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Thursday, October 11, 2012

Establishing Room Rates Part II


Revenue Management

  • Revenue management, also called yield management, is a set of techniques and procedures that use hotel specific data to manipulate occupancy, ADR, or both for the purpose of maximizing the revenue yield achieved by a hotel.
  • Yield is a term used to describe the percentage of total potential revenue that is actually realized. Revenue managers are responsible for making decisions regarding the pricing and selling of guest rooms in order to maximize yield.

Go Figure!                                                                                                                            

A hotel’s yield would be calculated as follows:

            Total Realized Revenue
            Total Potential Revenue       = Yield
                                                                                                                                               

  • RevPAR is a combination of ADR and occupancy % and is calculated using the following formula:

ADR x Occupancy %  =  RevPAR

  • To increase yield simply means to increase the hotel’s RevPAR. Therefore, any change (decrease or increase) in either or both of the factors comprising RevPAR will change the yield of the hotel’s revenue.
·         Because hotel rooms are highly perishable, the goal of revenue management is to consistently maintain the highest possible revenue from a given amount of inventory.
·         Revenue management techniques are used during periods of low, as well as high, demand.
·         Although the actual revenue management techniques used by hoteliers vary by property, in their simplest form, all these techniques are employed to:
·         Forecast demand
·         Eliminate discounts in high demand periods
·         Increase discounts during low demand periods
·         Implement “Special Event” rates during periods of extremely heavy demand
·         Sophisticated mathematical programs that help hoteliers manage revenues are built into most property management systems (PMS) used in the industry today. Using information gleaned from the hotel’s historical sales data, revenue management features in a PMS can:
·         Recommend room rates that will optimize the number of rooms sold
·         Recommend room rates that will optimize sales revenue
·         Recommend special room restrictions that serve to optimize the total revenue generated by the hotel during a specific time period
·         Identify special high consumer demand dates that deserve special management attention to pricing
  • PMS systems can “remember” more important dates than can an individual hotelier. However, it is hotelier’s skill and experience that is most critical to the revenue maximization process. The goal of a talented revenue manager is to increase RevPAR, not only on a daily basis, but on a long-term basis as well.
·         In the hotel industry, a competitive set (comp set) consists of those hotels with whom a specific hotel competes and to which it compares its own operating performance.
·         To fully evaluate RevPAR changes, hoteliers look to the relative performance of their comp set. They do so to better understand the room rate economics that affected their own property during a specific time period, as well as how the hotel’s management responded to the supply and demand challenges they faced during that period.
·         To better understand the shortcomings of an over-emphasis on RevPAR, it is important to take a closer look at its two fundamental components, occupancy % and ADR.

Occupancy Percentage

  • It might seem that the occupancy percentage for a hotel would be a straightforward calculation. A room revenue statistics report generated from the Blue Lagoon Water Park Resort’s property management system produced the information needed to calculate their occupancy percentage (refer to Figure 8.6).

Go Figure!                                                                                                                            

Exactly how should Paige at the Blue Lagoon Water Park Resort compute her occupancy percentage? Should she:

1.      Include only sold rooms in her computation? If so, her formula would be:

                        Rooms Sold   
            Total Rooms in Hotel            = Occupancy %

2.      Include complimentary rooms as well as sold rooms in her computation? If so, her formula would be:

Rooms Sold + Comp Rooms Occupied
            Total Rooms in Hotel                        = Occupancy %

3.      Subtract non-sellable out-of-order rooms from her rooms available count? If so, her formula would be:

                        Rooms Sold               
Total Rooms in Hotel – OOO Rooms          = Occupancy %

4.      Subtract non-sellable on change rooms from her rooms available count? If so, her formula would be:

                        Rooms Sold                           
Total Rooms in Hotel – On-Change Rooms = Occupancy %
                                                                                                                                               

ADR

  • Average daily rate (ADR) is also a critical component of RevPAR. Generally, hotel managers calculate ADR using one of the two following formulas:

            Total Rooms Revenue                      
            Total Number of Rooms Sold                = ADR
                                                or
            Total Rooms Revenue                      
            Total Number of Rooms Occupied              = ADR

  • Notice that the only difference in the two formulas are the words sold and occupied. See Go Figure! in the text for further illustration of the difference between these two formulas for calculating ADR.
  • Despite the slight differences in these two ADR computations, neither is as useful to the hotel’s owners and managers as the computation of the net ADR yield.

