To run a business and gauge performance, hoteliers need better methods of measurement.
What’s ‘wrong’ with RevPAR?
Firstly, RevPAR is a measure that’s based on the room, not the guest. This makes it a good way to measure the efficiency with which a room is being used but isn’t a good measure of the guest using it.
What we’re saying is simple:
All revenue is not the same and the room is not the guest—it’s the guest who brings in the money.
Let’s illustrate the importance of the guest with two examples; one relates to the cost of acquiring them and the second relates to their long-term value.
1. How OTAs breed RevPAR nonsense
Many hotels rely on business generated by an online travel agent rather than direct bookings. Everybody knows this and—apart from the OTAs—no one likes it because of the commission the OTAs demand for the business they generate.
If two guests are staying at your hotel, in the same room type, and one has been supplied via an OTA, then the RevPAR is the same for both rooms but the cost of acquiring each of those two guests 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 we all love direct bookers and everyone reliant on OTAs hates it.
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; they give a far better view of the business and the true cost of acquiring a guest.
But these metrics both still miss something important—the long-term value of the guest.
2. The impact of relationships on RevPAR
Let’s consider another two guests. In this example, both guests have booked directly with the hotel and both booked the same room type, so RevPAR comes out the same. The catch is that one of those 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 ten times, as the lifetime value (£) of that customer to date is so much higher and the likely costs associated with that guest can be amortised over the ten stays so far. 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.
In summary, throwing RevPAR away isn’t sensible. Instead, it should be used in conjunction with two other measurements:
- Cost of acquisition
- Lifetime value
What’s the benefit of focusing on these three measures?
- Maximise 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