By Dan Skodol, Vice President of Revenue Analytics at Rainmaker
When people think of all-inclusive resorts, they may conjure up images tied to bland buffet food, endless banana daiquiris, and conga lines of partying singles dancing around the poolside – all for one budget-conscious package price. Today’s all-inclusives still tempt travelers with comprehensive packages that include meals, lodging, and entertainment options. But the all-inclusive business model has evolved significantly from its 1950s origins.1
Today, gourmet meals are often made from sustainable, locally sourced ingredients, and served along with handcrafted cocktails made from top-shelf spirits. Spacious guestrooms are decorated with high-end furnishings. And sophisticated entertainment options are designed to appeal to a new demographic of multigenerational families, and couples seeking luxury vacations, adventure, romance, or health and wellness.
Across the board, the all-inclusive model is gaining strength,2 with guests showing increasing willingness to pay over and above their initial package purchase for authentic experiences, one-of-a-kind activities, and excursions that enhance their vacation. This has led to unprecedented opportunities for all-inclusive hotel owners to capture incremental and ancillary revenues. And this paradigm shift brings with it a necessary shift in revenue management strategy.
The narrow view of focusing on rooms and package revenue is no longer relevant in the marketplace. To maximize revenues and increase profits, all-inclusive hotels must move beyond the traditional metric of revenue per available room (RevPAR), to incorporate total profit per guest.
What’s Wrong with RevPAR for Maximizing Profit
The RevPAR formula (Rooms Revenue/Rooms Available) represents revenue generated per available room, whether that room is occupied or not. Because of RevPAR’s industry popularity, it can be useful when it comes to benchmarking against your aggregated competitive set’s performance. But for optimizing hotel profits, RevPAR misses the mark in a number of ways.
For one thing, RevPAR doesn’t take costs into account. Commissions may vary based on channel. There are different distribution costs depending on how the reservation is booked – for example, a guest who books using a travel agent typically costs the hotel more than a guest who books direct. In addition, higher guest expectations are driving a more competitive market, with all-inclusives now providing an increasing number of ancillaries for purchase beyond initial packages. RevPAR doesn’t consider any non-package income a guest generates from add-on amenities such as spa services, dining upgrades, golf, or access to private beaches.
For example, in another two-guest scenario, imagine that both guests’ package rates and acquisition costs are identical. Guest A stayed once and made no significant ancillary purchases. Guest B, however, stayed three times in one year, and spent extra on spa services, private beachside dinners, and golf lessons. The additional spending will not show up in any RevPAR metric despite the boost it would provide to the hotel’s bottom-line.
Moreover, based on Guest B’s behavior, it’s likely he will become a repeat guest, increasing his lifetime value and reducing his costs, which can be amortized over the total number of stays. Guest B’s profit potential over time is superior to that of Guest A, and while Guest B’s two additional hotel stays will eventually show up in RevPAR in the form of increased occupancy, RevPAR fails to tell the whole story. Having more Guest Bs and fewer Guest As will benefit the property’s profitability in the long run and we need to identify the right metrics that are more closely tied to that bottom-line impact.
Modern all-inclusive resorts now have huge revenue opportunities beyond package revenues, and metrics such as RevPAR are not sufficient for measuring profitability going forward.3 They must be used in conjunction with other key metrics, such as GOPPAR and Total Profit per Room.
The Rise & Rewards of GOPPAR and Total Profit per Room for All-Inclusives
Other key metrics that reflect non-rooms profit and overall profit can simultaneously incorporate occupancy, rooms and package revenue, guest spending habits, acquisition, distribution, and retention costs, and shopping behavior at all resort profit centers into the revenue management equation.
One metric growing in popularity is gross operating profit per available room (GOPPAR).4 GOPPAR is defined as total gross operating profit (GOP) per available room per day, where GOP is equal to total revenue less the total departmental and operating expenses. GOPPAR takes RevPAR a step further, utilizing total room revenue and subtracting total operating expenses, including variable costs.
Without this information, crucial pieces are missing when trying to optimize revenues and determine overall profitability. Another benefit that arises out of measuring GOPPAR is that the same principles of strategic revenue management that apply to RevPAR can be applied to all revenue-generating outlets. This allows you to move beyond optimizing package rates to optimizing revenue from all ancillary products and services guests use while on your property.
