What Is Revenue Per Available Room (RevPAR)?
Revenue per available room (RevPAR) is a metric used in the hospitality industry to measure hotel performance. The measurement is calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate. RevPAR is also calculated by dividing a hotel's total room revenue by the total number of available rooms in the period being measured.
- Revenue per available room (RevPAR) is a performance measure used in the hospitality industry.
- RevPAR is calculated by multiplying a hotel's average daily room rate by its occupancy rate.
- RevPAR is also calculated by dividing total room revenue by the total number of rooms available in the period being measured.
- RevPAR reflects a property's ability to fill its available rooms at an average rate.
- An increase in a property's RevPAR does not necessarily mean greater profits.
An increase in a property's RevPAR most likely indicates an improvement in occupancy rate.
Understanding Revenue Per Available Room (RevPAR)
RevPAR is a metric used in the hospitality industry to assess a property's ability to fill its available rooms at an average rate. An increase in a property's RevPAR means that its average room rate or its occupancy rate is improving. However, an increase in RevPAR does not necessarily mean better performance.
RevPAR fails to consider the size of a hotel. Therefore, RevPAR alone is not a good measure of overall performance. A hotel may have a lower RevPAR but still have more rooms that earn higher revenues. In addition, certain larger rooms (i.e. penthouses) may overcompensate for lower quality rooms that are not being checked or are unavailable.
Like other financial metrics, RevPAR is best suited as a comparison tool. A hotel can compare its own RevPAR statistics over time to see whether the metric fluctuates with seasons or changes due to consumer preference. In addition, RevPAR can be used to compare against other hotels in the area to get a better sense of how one hotel may be performing compared to other. Keep in mind that this financial performance is limited to just revenue and does not consider expenses.
It may be difficult to compare RevPAR with other hotels because the revenue and occupancy information may not be readily available. Therefore, management must be prepared to set internal RevPAR targets.
How to Calculate RevPAR
There are two ways to calculate RevPAR. First, hotel management can take the total amount of room rent revenue and divide it by the total rooms available to have been rented. Note that the total rooms available includes rooms that were available but were not occupied for this calculation.
RevPAR=Number of Rooms AvailableTotal Revenue
Alternatively, hotel management can calculate RevPAR by taking the average daily rate of revenue and multiply it by the occupancy rate. This method is more appropriate and more accurate for fully-occupied hotels with limited rooms that are unavailable as it is based on total occupancy, not total availability.
RevPAR=Average Daily Rate×Occupancy Rate
Either formula returns a dollar amount that is theoretically lower than the actual actual daily rate (as a hotel can not be or at least should not be occupied past 100%).
How to Improve RevPAR
Increasing RevPAR means a hotel is earning more money for every room it has. There are many ways hotel management can strive to make these improvements.
- Forecast Demand More Accurately. Demand for hotel rooms wax and wane, and hotels must be aware of what is going on around them to better understand consumer trends. In theory, this allows for hotels to charge higher prices during peak demand seasons and lower prices during slower seasons. This information also helps determine if and how much of a discount the hotel should offer for soon-to-be unoccupied rooms for an evening.
- Require Longer Stays. By requiring guests to stay a minimum number of nights, a hotel runs the risk of losing business to hotels willing to offer greater flexibility. However, it also gambles on the opportunity that locking in customers for longer stays will result in a business that would have not otherwise occurred. To incentivize longer stays, some hotels may offer pricing discounts or promotional packages.
- Excel at Customer Service. Sometimes, a financial goal of increasing revenue is best met by meeting non-financial service targets. In this case, guests are more likely to return to a hotel after a great experience and more likely to not award repeat business after a poor one. Though RevPAR may not immediately see a rise as customer service improves, long-term revenue trends may benefit as guests return and recommend certain hotels to their network.
- Leverage technology. Another way to improve RevPAR is to make it as easy as possible for a guest to not only book a room but access all the help and information they need to make the decision to stay at a specific location. This includes having a robust online booking system, central reservation system to most efficiently coordinate bookings, and a helpful location to outline frequently asked questions. This may also entail striving to build out an e-mail distribution list to better communicate and stay in contact with former guests.
Some hotels require a minimum stay should their rooms be booked by a third-party (i.e. Expedia). To compensate for the fees they'll need to pay the third-party booking company, the hotel can earn more money by requiring a longer stay.
