Introduction
Hospitality is a unique industry due to its four key characteristics: intangibility, inseparability, perishability, and variability.
It is for these reasons that measuring performance through KPIs becomes fundamental.
A Key Performance Indicator (KPI) is a measurable target that shows how individuals or businesses are doing in terms of meeting their objectives.
Reviewing and evaluating KPIs helps firms identify whether or not they are on track to meet their goals.
Table of Contents
1. Why do Hotels Need to Measure their Performance through KPIs?
A growing issue for many hotels is to generate enough demand over a constant period.
External influences can have a huge impact on the number of bookings (Seasonality, COVID-19, other global or regional events, etc.).
Therefore, successful hoteliers recognize that measuring and generating constant demand for their hotels through different forms of advertising has become a priority to increase sales.
Digital marketing agencies specialized in hospitality are familiar with many of the following hotel KPIs that will be useful to find areas to improve on.
2. Average Daily Rate (ADR)
This metric shows the average revenue from all the rooms over some time and divides it by the number of rooms sold.
Formula
Average Daily Rate = Revenue Earned through Rooms / Number of Rooms Sold
This allows hoteliers to look at how much revenue the hotel is generating daily and assess the financial situation.
Take this number to conduct a benchmark and evaluate your situation.
3. Marketing Cost per Bookings (MCPB)
Each channel has a unique set of distribution charges that might range from 10% to 50% of income. To calculate the MCPB, remove these fees from the total booking amount.
Formula
Marketing cost per booking = (Channel Revenue - Cost of Marketing Distribution) / Number of Bookings on that Channel
This statistic calculates ROI. The idea is to use every available channel to generate demand, raise awareness, boost bookings, and ultimately boost revenue. However, there must be a perfect balance across all channels with the greatest, most inexpensive solutions.
Hotels cannot overspend on a marketing channel solely to get clients; a balance must be struck between acquisition expenses and profit.
4. Total Available Rooms (TAR)
If you subtract the number of unused rooms from the total number of rooms over a specific period then you can calculate this number.
Formula
Total Available Rooms = Total Rooms in the Hotel - Unused Rooms
Especially for inventory purposes and occupancy, this metric is key to knowing the exact number of rooms that the hotelier has available to sell in a determined period.
TAR shows how many bookings are possible over a certain period and displays the hotel’s capacity.
5. Revenue per Available Room (RevPAR)
This metric is calculated by dividing the total room revenue by the number of the total available rooms (TAR).
Formula
Revenue per Available Room = Room Revenue / Number of Rooms Available
RevPar indicates the average generated revenue for each room without extra profit from food orders and other extra services that were supplied.
However, hospitality market research agencies know that an improvement in RevPAR doesn’t always imply an increase in performance.
The size of a hotel is not taken into account by RevPAR. As a result, RevPAR alone is not a reliable indicator of overall efficiency.
A hotel can have a lower RevPAR but more rooms that generate higher revenues.
6. Average Occupancy Rate (AOR)
Take the total number of occupied rooms and divide it by the number of total available rooms (TAR) to get the average occupancy rate.
Formula
Average Occupancy Rate = Total Number of Occupied Rooms / Total Number of Available Rooms
This ratio shows the percentage of available rooms that are occupied over a specific period.
Even though occupying all rooms is one of the biggest priorities of hotels, in some cases, it is not worth it.
For example, when offering too many discounts to sell the remaining rooms, the revenue from these rooms can’t cover the costs that are added for maintaining the additional rooms.
These are areas in which digital marketing agencies that specialize in hospitality should closely work together with hoteliers to ensure maximum effectiveness.
7. Average Length of Stay (ALOS)
Quite simply, the average number of days that guests stay in your hotel. To calculate it just add all the occupied room nights and divide that by the total number of bookings.
Formula
Average Length of Stay = Total Occupied Room Nights / Number of Bookings
For instance, let’s imagine that you have guest A who stays for 5 days, and guest B who stays for 9 days.
To calculate the ALOS, you need to add the total number of room nights of both guests to obtain 14 nights.
Then you need to divide that number by the 2 bookings which equals an average of 7 days.
Hoteliers can categorize guests by their ALOS and then look for other characteristics to see what are the reasons that make some of them stay longer.
This depends of course on the type of property. A resort in Cancun, Mexico probably has an ALOS of 9 days while guests in a bed and breakfast hotel in London stay for 3 days on average.
It also depends on whether it is a luxury property or an affordable motel on how long customers are willing to stay.
The luxury hospitality market is vastly different from the mass market.
8. Market Penetration Index (MPI)
The MPI compares your hotel’s share of business in the market to your close competitors in the same category.
More specifically, it measures the occupancy of your hotel against that of other similar properties in the area.
To calculate it you have to divide the occupancy rate of your hotel with the rate of your immediate competitors and then multiply by 100 to get a percentage.
Formula
Market Penetration Index = (Hotel occupancy % / Market occupancy %) * 100
If you have a number higher than 100 it means that your share is above the market average and that you are performing better than your competitors.
On the contrary, if you have a number lower than 100 it means that your share in the market is lower than the market average and as a result, your performance is below that of your competitors.
This metric allows market research agencies specialized in hospitality to evaluate the hotel’s performance against the direct competitors.
In return, this can reveal why visitors are choosing competitor services over your services.
9. Direct Revenue Ratio (DRR)
DRR shows the percentage of online revenue from direct sources (your website) vs third-party channels (OTAs, Expedia, Booking.com, etc.).
Formula
Direct revenue ratio = (Direct revenue) ÷ (Total revenue) x 100
To reach maximum profitability, you must generate at least 40% of your sales from your website or booking engine.
Reservations made by travel agencies and other third-party bookings are more expensive and reduce the net benefit.
You can increase your direct revenue by optimizing your social media accounts, re-targeting previous guests with special deals, creating call-to-actions that encourage direct contact, etc.
10. Revenue Generation Index (RGI)
This metric compares the revenue share of your hotel (RevPar) with the share of your competitors.
To calculate the revenue generated index, divide your RevPar with the RevPar of your immediate competitors. Multiply this number by 100 to obtain a percentage.
Formula
Revenue Generation Index = Hotel’s RevPar / Hotel Market RevPar
Similarly, as with the MPI, you aim to have a value higher than 100. In that case, your business performs better in terms of revenue than other hotels in your area.
In case your RGI is lower than 100, you have to improve the market share of your hotel.
Market research agencies specialized in hospitality can calculate the RGI to determine which costs/rates need to be raised or lowered to maximize the hotels’ profitability.
11. Average Rate Index (ARI)
Lastly, this metric is also used to benchmark as it shows the average daily rates of your hotel compared to your competition.
You take the average daily rate of your hotel and divide it by the ADR of your competitors before multiplying it by 100.
Formula
Average Rate Index = Your Average Daily Rate / Competitor’s Average Daily Rate
If you have a value higher than 100, this means that your rates are on average higher than the ones from your competitors and vice versa.
With this knowledge, hoteliers can adapt the hotel rates to get more bookings or to receive higher revenue.
Conclusion
Not every hotel and resort has to calculate all of these ratios to reach its goals.
Try out different metrics and keep the ones that help you measure the performance of your property.
The general advice is to not look at the different numbers in isolation but to take them together.
One number never reflects the whole picture of how a business with complex operations such as hotels is doing all the time.
Therefore, digital marketing agencies that specialize in hospitality can offer guidance in focusing on the most important hotel KPIs to improve business results.