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Key Performance Indicators in the Hotel Sector

Key Performance Indicators (KPIs) are a useful tool to assist in assessing the effectiveness of various functions and processes in achieving an organisation’s goals. By analysing performance measurements, hotels are able to identify where they can take action and make improvements, ultimately leading to increased profits and improved customer satisfaction.

Certain core KPIs have been established over the years focusing on revenue and profit measures, including REVPAR (revenue per available room), ADR (average daily room rate) and GOPPAR (gross operating profit per available room). However, in recent times, alongside the rise in big data and data analytics, there has been a shift towards more specific measures focusing on not just revenue and profits per room, but returns per square metre and how a hotel can best utilise the space it has available, as well as non-financial KPIs, such as customer satisfaction and the use of surveys and feedback forms.

REVENUE MEASURES

REVPAR is calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate, equivalent to total revenue for the hotel divided by total number of available rooms. As a hotel performance metric, REVPAR differs by market segment and timing, whilst reflecting a time-based snapshot of a hotel’s performance. It represents the success the hotel is having at filling its rooms.

REVPAR does, however, have its limitations as a revenue measure. Firstly, REVPAR usually only relates to room revenue, therefore, ignores the impact that food, beverage and conference operations have on revenue performance. Furthermore, the use of REVPAR tends to favour smaller hotels. It is often easier to achieve higher occupancy percentages in a 100 room hotel than one that has 300 rooms, particularly when there are many seasonal fluctuations throughout the year. Further, hotel values are typically based on net cash flows rather than total revenues. Whilst REVPAR can give some indication of valuation, it is somewhat limited in this respect, compared with profit or cash flow measures.

PROFIT MEASURES

In terms of profit measures, GOPPAR has been the industry benchmark. GOPPAR measures the gross operating profit per available room.

GOPPAR is clearly a more sophisticated measure than REVPAR as it incorporates both the revenue and cost elements of a hotel’s performance. It should be noted that GOPPAR is sensitive to any fluctuations in REVPAR as the profit margins in the rooms’ revenue is normally higher than elsewhere, so a slight fluctuation in REVPAR can have a significant effect on GOPPAR and, consequently, the underlying value of a hotel.

ALTERNATIVE KPIS

Although the above KPIs are still used regularly, many hotels are moving to more analytical and refined methods of measuring performance, such as customer satisfaction, environmental performance and performance based on square metre measurements.

The Gross Operating Profit per square metre (GOPPSM) method confronts the issue concerning the comparison of different sizes of hotels and non-room revenue, as the revenue reported will be linked to area and floor space. This allows for more quantitative measures of performance and will indicate how well the hotel is using the space available to it to drive its economic performance.

Non-financial measures have become increasingly important for hotels in terms of raising their profiles, particularly in the age of social media and TripAdvisor. A common practice by hotels is the use of feedback forms and customer satisfaction surveys, to monitor praise and complaints. Customer reviews are not only valuable in the way which guests select hotels based on the quality of the review, but they also provide useful feedback for hotels to effect improvements. Environmental based on carbon footprint and Online Travel Agent’s commission expressed as a percentage of room revenue are also KPIs on the rise in this age of increased Ethical Consumerism.

WHICH COMBINATION?

It is up to individual hotels to decide which measures are most suited to them, but we recommend that a focus on revenues and earnings expressed on a “per square metre” basis should be adopted more widely, both for the hotel as a whole and when measuring the profitability of individual departments, to ensure you are achieving the best value out of the space you have. And don’t forget the non-financial KPIs. No longer is it just about the cheapest rate, customer expectations are higher than ever.

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