6.4 Key Hotel Metrics
Performance metrics are essential in the hotel industry for monitoring success, uncovering opportunities, and guiding decisions. Key indicators provide insights on the property’s financial health, operational efficiency, and market position. This chapter will explore major hotel metrics and their significance.
Average daily rate (ADR), revenue per available room (RevPAR), and occupancy rate constitute the foundational trio of hotel metrics. ADR measures pricing and revenue, while RevPAR evaluates market penetration. Occupancy assesses demand against room capacity. Collectively, these indicators help assess financial performance and operating strengths.
Emerging metrics like gross operating profit per available room (GOPPAR), return on investment (ROI), and average length of stay (ALOS) provide additional dimensions. GOPPAR determines bottom-line profitability. ROI analyzes investment returns, while ALOS signals guest behavior patterns. Examining relationships between metrics from multiple angles empowers informed strategies.
Hotel professionals need to remember that key metrics provide vital insights into the operational and financial performance of hotels. The most successful hoteliers allow data to become an important part of their decision-making. ADR, RevPAR, and occupancy offer core indicators for revenue generation, demand trends and market position. These are the core metrics for most professionals at the property level and in operations. Emerging metrics such as GOPPAR, IRR, cap rate, and ROI enable deeper analysis of profitability, investment returns, and consumer behavior (Altexsoft, 2021).
Applying metrics cohesively and consistently over time provides key decision-making inputs on pricing, asset valuation, cost management, and financial planning. Hotel managers are encouraged to fully utilize the array of metrics now available to guide strategies and maximize enterprise value.
Average Daily Rate (ADR)
ADR represents the average rental income per occupied room over a given timeframe. It is calculated by dividing total room revenue by rooms sold. ADR demonstrates a hotel’s pricing power and revenue generation performance.
ADR is a crucial metric for revenue management. Adjusting rates across seasons, days, room types, and booking lead times allows hotels to maximize yield. Competitor and historical ADRs help set optimal pricing. Promotional offers, value-added packages, and premium room upgrades can lift ADR. Market conditions significantly sway ADR, necessitating constant monitoring.
Revenue per Available Room (RevPAR)
RevPAR measures total room revenue relative to total rooms available for sale. Calculated by dividing total room revenue by available rooms, RevPAR combines ADR and occupancy metrics to indicate market penetration and hotel income potential.
As an indicator of financial productivity, RevPAR is highly useful for assessing property performance and competitive position. Changes in RevPAR over time or against competitors inform strategic decisions on pricing, operations, amenities and market focus. Driving demand through sales, marketing and distribution channel management is key to optimizing RevPAR. High RevPAR signifies strong consumer desire coupled with effective revenue management.
Occupancy Rate
The occupancy rate metric represents the percentage of available rooms actually sold and occupied over a given period. It is derived from dividing number of rooms occupied by number of rooms available.
Occupancy measures hotel demand against room capacity. As a utilization metric, it supports analyses of peak versus low demand seasons to guide staffing, budgeting and revenue management. Occupancy rate works together with ADR and RevPAR to evaluate pricing power during high demand periods. Balancing occupancy and ADR is key for profitability.
Gross Operating Profit per Available Room (GOPPAR)
GOPPAR evaluates hotel profitability by determining gross operating profit achieved based on capacity. Calculated by subtracting operating expenses from RevPAR, GOPPAR excludes taxes, depreciation, rent, and interest.
This key profitability metric assesses net income generation relative to total rooms. GOPPAR helps evaluate potential returns on investment. Properties with high GOPPAR have strong revenue streams and efficient cost management to enhance bottom line income. GOPPAR must be sufficiently above breakeven levels to indicate financial health.
Return on Investment (ROI)
In business, ROI measures net profit earned relative to total funds invested. Hotels apply ROI to weigh investment decisions and profitability. ROI is calculated by dividing net operating income by total property investment or development costs.
