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What is RevPAR and why is it so important

What is RevPAR in a hotel and how is it calculated?

RevPAR (short for Revenue Per Available Room) is an important metric you may have been hearing a lot about. Perhaps, up until now, your main focus and priorities have been how to get (and keep) your hotel fully booked and how to increase your guest ratings on TripAdvisor. And why not? There is certainly nothing wrong with these objectives! After all, the main goal for any hotelier is not occupancy but ultimately to generate a profit. But knowing your RevPAR and how to use it is an important way of analysing and drawing the correct balance between occupancy, pricing and overall revenue and can have a substantial impact on the success of your hotel.


So what is RevPAR and how do you calculate it?


To calculate your RevPAR you need two pieces of information:

  • Your Average Daily Rate (ADR): Total revenue earned from all rooms / Total number of rooms sold
  • Your Occupancy Rate: Number of rooms occupied / Total number of rooms available


Then the RevPar is calculated by multiplying the Average Daily Rate with the Occupancy Rate

RevPAR = ADR x Occupancy Rate


To keep things simple, let’s make a fictional example, the Hotel Belvedere, which has 10 rooms in total.

  • 5 standard double rooms it sells at £85 / night
  • 5 superior rooms it sells at £135 / night


If all rooms are booked (100% occupancy rate) the total revenue that the Belvedere made is (5 x £85) + (5 x £135) = £1,100


Here the Average Daily Rate is £110 (Total revenue £1100 / Total number of rooms 10) 

 

But let’s assume that the Belvedere isn’t always 100% occupied. Instead the following scenario is far more likely, where it sells 4 standard rooms and 3 superior rooms. So our calculation is as follows:

  • (4 x £85) + (3 x £135) = £745 This is the Total revenue


Here the Average Daily Rate is £106 (Total revenue £745 / Total number of rooms 7)


Now we know our Average Daily Rate (ADR) we can calculate our RevPar figure.

In the first, unlikely 100% occupancy rate scenario the the RevPar figure is as follows:

  • RevPar = £110 (Average Daily Rate £110 x Occupancy Rate 100%)


Now the second scenario:

  • RevPar = £74.2 (Average Daily Rate £106 x Occupancy Rate 70%)


How does knowing your RevPAR figure help boost your profits?


You can see that there is a correlation and a tipping point between your average daily rate and occupancy rate. Somewhere there is the perfect balance between having a very high average nightly rate but with a low occupancy rate and vice-versa.


At the Belvedere, we know that our Ave. Daily Rate is £106, RevPAR is £74.2 and Total Revenue Per Night is £745.


But what if the Belvedere changed its prices? We would expect our occupancy rates to go up or down in accordance with our price. You can see that with just some small changes to the price and occupancy rate that the total revenue per night can change dramatically.


If the occupancy rate is not at 100% and the RevPAR is below the ADR, a hotel operator knows that it can probably reduce the average price per room to help increase occupancy. So the Belvedere should drop its prices slightly to increase occupancy rates and yield more revenue overall.


In general, RevPAR is simply the revenue you generate every single night from the total number of rooms in your hotel, whether booked or not. Such a figure gives you a clear indication of how well you are doing at stipulating rates and making a profit, more than just simply getting lots of bookings.


Knowing your RevPAR can help you correctly set your room rates against expected occupancy rates and help you know exactly where your cut-off points are. While dropping your occupancy rate might seem scary, if you are still making the same overall revenue then that’s absolutely ok!


With a better average booking price point you are maintaining your total revenue and what’s more, freeing up rooms that you can place on OTAs and elsewhere perhaps with a discount. 


If you want to know more ways to fill your rooms, check out our channel manager to help you connect to over 120 OTAs with just a simple click and increase your hotel’s exposure. 


Back to RevPAR… Knowing you have a suitable price point and overall revenue can help you know that cutting prices is not always the best way to stand out against your competitors and attract customers. You should always keep in mind the calculation between average price and occupancy rate.


RevPAR helps you cut down costs


If you focus solely on filling your rooms and pay little or no attention to RevPAR, you may be taking a steep loss without even realising it. With RevPAR-based data at your disposal, here is how to avoid that. 


With RevPAR, you establish a clear baseline for your daily revenue, for which your total expenditure cannot exceed. To illustrate, try summing up the total daily costs for your hotel, and divide it by the total hotel rooms. If the resultant number exceeds the RevPAR, then you guessed it, you are losing money even when your rooms are fully booked. 


As such, comparing your RevPAR with your daily costs helps you identify an optimal booking price point, to always avoid bookings at loss.


RevPAR is not the whole story


On matters of revenue, RevPAR alone does not tell the whole story, especially if you are a small hotel. A large hotel with 500+ rooms may have a lower RevPAR, but is pulling in a lot more revenue. As such, we recommend that while trying to increase your RevPAR, keep in mind other equally important factors such as costs and other key performance indicators.



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Nevertheless, RevPAR is a good indicator that can help you grow your business if you use it right and complement it with other metrics. It can keep you on top of your financial and overall hotel performance. Now we’ve got to grips with RevPAR and how to use it, you can get going on those crucial calculations as soon as you can!



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