By Laura Resco
Financial performance in the hospitality industry is traditionally measured in absolute terms: actuals for the relevant KPIs are compared against their budgeted numbers and, from this assessment, action plans are developed to correct course when needed. Moreover, in the presence of changes in market conditions, budgets are revised to make goals reflect the new business environment.
This absolute method measures a hotel’s performance against a backdrop of external factors. And although this knowledge is crucial, it by no means suffices to grasp the entirety of an operation’s financial health. The relative method, on the other hand, complements this information by using indices to measure a property’s results when compared with those of a set of its competitors.
An index is the measure of a variable relative to an aggregated base. For hotels, this takes the form of a property’s KPI—whichever it may be, whether it’s RevPAR or GOPPAR—relative to the average results for its chosen competitors. Mathematically, an index is expressed as:
Index = Your Property’s KPI / CompSet KPI * 100
If your index equals 100, you’re getting your fair share of that particular KPI within your competitive set. If it falls below 100, your property is underperforming compared to its competitors. Conversely, if your index is above 100, you’re outperforming the set.
Index analysis is a great way to compare your hotel’s performance against its competition because it is immune to swings in the marketplace. For example, when an economic downturn hits, hotels in the affected markets will expect their occupancy to fall and budgets will reflect this downward projection. However, even if occupancy falls for the property in absolute terms, there is no reason for the Market Penetration Index to fall, too, because the same external factor (the downturn) affects all properties in the competitive set.
In fact, indices and absolute KPIs need not move in the same direction. Even if your property’s average daily rate (ADR) is growing on a monthly basis, your average daily rate index (or ADR index) can be falling at the same time. This would indicate that your competitors are able to increase their rates at a faster pace, leaving you with a reduced share.
How can you use indices to analyze your data? Here are the three that are currently the most widely used, and two more for you to consider even more closely.
Market Penetration Index (or Occupancy Index): If the MPI is lower than 100, you can ask if your overbooking strategy should be more aggressive, or if you need to pay closer attention to changes in the booking pace. It could be that potential guests are not as aware of your property, and a new communication strategy must be implemented. On the other hand, an MPI of more than 100 isn’t positive or negative by itself. It might reflect a very effective inventory management strategy, or a very low rate.
Average Rate Index (or ADR Index): Many reasons can explain a sub-100 ARI. It might be related to a group-intensive business mix, or perhaps an ineffective market segmentation. Maybe rate fences are not implemented properly, or the forecasting method is inaccurate, or the distribution strategy needs to be revised. Also, an ARI that’s more than 100 could mean that the property’s pricing strategy is better than the competitors’, or that high rates are preventing an optimal use of inventory.
RevPAR Index: RevPAR index and MPI below 100 with a high ARI show that increased rates are making a hotel lose revenue dollars through falling occupancy. If the RevPAR index and the ARI are below 100 with a high MPI, it means that the property is forfeiting revenue by missing the opportunity to fill rooms at a higher rate. Even if the RevPAR index is 100, a sub-100 ARI with an MPI above 100 means that your competitors generate equal revenue, but without incurring as many costs related to occupancy.
These three indices allow observation relative to rooms. But as we know, hotels can generate revenue through other departments, including food and beverage, golf, spa and banquet catering. That’s why it’s important to measure performance on a total scale, with indices such as …
TRevPAR Index: The TRevPAR index measures how efficient your hotel is at generating revenue as a whole. If you have a sub-100 TRevPAR index, look at your cross-selling strategy. Are there incentives for members of staff at the hotel to offer all of the property’s services: restaurant, spa, fitness lessons, etc.? Do you train your staff to be proactive at cross-selling? There could also be a communication issue, and your guests don’t really know the whole service offering at your hotel. Perhaps you need to promote your departments through different platforms: in person, on the guest room TV, through the hotel’s app. Maybe your distribution strategy is mainly focused on the rooms department, creating occupancy with guests who aren’t willing to spend on your whole service offering.
Meanwhile, when it’s all said and done, profitability is what all hotels are after. Which is why measuring profitability is paramount.
GOPPAR index: Although all the other indices are focused on the top line, the GOPPAR index reflects your property’s share of the bottom line. That is, how profitable your operation is when compared with its competitors after all is said and done. When your GOPPAR index is below 100, you should look at your costs, find the fat and figure out ways to cut it down. Is there a staffing issue? Perhaps you need to fine-tune your scheduling to avoid overstaffing during the low season. Or maybe you need to renegotiate terms and prices with your vendors. It could also be that your distribution strategy is too costly by way of commissions. Maybe you should start looking at becoming greener to minimize waste, therefore lowering your utility bill. Note: You could be overperforming in all top-line indices, and yet underperform on the GOPPAR index because of creeping costs.
The GOPPAR index is the true reflection of your operation’s financial health because it takes into account not only how much money comes into your hotel, but also how much of it disappears before you can take it to the bank. Imagine going through the effort of streamlining all your revenue-generating processes (designing SOPs, training your staff, enhancing communication, etc.) just to end up empty-handed, or even worse, in the red!
However, an index is only as good as the competitive set it is derived from. If your property’s indices consistently score above or below 100, it’s an indication that you’re in the wrong set. Index analysis is the start of a deeper inward evaluation for hotels, but its insights are only meaningful in the presence of relevant competitors. That is why choosing the right CompSet to measure performance against is paramount.
In closing, charting performance using indices such as the ones listed here only works if the data is available. That is why data contribution to benchmarking platforms isn’t just a benefit to you, it’s a benefit to the entire hotel industry ecosystem. And the smarter the industry gets, the better your profits will be.