Discover how to use Key Performance Indicators effectively and benchmarking in the hospitality industry to enhance your revenue management strategies.
Use KPIs and benchmarking to drive your hotel's revenue growth
In the fast-paced hospitality industry, standing still is the same as moving backwards. One of the most critical aspects of moving forward and ensuring continuous growth is informed decision-making. But how can you make the right decisions if you don't have a comprehensive understanding of your performance? Enter KPIs and benchmarking.
Determine price, timing, and placement
Solving the puzzle of revenue management in the hospitality industry involves juggling many variables at once. Each decision you make needs to answer several questions accurately:
- What’s the right price?
- When is the right time to offer it?
- Who’s the right customer for this offer?
To effectively answer these, you need a reliable guide – a guide that comes in the form of Key Performance Indicators (KPIs), trend analysis and benchmarking.
Measure the right KPIs
In the hospitality industry, there are three primary Key Performance Indicators (KPIs) that Revenue Managers mostly focus on: Occupancy Rate (OCC), Average Daily Rate (ADR), and Revenue Per Available Room (RevPAR). Each of these metrics plays a crucial role in providing insights into your hotel's performance, and, more importantly, into the areas where improvements can be made:
- Occupancy Rate (OCC): This KPI measures the percentage of available rooms that are occupied during a specific time period. It is crucial to monitor as it gives an idea about the hotel's ability to fill its rooms. A low occupancy rate may indicate a need for marketing efforts or strategic pricing adjustments.
- Average Daily Rate (ADR): ADR calculates the average rate paid for rooms sold, computed by dividing total room revenue by the number of sold rooms. Monitoring this metric is vital as it provides insight into the revenue generated from room sales and helps gauge the effectiveness of your pricing strategy.
- Revenue Per Available Room (RevPAR): This KPI is the product of the occupancy rate and the average daily rate. It provides a snapshot of how much income each room in the hotel generates per night. RevPAR is particularly useful as it accounts for both occupancy and revenue, giving a more holistic view of the hotel's performance.
EXAMPLE:
If your OCC is low but your ADR is high, you may need to consider whether your prices are discouraging potential bookings. Conversely, a high OCC with a low ADR might indicate that you could be earning more by adjusting your rates upwards.
RevPAR integrates both the ADR and OCC to give you an overview of your revenue efficiency per available room. If your RevPAR is decreasing despite high occupancy, it could mean your room rates are too low or that you are not effectively optimizing the use of your available rooms.
Rising trend: The TRevPAR benchmark
The rising trend in revenue management is to look beyond the traditional room-based metrics mentioned above and adopt a more holistic measure: Total Revenue Per Available Room (TRevPAR). TRevPAR looks at not only room revenue but also additional revenue streams such as the restaurant, minibar, spa services, breakfast, and so on. In other words, it reflects a more comprehensive view of hotel performance.
PRO INSIGHT:
If your TRevPAR is decreasing despite a high RevPAR, it usually indicates that other services are underperforming. In such a scenario, it's essential to focus on improving these to boost overall revenue.
Looking at your TRevPAR allows you to consider various strategies and make informed decisions about offering special packages, adjusting room rates, or applying restrictions based on an overall profitability perspective. You can then evaluate these strategies to see if, in total, they contribute positively to the bottom line.
Use benchmarking to evaluate KPIs
Measuring your KPIs is one thing. But putting them against industry benchmarks is key to making informed decisions. Without this comparison, you can't accurately gauge whether your performance is good or bad.
Take this example: if your Occupancy Rate declines by 5%, it might initially seem troubling. However, if the market average falls by 10%, your hotel is actually outperforming the market. Without this data, you might make rash decisions based on incomplete information.
Benchmarking allows you to look beyond your hotel's data and understand broader market trends. This perspective is crucial, both in times of global uncertainty and during regular operations.
Leverage benchmarking data for strategic improvements
Benchmarking data, a cornerstone of strategic decision-making in the hospitality industry, offers you an eagle-eye view of your performance metrics, enabling you to spot trends and make impactful improvements. Is there a day you consistently outperform? Perhaps it's time to ease off Online Travel Agencies (OTAs) and capitalize on direct bookings. Conversely, if certain days underperform, you now have a clear target for strategy improvement.
PRO INSIGHT:
When hotels noticed a drop in Thursday occupancy a few years back, benchmarking data proved to be vital. It revealed that business travelers were leaving earlier in the week because of work. By identifying this trend, hotels could reassess their Thursday strategies and optimize them for more profitable opportunities.
In the hospitality industry, it's crucial to focus on 'need to know' data (data that directly influences strategic decisions). Benchmarking serves this purpose by offering actionable insights for swift strategy tweaks. With the right strategy in place, you can monitor the outcomes of your actions in real-time and make quick changes if needed.
Mastering KPIs and using benchmarking data effectively is key to driving your hotel's revenue growth. But it requires both strategic thinking and analytical precision. To take your skills to the next level, check out our article on becoming a benchmarking expert.
