Beyond RevPAR: 3 effective measures

Revenue per available room (RevPAR) is one of the most commonly used metrics that hotels use to track their progress. But this metric is flawed if it is looked at in isolation because it assumes all bookings are equal. To grow the profitability of a business and gauge performance accurately, hoteliers need better methods of measurement that look at the value of customers (guests and bookers) rather than the value of the room.

What’s ‘wrong’ with RevPAR?

Firstly, RevPAR is a measure that’s based on the room, not the guest. It measures the efficiency with which a room is being used but it doesn’t take into account the cost of acquiring the booking or the longer-term value of the guest or booker.

RevPAR sees all bookings as equal but revenue is not all the same and the room is not the customer—it’s the customer who brings in the money. 

How OTAs breed RevPAR nonsense

Many hotels rely on business generated by online travel agents (OTAs) rather than direct bookings. Although this can be an efficient way to fill a hotel OTA bookings attract high commission rates. It is an expensive way for hotels to acquire bookings and it doesn’t support the development of long-term customer relationships.

If two guests are staying at your hotel, in the same type of room, one has booked via an OTA and the other has booked direct, the RevPAR is the same for both rooms but the cost of acquiring each guest is likely to be wildly different. The cost of the customer acquired through the OTA will be much higher than the guest who booked direct. This is a prime example of why direct bookings are prefered and why reliance on OTAs is hurting hotels.

If we only focus on RevPAR OTA bookings appear to be as valuable as direct bookings. You can be hitting your RevPAR target but your options for increasing profitability and reducing acquisition costs are limited. 

Better acquisition measures 

Two increasingly popular measures for the cost of customer acquisition are:

• NetRevPAR (revenue minus commissions + total sales and marketing costs)
• ProPAR (profit per room)

Both are good metrics that give a far better view of the business and the true cost of acquiring guests. But these metrics both still miss something important—the long-term value of the guest.

The impact of relationships on RevPAR

Let’s consider another two guests. Both guests have booked the same type of room directly with the hotel, their RevPAR is equal. However, one of the guests has stayed 10 times this year and the other has only stayed twice.

We all know that the ‘best’ guest is the one who has stayed 10 times because the lifetime value of that customer to date is so much higher and the likely costs associated with them can be amortised over the ten stays. Based on historic behaviour, it’s also likely that the guest is going to keep coming back. While we know that one guest is ‘five times better’ from a lifetime value perspective, from a RevPAR perspective, both are worth the same amount.

Hoteliers know this, which is why so many run loyalty programmes. Having said this, it’s rare to see RevPAR being placed in a context where it’s measured in conjunction with guest loyalty and value.

Similarly, bookers are not necessarily guests. Bookers who are making reservations on behalf of multiple guests, something which is commonplace for corporate bookings may be the customers with the highest lifetime value of all. Hotels need to implement measures that reveal the development of relationships with these most valuable customers. 

3 effective measures hotels should be using

It is clear that throwing RevPAR away isn’t sensible. Instead, it should be used in conjunction with two other measurements:

• RevPAR
• Cost of acquisition
• Lifetime value

The benefit of using these three measures together can be summarised as: It maximises revenue per room, from customers who are acquired more efficiently, who come back more often.

Getting the second and third points right will inevitably lead to a higher RevPAR. Better RevPAR is driven by a focus on better acquisition—acquiring directly wherever possible—and maximising the rate of customer return, creating a higher lifetime value.

Written by: Stephen Barr, Chief Insight Officer and Co-Founder

What next?

Noetic’s approach is all about building direct relationships with guests contact us to find out more.

You might also be interested in reading 3 rules to build direct relationships for repeat bookings