Revenue management is the application of analytics that predicts consumer behavior to secure maximum revenue for a business.
In the lodging industry, implementing Revenue Management Strategies (“RMS”) for hotel and lodging growth is a must.
Our industry requires sound RMS in a variety of ways to ensure optimal hotel revenue.
Techniques that lodging operators use to implement RMS vary according to numerous factors that can be included such as the size of the property, number of employees, average room rate in the local area, and more. However, the most common revenue management practice for hotels across Texas is to use key performance indicators such as Average Daily Rate, Hotel Occupancy Rate, and Revenue Per Available Room as a basis for maximizing revenue.
Average Daily Rate (“ADR”) is a widely used industry term that details the average dollar amount received for the rental of a hotel room.
To calculate ADR, a lodging property takes its total room revenue and divides it by the number of rooms sold on a specific night. This calculation produces the average daily rate for that night.
The ADR of a lodging property is often utilized alongside an array of other hotel statistics to analyze performance over time as well as how one property compares to another similar property in the area.
Another key performance indicator studied by lodging properties to maximize its RMS is Hotel Occupancy Rate (“HOR”). HOR is the ratio of rented rooms to the total number of rooms available.
Lodging properties also use their vacancy rate to indicate the same information by calculating the number of vacant rooms compared to the total number of rooms available.
Ultimately, using both ADR and HOR allows lodging properties to determine their Revenue Per Available Room (“RevPAR”).
RevPAR is another frequently used industry term that indicates a hotel’s ability to fill its available rooms at an average rate.
RevPAR is calculated by multiplying the ADR by the HOR. It is imperative for a lodging property to determine its RevPAR on a consistent basis. Doing so allows a lodging operator to accurately assess performance.
This one key metric can help show how well a hotel is filling its rooms and whether room rates might merit adjustment in order to maximize rented rooms and overall revenue.
Every key performance indicator in the lodging industry has its own significance and importance. The above-discussed terms highlight some of those most commonly used in the industry toward achieving effective revenue management.