From RevPAR to TRevPAR – How Profitable is Your Hotel?

The hotel industry changes all the time. Hoteliers must adapt to stay profitable. One key to this is understanding financial metrics. For many years, the main metric used was RevPAR (Revenue Per Available Room).  But today, metrics like TRevPAR (Total Revenue Per Available Room) and ARPAR (Adjusted Revenue Per Available Room) have come into use. These new metrics give a clearer picture of a hotel’s profitability. They help hoteliers make better decisions in a competitive market.

Origin of RevPAR

Managing a hotel is like managing a living organism. The hospitality industry changes quickly. Supply and demand go up and down every day. This makes hotel revenue management more complex.

There are three main Key Performance Indicators (KPIs) to measure a hotel’s financial success:

Average Daily Rate (ADR): The average income per occupied room.

Occupancy: The percentage of rooms that are occupied.

Many hotels used to focus only on having high occupancy rates or high room rates. But this often ignores other important parts of the business. To fix this, a new concept in hotel revenue management was introduced years ago.

RevPAR (Revenue Per Available Room) is arguably the most important figure for calculating a hotel’s financial performance. It combines the hotel’s daily rates with its occupancy rate to give a more comprehensive view of financial health.

Examples of RevPAR Calculation

There are two common ways to calculate a hotel’s RevPAR:

1. ADR x Occupancy
2. Total Room Revenue in a Given Period / Number of Available Rooms in the Same Period

Let’s do the math for a hotel with 100 rooms, where 60 rooms are sold in a day, generating a total revenue of €4200:

• Average Daily Rate (ADR): Total Revenue / Number of Rooms Sold = €4200 / 60 = €70
• Occupancy Rate: Number of Rooms Sold / Total Rooms = 60 / 100 = 60%

Using either calculation method, we find:

• RevPAR = ADR x Occupancy: €70 x 0.6 = €42
• RevPAR = Total Revenue / Total Rooms: €4200 / 100 = €42

Limitations of RevPAR

RevPAR is widely used to calculate and compare hotel performance. However, it has its limitations. Let’s look at two scenarios for a hotel with 50 rooms:

1. The hotel sells 50 rooms for €20 each.
2. The hotel sells 5 rooms for €200 each.

In both cases, the hotel generates €1000 in revenue and a RevPAR of €20. But does this mean the hotel’s net operating income (NOI) is the same in both scenarios? No. Traditional RevPAR calculations do not consider costs per occupied room or additional revenue per room sold. Thus, RevPAR alone isn’t a perfect indicator of financial success.

Evolution of RevPAR

To address these limitations, revenue managers like Ira Vouk, Vice President and Co-founder of iRates, introduced the concept of Adjusted Revenue Per Available Room (ARPAR) or Total Revenue Per Available Room (TRevPAR).

• TRevPAR: Considers the total revenue from all sources (e.g., bar, room service, breakfast). It provides a more comprehensive look at profitability.

TRevPAR = Total Revenue / Number of Available Rooms

However, TRevPAR doesn’t account for costs or occupancy rates, which are crucial for understanding efficiency.

On the other hand, ARPAR reflects the bottom-line profit. Ira Vouk’s simplest ARPAR formula is:

ARPAR = (ADR – Variable Costs per Occupied Room + Additional Revenue per Occupied Room) x Occupancy

Applying ARPAR to Our Example

Let’s apply this to our previous example:

1. The hotel sells 50 rooms for €20 each.
2. The hotel sells 5 rooms for €200 each.

We assume:

• Variable costs per occupied room = €10
• Additional revenue per occupied room = €5

Case 1:

ARPAR = (€20 – €10 + €5) x 1 = €15

Case 2:

ARPAR = (€200 – €10 + €5) x 0.1 = €19.5

Here, Case 2 is more profitable. This example shows how ARPAR provides a clearer picture of financial performance. The results vary depending on variable costs and additional revenue per room, which differ across hotels. Factors like commission rates and the proportion of direct bookings also significantly influence a hotel’s NOI.