Potential limitations with using ROI in hotels include variations in capital costs and ownership structures. However, ROI remains insightful for benchmarking against industry averages and evaluating investment outcomes over time. ROI must be assessed against investor hurdle rates and risk profiles.
Capitalization Rate (Cap Rate)
The capitalization rate compares a property’s net operating income to its total market value. Calculated by dividing NOI (Net Operating Income) by property value, cap rates express expected yields from hotel investments as a percentage.
Cap rates help determine asset valuation and assess investment appeal. Lower cap rates indicate higher property values, assuming stable income. Cap rates influence investor decisions, as returns must sufficiently exceed alternative investment yields. Market cap rate averages provide comparison standards.
Internal Rate of Return (IRR)
Internal Rate of Return (IRR) represents the annualized rate of return projected for an investment over time based on estimated cash inflows and outflows. Essentially, IRR identifies the breakeven discount rate at which net present value equals zero.
Hotels rely on IRR to evaluate capital projects and acquisitions. Comparing deals using IRR accounts for differences in size, timing and duration of cash flows. IRR must surpass the cost of capital to signify a sound investment.It assists investors in ranking multiple development opportunities.
Net Operating Income (NOI)
A property’s Net Operating Income (NOI) equals all revenue from operations minus operating expenses. NOI excludes taxes, depreciation, debt service costs, rent, and any non-operating sources of income.
NOI indicates the earnings potential of a hotel asset before accounting for capital structure and other fixed costs. Tracking NOI over time aids financial planning and identifying issues. NOI also enables comparisons across properties. Sufficient NOI must be generated to service debts and provide return on investment.
Average Length of Stay (ALOS)
ALOS refers to the average number of nights hotel guests stay during a given period. It is calculated by dividing total occupied room nights by total guests served.
ALOS helps hotels forecast demand and optimize revenue. Extended stays may indicate opportunities for packages and loyalty programs. Shorter stays could signal a need for quicker turnover. Strategically managing length of stay through pricing, incentives and promotions allows hotels to influence guest behavior, costs and revenues.
Your Bonus Structure
Hotel managers are responsible for the overall performance and profitability of their properties. Bonus structures based on key performance indicators (KPIs) are often implemented to incentivize successes and align a manager’s goals with the success of the hotel. These KPIs, or hotel metrics, provide a quantifiable way to measure and evaluate various aspects of a hotel’s operations. This section explores common hotel metrics that make up a hotel manager’s bonus structure. There is a focus placed on elements that make up common hotel management bonus structures:
- Performance-based bonuses, especially in contrast to a property’s comp set
- Flowthrough
- Customer service scores
- Employee Engagement and Retention
Performance-Based Bonuses
Many hotel managers receive bonuses based on the overall financial performance of the property. This can be tied to metrics such as revenue growth, profitability, and cost control. For example, if a hotel exceeds revenue targets or achieves a high flowthrough percentage, the manager may be eligible for a performance-based bonus. The common metrics a manager may be bonused on includes RevPAR, ADR, and Occupancy targets.
RevPAR (Revenue per Available Room), ADR (Average Daily Rate), and occupancy targets are widely used metrics in the hospitality industry. Managers may be bonused based on their ability to achieve or exceed these targets, as they directly impact the hotel’s financial performance. Higher occupancies, higher average daily rates, and RevPAR often indicate effective management and leadership strategies. The most common performance-based bonuses are set against comp sets in lieu of being stand-alone though, to ensure the bonus is based on a manager’s successes rather than market conditions.
Competitive sets, also known as comp sets, play a significant role in assessing a hotel’s performance relative to its competitors. A comp set consists of a group of hotels in the same market or geographical area with similar characteristics and target markets. Benchmarking against comp set performance allows hotel managers to evaluate their property’s market share, pricing strategies, and revenue generation capabilities.
