Revenue Per Available Room (RevPAR) – How it works?

Revenue Per Available Room (RevPAR) – How it works?

If you had any contact with hotel management KPI’s then you have probably seen or heard about RevPAR. It is one of the main KPI’s to compare your hotel performance metrics. Revenue Per Available Room helps us understand performance by combining both occupancy and ADR. If your hotel occupancy is higher than your competitors, right down the street, then maybe your rates were too low.

How do we define RevPAR?

There is a basic formula for this:

RevPAR = ADR x Occupancy Rate or RevPAR = Total Rooms Revenue /  Total Rooms Available During Period

Where we define:
ADR = Average Daily Rate = Room Revenue / Occupied Rooms
Occupancy Rate = Total number of occupied rooms / Total number of available rooms in hotel x 100

From this formula, we can conclude, that if we wish to influence RevPAR, we need to increase ADR and/or occupancy. A higher ADR and occupancy rate means more revenue per available room. But we need to know, that there is a limit, that is directly connected with the price elasticity of demand. So in one moment, increasing your rate will reduce demand for your available rooms.

Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product and/or service in relation to its price change. Hotel prices are fairly elastic, which means that there are numerous factors that make an influence on demand. From macro economies such as unemployment rates, and inflation, to local income, location of the property, etc.

So to make the right measurement you need to practice and you need to follow every relevant source of information to stay updated. Sometimes, higher ADR will lead to more bookings, but when we add unexpected factors, like the Covid19 crisis and travel restrictions, we can lower the demand when we go with the higher ADR.

What do you need to keep in mind? More reservations do not correlate to more profit if you lower your rates. You need to be careful with your profitability so that you don’t lower your rates to increase occupancy, and end up actually making less money because it costs a fixed amount of money to service each additional room. So cost management is also essential when deciding how to adapt your rates.

How to positively influence your RevPAR?

Essentialy, there are two ways to increase your revenue per available room:

  • Increase your room rates (increase in ADR)
  • More people in a room (increase in occupancy)

For the first one, we recommend the upselling technique. Try to upsell more of your services or to offer guests to upgrade their rooms. How can you achieve that? The best way is e-mail marketing, before your guest’s arrival, and on the day of check-in. Send your follow-up mail with instructions on how guests can upgrade their experience. Maybe you offer additional spa services? Some romantic dinner for two in the room? Airport pick-up? Or some local tours for your guests to experience the best that your place can offer.

For the second technique, we advise you to reach out to the group or corporate clients that can more easily place more people in every booked room. Special rates for this should do the job. Also, family vacations are a big chance for you to increase your per room occupancy.

Those were some of the basics of Revenue per Available rooms, this is something that a lot of tourism schools are teaching and experience in this field is essential for you to be better in revenue management.

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