News for the Hospitality Executive
Not so fast, RevPAR is still the best metric
for revenue managers
By Jean Francois Mourier, CEO & Founder of REVPAR GURU, February 23, 2010
There has been a ripple of interest lately in a new metric for the hotel industry, GOPPAR. (If it seems strange that an obscure ratio can spark an industry-wide debate, then you should start hanging out at the accounting department water cooler more often.) Proponents of the measure, which computes gross operating profit per available room, argue that it is a more effective benchmark for a hotelís overall fiscal health than RevPAR is, because it incorporates all operating costs. After all, it is profits that matter most at the end of the day- not necessarily revenues- and having a day-to-day yardstick with which to measure those profits in terms of available rooms is both useful and realistic. The advantages of GOPPAR in this area are obvious; a hotel with both high ADR and RevPAR could, conceivably, still fail to turn a profit, but a hotel with strong GOPPAR will, by definition, be profitable.
For lack of a more original assessment, we like GOPPAR. Itís a great benchmark for overall operational soundness, and we feel that it may well be the metric of the future.
In terms of revenue management and pricing, however, we still believe that RevPAR should be the standard by which hotels measure the performance of their rooms divisions. Our rationale for this is simple: GOPPAR, by incorporating all aspects of a hotelís operations, casts too wide a net to be a functional metric for revenue management, particularly on the room side. Though GOPPAR may establish a tidy industry-wide performance benchmark, it ultimately compares apples with oranges.
A simple hypothetical might go something like this: a limited-service hotel without food and beverage operations posts a GOPPAR roughly equivalent to that of a full-service hotel with multiple food and beverage outlets and a spa. From this single metric, can you tell which pricing strategy is working better? Or which revenue manager is underperforming?
Wide-view GOPPAR enthusiasts will say it doesnít matter; you canít take performance to the bank, but you can deposit your GOPPAR every night. But this scenario underlines the limitations of GOPPAR, and while the metric appears to level the evaluative playing field, itís really just recalibrating the equipment.
Since this article is basically about accounting methods, letís revisit some basic hotel bookkeeping. There are three major categories that hotel operating systems fall into: revenue centers, profit centers and cost centers. The rooms division, with minimal directly-attributable cost of goods sold, is traditionally considered a revenue center. Food and beverage, which relies on its expenses to generate revenue, is a profit center, and a department like engineering, with no directly-attributable revenues, is a cost center.
The combination of these operational centersí net contributions adds up to gross operating profit, the basis for the GOPPAR calculation. It remains useful - even necessary - to evaluate these centers independently of one another. For revenue centers, the best measure is still RevPAR.
Since the room is the primary revenue center for just about every hotel, RevPAR provides the most accurate assessment of the efficacy of revenue management strategies. As such, maximizing RevPAR should remain the goal of revenue managers, and the guiding principle behind pricing methodologies.
The best way to achieve the maximization of RevPAR, of course, is to implement a revenue management system that can manage multiple sales channels and automatically adjust pricing according to demand levels and competitorsí rates. Such a system actually illustrates the natural connection between GOPPAR and RevPAR (this mini-debate shouldnít obscure the fact that both of these metrics are just different ways of measuring the same thing). An automated system reduces labor cost in the revenue management department while simultaneously freeing revenue managers to explore new revenue-generating opportunities and allows for a focus on the bigger picture of revenue management. The labor cost figures into the GOPPAR figure, while the revenue development activities and revenue maximization through efficient pricing and multi-channel distribution contribute to both RevPAR and GOPPAR.
In short, GOPPAR canít exist without RevPAR, and though it presents a more holistic view of a hotelís performance, GOPPAR does not adequately and realistically assess a hotelís revenue management strategy. For the rooms division, then, we maintain that it is more useful to compare apples with apples, and to keep RevPAR as the baseline metric for pricing strategies and revenue management system implementation.
At the end of the day, it is the RevPAR figure that is the best guide for a revenue manager looking to help their hotel achieve profitability.
About REVPAR GURU
|Also See:||An Investment Driven Breakeven Analysis for Hotels; The Investment Driven (ID) RevPAR and GOPPAR / Elie Younes and Russell Kett / October 2003|
|RevPAR vs. GOPPAR: There Are Times When RevPAR Just Doesnít Reveal Enough; How One Hotel Company Gets Down Into the Numbers / PKF / April 2003|