By David Eisen
Imagine you’re scouting a young baseball player or footballer—someone experts have pegged as the next Derek Jeter or Lionel Messi. You can’t, however, just take their word for it; you have to see their performance for yourself and also dig into the numbers—into how they rate statistically.
Now, imagine you are only allowed to consult one statistic, such as batting average (hits divided by at-bats) or goals scored. Then, imagine that within this context, our Jeter heir apparent is hitting a more-than-respectable .315, and our Messi-to-be is his team’s leading goal scorer. Great news, right?
Well, yes and no. It’s nice to see that one stat category is filled out. The problem is: It’s the only stat you have to go on. You don’t know anything about fielding percentage (ratio of putouts to errors), or assists, or fouls committed, for example.
In this instance, it turns out that while our baseball player’s batting average is high, the majority of his hits are singles, which portends a lack of power. In addition, his fielding percentage is nowhere near all-star caliber.
Meanwhile, our footballer scores goals for his team, but only ranks fifth in his league. And while he is a keen striker, he hasn’t accumulated one assist all year, which could indicate that he isn’t a team player.
In the end, the presumptive Derek Jeter successor is actually a slap hitter with a suspect glove, and our notional Lionel Messi can put the ball in the back of the net, but doesn’t support his teammates.
Had you had more stats at your disposal, you’d know this.
Our sports analogies extend to hotels, for which judging a property’s performance based on one metric is foolhardy.
RevPAR, or revenue per available room, has historically been the one statistic by which the health of the industry is measured—its batting average or goals scored, if you will. But as you can see in the example above, making determinations based solely on one data point is imprudent and has the potential to result in a false positive.
Here are three reasons why.
1. RevPAR (which is calculated by multiplying a hotel's average daily room rate—or ADR—by its occupancy rate) only takes into account room operations. And while the bulk of a hotel’s revenue and, ultimately, its profit, are derived based on its rooms, there are other revenue and profit centers that need to be taken into account in order to truly and holistically approach the full picture of a hotel’s operations. These include food and beverage, conferences and banqueting, golfing and spas—all areas from which a hotel can potentially derive revenue. Luckily, there is a stat for that.
TRevPAR, or total revenue per available room, is the ratio of a property’s total revenue to its number of available rooms. In sum, it takes into account all departmental revenues, not just those derived from rooms. As a larger cross-section of travelers seek out meaning and involvement in their travels (the so-called “experience economy”), hotels are well-positioned to slake those cravings, in areas including wellness to cuisine, all of which amount to TRevPAR opportunities.
2. RevPAR doesn’t account for expenses. Revenue is great, but if your costs are more than you take in, well, that is a bind no hotel owner wants to be in. The good news is that tracking expenses—even benchmarking them against those of competing hotels—exists, and monitoring them on a monthly basis can go a long way toward keeping costs under control.
For instance, take an accounting of your labor costs on either a per-occupied or per-available-room basis to measure their ebb and flow and also how they stack up against those of competitors. There are also pesky utility costs—from water to electric—that, unless you own a hotel in Idaho or Bulgaria, can set you back a pretty penny each month if you aren’t careful.
Remember: You can’t change what you can’t measure. By tracking expenses, you’ll be better positioned to make choices that can save you money in the long run.
3. RevPAR isn’t profit, which is what really matters. Going beyond RevPAR to look at indicators such as GOPPAR (gross operating profit per available room) offers a truer portrait of the success of a hotel. GOPPAR is calculated by dividing the gross operating profit by the number of available rooms in the hotel. By doing this, we are able to understand if an asset is actually making money and, if not, why?
It’s only when we climb down the profit-and-loss funnel do we start to put together a picture of a hotel’s real rate of production, its overall health and its ultimate ROI. It’s why a closer examination of a property’s inflow and outflow should be any manager’s top priority.
Superstar baseball players and footballers don’t come around often. They combine power, speed, instincts and intangibles. If we judged them by only one of those characteristics, we’d only know how good or bad they were in the context of that one facet, when there are multiple attributes to consider.
It’s the same when judging hotels. There are multiple layers and myriad angles to analyze. Each one needs to be scrutinized and adjustments need to be made as necessary.
If you don’t, you may think your hotel is a Jeter or Messi, when it’s really a minor leaguer that looks good in his uniform but can’t hit a curve or pass the ball to save his life.