5.3 Economics and Revenue Management
Although the primary goal of any property is to provide temporary lodging with exceptional guest experience, a lodging property cannot stay in business without generating a profit. Hospitality should remain a constant focus. Ultimately, however, lodging properties are businesses that must maintain a profit to stay afloat. To be profitable a property must understand their distribution channels, create realistic pricing strategies, and constantly monitor those decisions through their key performance indicators.
5.3.1 Distribution Channels
A property sells its rooms to guests through various distribution channels, including the property website or mobile app, phone reservations, or direct contact via walk-in reservations. These direct distribution channels enable the property to customize the message and branding. These methods can often be linked to loyalty programs that help repeat business. Direct distribution channels, however, rely heavily on the property’s marketing reach and brand awareness among the public, which can have a downside. The demographic of people who use these channels as first-time buyers is much smaller.
Indirect distribution channels, which extend beyond the direct control of the property, can expand this limited reach by accessing a much wider audience. Rooms can be sold via online travel agencies such as Expedia or Booking.com or through brick-and-mortar travel agencies or tour operators. In addition to travel agencies and tour operators, indirect channels include metasearch engines also such as Kayak and Trivago and corporate or event room blocks that have been pre-sold to an event operator or business that sells the rooms individually to their guest demographic.
5.3.2 Pricing Strategies
Lodging properties operate on a dynamic or demand-based pricing model. This means that a room does not cost the same every day. The sales price of a room depends on the demand for that given day. For example, a hotel room in Seattle may not be in high demand in the middle of winter. As a result, the price will be cheaper to entice more people to purchase a room at that property. Low demand creates a lower price. In contrast, high demand created higher prices. On the day of a Seahawks home game, for example, demand for hotel rooms in Seattle increases, driving up prices for available accommodations.
Another common pricing strategy in the lodging industry consists of segmented pricing. In this model, a room is sold at a different rate depending on which segment of the market you are selling to. Discounted rates are often given to government workers, select corporate partners, or reward members. Properties will also segment their pricing based on room type and amenities. For example, an ocean-view room will cost more than a city-view room. Additionally, a large suite with a jacuzzi tub would cost more than a standard single queen room.
5.3.3 Key Performance Indicators KPIs: ADR, RevPAR, Occupancy Rate
Once a property has identified its distribution channels and the price it will charge per room, it needs a system by which to verify that it can reach a profit. If the current distribution channels, pricing, and other key statistical measures do not predict a profit, then corrections must be made. These markers of success consist of statistical measurements or equations that an operator can use to make real-time management decisions. These statistical measurements, also known as key performance indicators (KPIs), may be unique to a certain property and reflect the preferences of its stakeholders. Other KPIs are standardized, such as average daily rate, revenue per available room, and gross operating profit per available room. Since these are industry standard KPIs they can show the fiscal health of the property and also be used as property-to-property comparisons.
5.3.3.1 Average Daily Rates (ADR)
One of the most common KPIs is the average daily rate, also known as ADR. The ADR shows the average revenue earned for an occupied room on any given day. The ADR shows the average revenue earned for an occupied room on a given day, providing a common key performance indicator for a property. The ADR is determined by dividing the total room revenue generated on a specific day by the total number of rooms sold during that same period. The ADR does not account for the price difference in individual rooms sold such as suites versus standard rooms. Selling a higher number of higher-priced rooms can artificially inflate the ADR. The ADR also does not account for any expenses that the property incurred on that day. It merely provides a snapshot of revenue for any given day and can be easily tracked over time to identify trends.
ADR Example
Hotel XZY sold 10 rooms. Of those 10 rooms 2 were suites at $200 a night, 7 were standard rooms at $150 a night and 1 was a government rate at $100 a night.
To find the ADR calculate the average room rate by adding all room revenue divided by the number of rooms sold.
5.3.3.2 Revenue Per Available Room (RevPAR)
The revenue per available room (RevPAR) shows an operator how successful they are at filling rooms at any given time or how successful they are at selling rooms at a higher rate. To calculate the RevPAR, take the total revenue of all rooms sold for the day and divide it by the total number of rooms on the property. RevPAR does not take into account expenses, functioning solely as a revenue KPI.
