For hotel owners, there are a number of ways to determine how well a hotel is performing. One such measurement, based on hotel occupancy and room rate, is known as RevPAR.
What Is RevPAR?
RevPAR is shorthand for revenue per available room, a metric used in the hospitality industry to assess hotel performance. RevPAR is an important metric because it can help hoteliers compare their revenue against their competitors. It can also help hotel owners identify opportunities to improve their RevPAR, price their rooms, and increase revenue overall.
RevPAR Formula: How to Calculate RevPAR
To calculate RevPAR, multiply a hotel’s average daily room rate (ADR) by its occupancy rate. Another way to calculate RevPAR is by dividing the hotel’s total room revenue by the total number of available rooms in the period being measured.
“RevPAR often gets confused with ADR,” said Vimal Patel, President of Q Hotels. “But they are very different things because the revenue per room can differ. Different guests have different promotions and rates, for example.”
Roberto La Rocca, an agent with Coldwell Banker Commercial Realty, provided an example of RevPAR, saying, “Suppose you’re running a hotel with 100 rooms and your rate is $120 per night, your occupancy 75%. It means that the revenue per available room will be $120 multiplied by 75%, which equals $90 per room.”
Of course, as Patel noted, different guests may have different room rates, which can complicate the formula. In that case, your calculation would change slightly as you figure out the ADR.
What Does RevPAR Tell You?
RevPAR indicates the hotel’s ability to fill its available rooms at an average rate. If the RevPAR increases with time, the average room rate or occupancy rate improves. Understanding RevPAR can also give hotel owners an idea of how to price their rooms. RevPAR also offers a good comparison against similar properties.
“The easiest way of putting it, [RevPAR] is the total dollar amount the rooms have brought in,” Patel explained.
What Is a Good RevPAR for a Hotel?
What qualifies as a good RevPAR varies depending on the type of hotel and the location.
“New York City would be very different from Louisiana, for example,” Patel said. “But if your RevPAR is 110% index compared to your local competitors, then you are doing well.”
“The hospitality industry considers a RevPAR of 100 the target to get a fair market share of rooms,” La Rocca added. “Going back to the example before — 100 rooms at a rate of $120 — a good RevPAR of 100 means that occupancy should be at 83%.”
When the RevPAR falls below 100, La Rocca said, that is an indication that the daily rate or occupancy is below competitors.
How to Improve RevPAR
The way to improve RevPAR is by increasing either ADR or occupancy, both Patel and La Rocca advised. However, Patel noted it’s better to increase your rate rather than increase occupancy at a lower rate.
“This is the job of the revenue manager — to play with ADR to increase occupancy, but avoiding overselling rooms,” La Rocca said. “In other words, having the hotel 100% occupied might not be the best scenario because of the increase in variable expenses.”
Limitations and Alternatives to RevPAR
There are quite a few areas where RevPAR falls short. For starters, RevPAR doesn’t consider the size of a hotel. While a hotel may have lower RevPAR, the property could have more rooms that earn higher revenues. Increased RevPAR also doesn’t necessarily mean profits are increasing. When measuring hotel performance, focusing solely on RevPAR isn’t a good idea.
“RevPAR doesn’t reflect other income from the hotel as part of the calculation (i.e. food and bar, gift shop, events, etc.),” Patel added.
Other measurements to evaluate hotel performance, according to La Rocca, include:
- TrevPAR (total revenue per available room): TrevPAR looks at the total revenue of the property across all outlets, including restaurants, bars, spa, etc. Like RevPAR, TrevPAR does not take into account cost factors.
- ARPAR (adjusted revenue per available room): ARPAR is similar to RevPAR, but considers revenue and variable costs per occupied room, such as cleaning, energy usage, water usage, internet and TV, supplies and toiletries, etc.
- GOPPAR (gross operating profit per available room): GOPPAR looks at profit rather than revenue, so it’s a good measurement to indicate a property’s performance across all revenue streams.
RevPAR Can Help Assess Hotel Performance, But It’s Not the Only Measure Hoteliers Should Use
While RevPAR can be a useful measure to assess hotel performance, hoteliers should note that there are a number of different measurements that can be leveraged as well. Because RevPAR can be limiting, it’s best to do your due diligence and look at a number of different calculations to assess the success and profitability of your hotel. Still wondering about hotel investment? Learn how much it costs to build a hotel here.