Hotel managers are responsible for analyzing comp set data to identify opportunities for growth and improvement. They must closely monitor key performance metrics such as average daily rate (ADR), occupancy rate, revenue per available room (RevPAR), and market share. By outperforming their comp set in these areas, managers demonstrate their ability to attract and retain customers, optimize pricing, and increase market share, which can contribute to their bonus eligibility.
Flowthrough
Flowthrough is a crucial metric that measures the efficiency of a hotel’s revenue management strategies. It evaluates the extent to which revenue growth translates into profit growth. The flowthrough percentage is calculated by dividing the change in gross operating profit (GOP) by the change in total revenue. A higher flowthrough percentage indicates effective cost control measures and the ability to convert revenue into profit.
Managing costs and maintaining operational efficiency are crucial for a hotel’s profitability. Managers may be bonused based on their ability to control expenses, implement cost-saving measures, and improve operational efficiency. Achieving favorable flowthrough percentages or managing expenses within budgeted targets can be rewarded with bonuses.
Hotel managers must demonstrate a strong understanding of flowthrough to optimize the hotel’s financial performance. By closely monitoring expenses, identifying areas of cost savings, and implementing revenue management techniques, managers can improve flowthrough and maximize profitability. Achieving or exceeding flowthrough targets is often rewarded in bonus structures.
Customer Service Scores
Customer service scores are vital metrics that reflect a hotel’s ability to deliver exceptional guest experiences. These scores are typically based on guest feedback obtained through guest satisfaction surveys, online reviews, and other feedback channels. The metrics may include overall satisfaction, staff friendliness, cleanliness, quality of service, and responsiveness.
Hotel managers are responsible for creating a culture of exceptional customer service throughout the property. They must ensure that staff members are properly trained, motivated, and empowered to provide outstanding service to guests. By consistently achieving high customer service scores, managers demonstrate their ability to deliver a positive guest experience, build guest loyalty, and drive repeat business. These scores often play a significant role in determining bonus eligibility.
Employee Engagement and Retention
The hotel industry is known for being labor intensive. Employee turnover has been identified as costing $3,000-$8,500 for front line team members in the U.S. (Tracey & Hinkin, 2006), with the wide variation in cost attributable to location (e.g., Seattle wages are higher than those in central Washington) and position specifics (e.g., training a bellman is less cost intensive than training a front desk agent). With employee turnover, engagement, and retention being so integral to the bottom line it makes sense that managers would be bonused on these things.
Employee engagement and retention are key factors in delivering exceptional service and maintaining a motivated workforce. Hotel managers may be bonused based on their ability to improve employee satisfaction, reduce turnover rates, and foster a positive work environment. Engaged employees are more likely to provide excellent service, resulting in higher guest satisfaction and improved financial performance.
Measurable data and key performance indicators (KPIs) that are used to assess various aspects of a hotel's performance, operations, and financial health.
A financial metric in the hospitality industry representing the gross operating profit generated per available room or unit, calculated by subtracting total operating expenses from total revenue.
Please look for related terms in the Glossary.
Capitalization rate, a financial metric used to estimate the rate of return on real estate investments, calculated by dividing the property's net operating income by its purchase price or value.
A key performance metric in the hospitality industry representing the percentage of available rooms or units occupied by guests during a specific period, indicating utilization and revenue performance.
A financial metric used to evaluate the potential profitability and return on investment (ROI) of a project or investment over time, taking into account the time value of money and cash flows.
A financial metric representing the total revenue generated from operations minus operating expenses, excluding taxes and financing costs, used to evaluate the profitability of real estate investments.
A financial analysis method used to assess the impact of changes in revenue or expenses on gross operating profit or net income, measuring the efficiency of revenue management and cost control strategies.
The total revenue generated from hotel operations minus total operating expenses, representing the gross profit before deducting fixed costs and taxes.
Ratings, surveys, or feedback collected from guests or customers to evaluate their satisfaction with service quality, responsiveness, and overall experience at hotels and hospitality establishments.