Alternatives to RevPAR
RevPAR is a common metric useful in comparing figures across brands and locations. However, RevPAR does not use any profitability measures or information on profits. Focusing solely on RevPAR, therefore, can lead to declines in both revenue and profitability as it does not inform users of expenses.
Many hotel managers prefer to use the average daily rate as a performance measure since it is among the main drivers of hotel occupancy. Therefore, with accurately priced rooms, the occupancy rate should increase, and a property's RevPAR should also naturally increase. Properties may also opt for a similar but slightly different formula by only considering the occupied rooms and measuring RevPOR.
In addition, there are several other "per available room" metrics used in the hotel industry.
TRevPAR (Total Revenue Per Available Room)
Total revenue per available room (TRevPAR) is similar to RevPAR. However, it also includes revenue earned by amenities such as spas, pools, entertainment areas, and restaurants. Though TRevPAR faces the same downside as RevPAR by not considering expenses, it also gives a greater holistic view about what revenue is earned for every available room.
Calculation: Number of Available RoomsTotal Revenue
ARPAR (Adjusted Revenue Per Available Room)
Adjusted revenue per room factors in variable costs and variable revenue. It manipulates average daily rate by subtracting the variable expenses such as the cleaning, utility, water, internet, TV, and supplies expenses. However, ARPAR also factors in additional revenue such as room service that may otherwise be subtracted from RevPAR. ARPAR starts to factor in expenses, though it still omits many overhead costs needed to operate a hotel.
Calculation: (ADR−VCpOR+ARpOR)×ORwhere:ADR=Average daily rateVCpOR=Variable cost per occupied roomARpOR=Additional revenue per occupied roomOR=Occupancy rate
GOPPAR (Gross Operating Profit Per Available Room)
Gross operating profit per available room takes a larger view at an operating property by factoring in even more expenses, especially those for rooms that are not occupied. The downside to GOPPAR is it may include expenses that are not controllable by hotel management.
Calculation: Number of Available RoomsGross Operating Profit
Imagine a hotel has a total of 150 rooms, of which the average occupancy rate is 90%. The average cost for a room is $100 a night. A hotel wants to know its RevPAR so it can accurately assess its performance. The hotel manager can calculate the RevPAR as follows:
($100 per night ×90% occupancy rate)=$90
The hotel's RevPAR is, therefore, $90.00 per day. To find the monthly or quarterly RevPAR, multiply the daily RevPAR by the number of days in the desired period. This calculation assumes all rooms are the same price.
The hotel manager can make key assessments and decisions regarding the hotel property based on the RevPAR. The manager can see how well the hotel is filling its rooms and how wisely the average hotel room is priced. With a $90 RevPAR but a $100 average room, the hotel manager could reduce the average rate to $90 to help realize full capacity.
What Does RevPAR Tell You?
RevPAR is a metric used in the hospitality industry to assess a property's ability to fill its available rooms at an average rate. An increase in a property's RevPAR means that its average room rate or its occupancy rate is improving. Since it tells you the revenue per available room, whether it's occupied or not, it can aid hoteliers in accurately pricing their rooms. Additionally, RevPAR can form the basis for measuring properties against each other.
Where Does RevPAR Fail?
An increase in RevPAR does not necessarily mean better performance so using this alone to measure overall performance might lead to inaccurate results. Also, RevPAR fails to consider the size of a hotel. A hotel may have a lower RevPAR but still have more rooms that earn higher revenues. Additionally, growth in RevPAR does not mean that a hotel's profits are increasing. This is because RevPAR does not use any profitability measures or information on profits.
Should RevPAR Be High or Low?
For almost all hotels, RevPAR should be higher as this indicates a company is earning more revenue per available room. However, there are several things to consider. First, even though the hotel may be able to charge more, RevPAR does not consider expenses and a company may be better suited avoiding certain expenses and charging less.
Second, a hotel's RevPAR should be in line with its strategic plan and business motel. Hotels aiming to be budget-friendly may want to have a fairly low RevPAR; otherwise, they'll be known for their higher prices and their operating model may have failed.
The Bottom Line
The hotel industry often utilizes RevPAR (revenue per available room) to gauge how a hotel's financial performance is going. RevPAR does not measure a hotel's profitability, and some hotels may want to be considerate of not having a RevPAR too high to best match consumer preferences. RevPAR can be used to compare against competitors, track over time, or assess where the hotel can immediately improve operationally.