Net ADR Yield

  • Net ADR Yield is the percentage of ADR actually received by a hotel after subtracting the cost of fees and assessments associated with the room’s sale. For a single room it is computed as:

Room Rate - Reservation Generation Fees
            Room Rate Paid                                = Net ADR Yield

  • To really understand net ADR yield, you must first understand how hotel rooms were sold in the past as well as how they are sold in today’s competitive marketing environment. In the distant past, hotels clearly preferred that guests arrive with a previously made reservation. Of course, if the hotel had vacant rooms, the front office agent would quote a rate (often higher than that quoted to other guests) to the non-reserved guest and the room would be sold.
  • Today, most hotel guests already have a room reservation prior to arrival, and the reservation distribution channels (sources of reservations) used to make their reservations will charge the hotel widely varying fees for making them.
  • When a guest makes a reservation via the Internet, no less than three reservation-generation fees are typically charged to the hotel, including fees from:
·         Internet Travel Sites - websites for booking travel to end-users
·         Global Distribution System (GDS) - system that books and sells rooms for multiple companies
·         Central Reservation System (CRS) – system used by companies to centrally book reservations
  • Consider the information in Figure 8.7. As you can see, the hotel pays “zero” reservation fees on a walk in reservation and pays several fees for the reservation made by the Internet user.
  • If the reservation is made by a travel agent, additional fees are charged.
  • With increased usage of high priced distribution channels, a room’s selling price (quoted) and the ADR the hotel actually receives can be radically different. 
  • For a further illustration of net ADR yield, see Go Figure! in the text.
  • Clearly, it is the ADR after the cost of reservation generation fees that should be most important to hoteliers and their attempts to increase RevPAR. If net ADR yield is not used, hotel owners and managers run the risk of significantly over inflated RevPARs accompanied by significantly reduced profits as well.


Flow-Through

  • Flow-through is a measure of the ability of a hotel to convert increased revenue dollars to increased gross operating profit dollars. Consider the simplified income statements detailing revenue and expenses for January 2010 and for the same month of the prior year for the Blue Lagoon Water Park Resort (see Figure 8.8).

Go Figure!                                                                                                                            

From Figure 8.8, the Blue Lagoon’s flow-through for January 2010 is calculated as the change in gross operating profit (GOP) from the prior year divided by the change in total revenues from the prior year as follows:

                     GOP This Year- GOP Last Year                            
         Total Revenues This Year – Total Revenues Last Year    = Flow-Through
                                                                                                                                               

  • Gross operating profit (GOP) is, in effect, total hotel revenue less those expenses that are considered directly controllable by management. Flow-through was created by managerial accountants to measure the ability of a hotel to covert increases in revenue directly to increases in GOP.
  • When flow-through is high (over 50%), it reflects efficiency on the part of management in converting additional revenues into additional profits. For most hotels, flow-throughs that are less than 50% indicate inefficiency in converting additional revenues into additional profits.

GOPPAR

  • Gross operating profit per available room (GOPPAR) is defined as a hotel’s total revenue minus its management’s controllable expenses per available room. For example, the costs of a hotel’s lawn care services, utility bills, and even food and beverage expenses are considered when computing GOPPAR. These same expenses are not, of course, considered when computing RevPAR.
  • In most cases, those managers directly responsible for revenue generation do not control the majority of costs used to compute GOPPAR. How did it become popular to suggest GOPPAR as a method of evaluating the decision making of those revenue managers?
·         For a simple example of why this is so, consider a hotel that elects to launch a major advertising campaign in its local market, which costs $100,000 per month, and increases RevPAR by $15,000 per month. Despite the fact that RevPAR certainly did increase, the amount of money spent by the hotel to increase RevPAR exceeded, by far, the actual amount of the revenue increase. Clearly, the short-term effect on hotel profitability will be a negative one.
·         Thus, there are still some pitfalls to be aware of when analyzing a hotel's performance based solely on RevPAR. For example, in those cases where room revenue accounts for only 50 to 60% of total revenue (as is the case in large convention hotels), RevPAR represents only half of the hotel’s revenues and neglects to consider all other sources of incremental revenues.
·         It is for shortcomings such as these that hoteliers now consider an analysis of a hotel’s GOPPAR to be of such importance.

Go Figure!                                                                                                                            

GOPPAR is calculated as follows:

            Gross Operating Profit                    
            Total Rooms Available to Be Sold   = GOPPAR
                                                                                                                                               

  • GOPPAR, because it reflects the gross operating profits (not revenue) of a hotel, actually provides a clearer indication of overall performance than does RevPAR. RevPAR indicates the performance of a hotel in terms of rooms inventory sales and marketing, however, it provides no indication of how much money the hotel actually is, or should be, making.
  • GOPPAR takes into consideration the cost containment and management control of the hotel and must be considered in any effective rooms pricing strategy. The difficulty is not that RevPAR is a poor measurement, but rather it is the fact that RevPAR should not be the only measurement of a hotel’s revenue manager’s effectiveness.


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