Once you ensure that you are yielding your available inventory based on total profit, it becomes time to evaluate the mix of business that is staying in the rooms by understanding your market segments and how they differ. Total Profit per Room backs out occupancy from the equation, allowing you to generate metrics at a guest, room, or segment level. Total Profit per Room can be defined as rooms plus ancillary revenues generated by guests in occupied rooms, less the associated variable costs, divided by the number of occupied rooms.
Asking “for this segment, what is my total revenue or profit per guest, or room?” becomes valuable as your revenue management efforts aim at forecasting the available demand for future dates and help you identify the most profitable business mix in constrained situations. Even in unconstrained situations where you are not filling every hotel room, it can help inform your marketing efforts and achieve the best ROI on marketing dollars aimed at generating additional occupancy. Getting at this total guest value is something you cannot do using a per available room metric, since you can’t determine which rooms are available for which segment. Once you understand the value of each guest segment, your ability to shift towards higher value guests is maximized.
For today’s all-inclusive guest, it’s all about customized experiences. Examining revenue on a per-guest basis provides a vehicle to a better understanding of guest behavior and preferences, which can have a profound effect on future income streams.5 With the all-inclusive model, the less time a guest spends on property, the higher the profit potential. By analyzing guest spend behaviors, all-inclusive hotel owners can determine which guests will enjoy different off-property experiential activities and excursions. You will be able to capitalize on the amount of time a guest spends outside the resort gates, creating better guest experiences while simultaneously improving your bottom line.
And finally, guest-centric data captured from measuring total profit per room allows hoteliers to overcome the age-old dilemma between a focus on managing long-term customer relationships and focusing on the immediate gains associated with revenue management. From knowledge gained through analysis of Total Profit per Room, you’ll improve customer relationships, which will in turn create a significant and positive impact on business performance.6
A growing number of hotels across the globe are adopting the all-inclusive model,7 and competition in the industry is fierce. Savvy hoteliers understand that optimizing profits is no longer just about pricing rooms and packages right. With science-based revenue management and business intelligence solutions in place, you gain the ability to capture and analyze both package and non-package revenues, which will have a powerful effect on revenue streams. While RevPAR has its merits, shifting your revenue management strategy from a per-room focus to a per-guest focus allows you to attain new heights in guest satisfaction, and elevate your business in terms of growth, revenue, and profits.
Attending the Hotel Data Conference in Nashville? Don’t miss my session focused on non-traditional revenue management on Friday August 17 from 12-12:25 PM. Rainmaker is also sponsoring the Networking Reception on Thursday 5:45 PM – 7:00 PM. If you would like to connect or set up a meeting at the event, let me know.
SOURCES 1JLL. “All-Inclusive Hotels Have a New Look for a New Era – JLL Real Views.” Hotel-Online, JLL Hotels & Hospitality Group, 30 May 2017, https://www.hotel-online.com/press_releases/release/all-inclusive-hotels-have-a-new-look-for-a-new-era. 2Myers, Nagle, and Johanna Jainchill. “The All-Inclusive Evolution: Travel Weekly.” Travel Weekly- The Travel Industry's Trusted Voice, 7 Oct. 2015, www.travelweekly.com/Travel-News/Hotel-News/The-all-inclusive-evolution. 3 Kimes, Sheryl E. “The Future of Hotel Revenue Management.” Cornell University, 13 Jan. 2017, scholarship.sha.cornell.edu/chrpubs/235/. 4 Younes, Elie, and Russell Kett. GOPPAR: A Derivative of RevPAR. HVS International, Mar. 2003, www.hvs.com/content/913.pdf. 5Johnson, Richard L. “The Strategic Approach to True GUEST KNOWLEDGE / Harry W. Rivkin & John W. Clevenger / April 2005.” Hotel-Online, Apr. 2005, www.hotel-online.com/News/PR2005_2nd/Apr05_StrategyCRM.html. 6Wu, Shwu-Ing & Lu, Chien-Lung. (2012). “The relationship between CRM, RM, and business performance: A study of the hotel industry in Taiwan.” International Journal of Hospitality Management. 31. 276–285. 10.1016/j.ijhm.2011.06.012. 7Ibid