Rate (ATR). This statistic is greatly influenced by the mix of service offerings, duration of services and the pricing structure of services, i.e. is service charge/gratuity applied automatically. This metric will become more meaningful as dynamic pricing becomes more prevalent in the industry. Analyzing ATR combined with Treatment Room Utilization (see below) by day of the week and hour of the day will allow you to increase revenues by applying discounts at points of low demand while yielding higher rates at peak demand.
Treatment Room Utilization
Hoteliers should think of this as occupancy. A 1% point increase or decrease in room utilization is worth about $50,000 – $75,000 in revenue per year in an average size spa. Treatment Room Utilization (TRU) is a critical measurement of demand against your maximum available inventory and should be looked at on a service-by-service and day-by-day basis. Spas that do a large volume of treatments should even consider evaluating this information on an hourly basis. Most spas operate at 35% – 40% treatment room utilization with the best performing spas offering discounts, longer services/upgrades and added value at low demand periods.
Analyzing Therapist Productivity (Service Hours Performed/Therapist Hours Available) has several benefits often overlooked by spa managers. Therapist Productivity can be used as a measurement of demand. A high (>85%) Therapist Productivity over time generally means that there is not sufficient availability and guests are being turned away. Management should not assume that higher Therapist Productivity is better. Maximizing Therapist Productivity requires a delicate balance of ensuring that you have staff available for short lead bookings and not overstaffing. It generally only takes a single treatment to justify the hourly payroll for an entire day of a staff member. Therapist Productivity below 70% signals over-staffing and can have a significant financial impact if therapists have any kind of hourly compensation.
As an example assume the following:
- - 14 treatment rooms
- - Opened 12 hours per day, 365 days per year
- - 40% Treatment Room Utilization (12 hours/day x 365 days x 14 treatment rooms x 40% Treatment Room Utilization = 24,528 service hours per year)
- - The spa pays therapists $10/hour for all hours worked plus a productivity incentive (commission) when a service is booked
- - Payroll taxes and benefits are 30% of payroll
- - ATR (Average Treatment Rate) is $100
If we targeted an 80% Therapist Productivity, we would allow for payroll hours of 30,660 (24,528/80% target Therapist Productivity) per year. If we did not manage effectively and only achieved Therapist Productivity of 70%, we would have used 35,040 hours for the year. This is an increase of 4,380 hours and $56,940 in gross operating profit! (4,380 hours x $10/hour x 1.3 payroll taxes and benefits)
As a further example, the chart below depicts a spa’s performance over a period of time. The Therapist Productivity A (shown by the solid blue line) increases and decreases along with the Room Utilization (in red). At first glance the relationship makes sense, perhaps even seeming optimal. However, it is actually Therapist Productivity B (dotted line) that is optimal as it is evident that staffing levels are being adjusted based on business levels on a consistent hour-by-hour basis. Under Therapist Productivity B there is always someone available to capture the impulse buy.
As a general rule, if your spa does not pay an hourly rate, you should be focusing on Therapist Productivity solely as demand measurement and concentrating on ensuring service availability. If your spa does pay an hourly rate, managing to a Therapist Productivity rate of 75% – 85% by treatment category strikes a good balance between profitability and availability.
* Revenue per Available Treatment Room
Revenue per Available Treatment Room (RevPATR) corresponds to the hotel’s RevPAR, taking the total amount of service revenue generated divided by the number of treatment rooms. RevPATR can be used to easily understand the revenue impact of building a spa, adding additional treatment rooms to a property and helping developers and asset managers compare their property to the competition. Taking it one step further, understanding the fixed and variable expenses of the spa can help calculate the Gross Operating Profit contribution (GOP is Revenue less COGS and Direct Operating Expenses) per treatment room. For example, assume 14 treatment rooms are generating gross operating profit of $300,000 per year. We forecast that adding 2 rooms will generate an additional $250,000 in revenue per year, and we believe our variable cost on this revenue is 50%. Therefore, our gross operating profit on these rooms is $125,000 or $62,500 per room.
* Revenue Per Guest
Hotels and resorts calculate the Average Revenue per Guest for all outlets on a property. This helps evaluate the average spend per guest and, over time, helps determine whether adding new outlets will result in new revenue or displacement (guest spends the same money they would have otherwise, just in the new outlet).
* Revenue Per Square Foot
Revenue per Square Foot is used to understand the revenue contribution of different assets to the property on a square foot basis. For example, a developer would evaluate the cost per square foot to add a spa and the on-going revenue per square foot versus a restaurant, retail outlet, etc. When using this metric, it is important to define whether or not this is indoor, air-conditioned space.
* Spa Revenue Per Occupied Room
Spa Revenue per Occupied Room (SRevPOR) is a high-level metric easily reviewed alongside the same term (RevPOR) in the hotel. SRevPOR is calculated by taking direct spa revenue divided by occupied hotel rooms. For the basis of this calculation, spa revenue should only include revenue derived from treatments, product sales, facility fees and other ancillary sales (spa revenue should not include any lift or allocations from room revenue, resort fees or membership dues). SRevPOR in the spa industry generally falls in the range of $40 – $70; however, it can vary greatly depending on the size of the spa and magnitude of local business among other factors. An effective chart to help determine the range of SRevPOR as well as many of the metrics previously described follows:
We as an industry have developed to the point where optimal growth can only occur by fully understanding the specific drivers of the spa business model. Furthermore, in order to be able to evaluate performance, we must adopt a uniform set of performance metrics. The metrics listed above can be used by investors, asset managers and hotel operators to assess the performance of their spa, as well as determine areas to focus on to reach maximum profit potential.
The Spa Report: The Answer to Financial Benchmarking
Several financial, hospitality, spa and software programming experts have gathered together to develop a comprehensive spa financial benchmarking program. Several spas have already gone through a preliminary beta test and more are currently participating in a pilot test group. The feedback has been excellent.
As a result of this, an independent research company has been formed to launch a real-time, web-based data analysis program which will be known as The SPA Report… The Spa Industry’s “Spa Performance Analysis”.
The spa industry needs more economic accountability. Spa directors need to be able to accurately and consistently measure, monitor and manage the spa’s performance and see how it compares to that of other spas within their chain and the spa industry. Asset managers, lenders, hotel operators, etc. need reliable and realistic information regarding the spa’s economic viability as a business and its contribution to the “core” business.
Accurate spa metrics will help many spas go from being under-performing “lazy assets” to business-oriented “profit centers.” If the spa industry is to grow in terms of either more development or more economic contribution, it is necessary to “de-bunk the mystery of spa metrics” and to focus on the “business of spas.”