RevPAR Example
Hotel XZY sold 10 rooms. Of those 10 rooms 2 were suites at $200 a night, 7 were standard rooms at $150 a night and 1 was a government rate at $100 a night. The hotel has a total of 20 rooms on the property.
To find the RevPAR take the total revenue of all rooms sold for the day and divide it by the total number of rooms on the property.
5.3.3.3 Gross Operating Profit Per Available Room (GOPPAR)
The gross operating profit per available room, or GOPPAR, is one of the only industry standard KPIs that takes into consideration the expenses of a room sale. It is a more realistic benchmark of the daily profitability of a property as it shows how much profit each room is worth. To calculate the GOPPAR, take the total revenue minus the operating expenses and divide by the total number of available rooms.
GOPPAR Example
Hotel XZY sold 10 rooms. Of those 10 rooms, 2 were suites at $200 a night, 7 were standard rooms at $150 a night and 1 was a government rate at $100 a night. The hotel has a total of 20 rooms on the property. The total operating expenses were $1000.
5.3.4 Loyalty Programs and Customer Retention
Lodging properties rely on repeat business to increase their profitability. Tourists and business travelers often visit the same location multiple times throughout their lives. Having a good experience as a guest plays a key role in determining whether a guest will rebook at the same location. To increase the likelihood of repeat business most properties institute loyalty programs and focus on the guest experience through unique personal touches.
Case Study
The hotel that Zavier works at calculates the average daily rate over time. On Monday, the average revenue for rooms sold was $20,000, and the hotel sold 100 rooms for an ADR value of $200. On Friday, a cruise ship docked, and its average revenue was $30,000 for 100 sold rooms, creating an ADR value of $300. Zavier wants to know what factors drove the price increase between Monday and Friday’s ADR. What other key performance indicators (KPI’s) could Zavier be using to best track the hotel’s revenue ?
5.3.4.1 Loyalty Programs
Loyalty programs are not unique to the lodging industry. They are incentive models used to create brand loyalty and to gather demographic information about the purchaser to better aid in future marketing strategies. Loyalty programs reward buyers with “points” for each stay or on-property purchase. Guests may also receive additional points for updating personal information, referring a friend, or reposting marketing content on their personal social media pages. These “points” can then be redeemed for free or reduced-price stays or used for various upgrades like free Wi-Fi, valet parking, or meal credits at on-property restaurants. Loyalty programs incentivize repeat bookings, aid in demographic data collection, and increase marketing visibility.
5.3.4.2 Guest Personalization
Guests that receive personalized service have the highest booking and return rates. According to the 2025 economic impact report by AHLA, 87% of travelers want generative Artificial Intelligence (AI) advisors to provide reliable and specific recommendations when they are searching for online reservations. Personalization may include calling the guest by name at check-in, using auto-fill emails that add to their personal information such as name and travel itinerary, sending solicitations that fit their exact travel needs, and pre-populating their room with products or services that the guest has utilized in the past. The level of guest personalization will depend partly on the quality of the hotel and on the staff but almost any property can increase their revenue potential by focusing on guest personalization.
Attributions
- Figure 5.4: Hyatt Fisherman’s Wharf, by Prayitnophotography, is licensed under CC BY 2.0.
Key performance indicators (KPIs) are metrics that a property uses to make informed management decisions. Standardized KPIs also help managers compare their property’s successes or failures to other properties in the area.
A key performance metric in the hospitality industry representing the average revenue earned per occupied room or unit for a specific period, calculated by dividing total room revenue by the number of occupied rooms.
The revenue per available room (RevPAR) of a property gauges a lodging’s ability to fill rooms at an average rate. An increase in RevPAR means a property is either filling more rooms or charging a higher rate. To calculate the RevPAR, take the total revenue of all rooms sold for the day and divide by the total number of rooms in the property.
The gross operating profit per available room (GOPPAR) calculates the relationship between a property’s revenue and expenses. It provides a realistic benchmark of daily profitability as it shows how much profit each room makes. GOPPAR is calculated by dividing the gross operating profit—the total revenue minus operating expenses—by the total number of available rooms.
Loyalty programs are guest tracking platforms that reward those clients who return repeatedly, complete surveys, or or submit demographic information. The purpose of a loyalty program is to encourage repeat business.
