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Time for a Change: Why Hotels Need to Shift from RevPAR to NetRevPAR

31 August 2023
The adage "What gets measured gets done," often attributed to management guru Peter Drucker, captures the essence of the relationship between tracking metrics and achieving goals. While Drucker's original saying was, "What gets measured gets managed," the underlying principle remains the same: Measurement brings focus and accountability to any objective. When clearly defined and monitored, performance metrics draw attention and resources, making achieving those objectives more likely.
There's a cautionary tale in the expression, "What gets measured gets done." If an organization manages by inappropriate or misguided measurements, it can lead to counterproductive behavior, misallocated resources, and strategic blunders. In essence, what gets measured incorrectly still "gets done"—but not in a way that aligns with the true goals or values of the organization. The risk is that these faulty metrics become the compass that guides decision-making, inadvertently steering the organization away from its intended path and desired outcomes.

The All-Encompassing Metric: RevPAR in the Hotel Industry

One Key Performance Indicator (KPI) reigns supreme in the hotel industry: Revenue per Available Room, or RevPAR. This metric is calculated by dividing the total room revenue by the number of available rooms or multiplying the average daily room rate (ADR) by the room occupancy rate. In simpler terms, RevPAR provides a snapshot of how well a hotel is utilizing its capacity to create revenue.
RevPAR has emerged as the go-to metric for hoteliers for several reasons. It's straightforward, easy to calculate, and a quick barometer of a hotel's revenue-generating performance. Many hotels even link management bonuses to improvements in RevPAR, cementing its status as the ultimate measure of hotel business success.
However, the emphasis on RevPAR often comes with many unintended consequences. While it gives an idea of revenue efficiency and capacity utilization, it ignores significant factors like operational costs, customer acquisition costs (CAC), and guest satisfaction. In the relentless quest for higher RevPAR, hotels often need to pay more attention to these essential components, leading to flawed strategies, resource misallocation, and, ultimately, decreased profitability.
In the subsequent sections, we will examine the risks of having a myopic focus on RevPAR and explore how a more balanced approach can pave the way for long-term success and customer satisfaction.

Has RevPAR become a vanity metric?

The risks of focusing on the wrong metrics or measuring the wrong things are substantial in any business. This is often referred to as "vanity metrics," and the concept is applicable in various contexts, both individual and organizational.
RevPAR became the most important KPI when revenue management was invented and has been considered the essential KPI for over forty years to measure hotel success.
Let's look at how focusing on a single Key Performance Indicator (KPI) like Revenue per Available Room (RevPAR) in the hotel industry offers a prime example of the risks associated with measuring the wrong things or not seeing the complete picture.

Risks of Focusing Solely on RevPAR

  1. False Sense of Progress: A high RevPAR might make it look like the hotel is doing well, but this number does not account for the cost side of the operation. If Customer Acquisition Cost (CAC) is skyrocketing, the actual profits could diminish, contrary to what RevPAR might suggest.
  2. Resource Misallocation: The emphasis on RevPAR could lead to spending more on advertising or premium services to attract guests, neglecting other aspects like operational efficiency, customer service, or long-term investments that could be more crucial for profitability and customer retention.
  3. Demotivation: Staff and management may be demotivated when a high RevPAR doesn't translate into bonuses or doesn't reflect the quality of service provided. Focusing solely on revenue may overshadow the efforts put into guest satisfaction, leading to a disheartened team.
  4. Loss of Strategic Focus: The obsession with RevPAR might make a hotel ignore other important metrics like customer satisfaction, employee turnover, or even Net Profit Margin, which are equally crucial for the long-term health of the business.
  5. Incentive Misalignment: If bonuses and rewards are structured around RevPAR, this might encourage behaviors like overbooking, price gouging during peak seasons, or using expensive distribution channels to increase occupancy, which could be detrimental in the long term.
  6. Impaired Decision-making: Decisions like marketing spend, room pricing, or the number of salespeople could be influenced more by their potential impact on RevPAR than their overall impact on the business's profitability or customer satisfaction.
  7. Wasted Time and Effort: Focusing on a single KPI could lead to extensive strategizing and action plans around improving that metric, which may not necessarily lead to better financial performance or customer satisfaction.
  8. Reputation Risks: A strategy solely built on RevPAR might lead to practices that do not sit well with customers, like overbooking or hidden charges. This can harm the hotel’s reputation in the long term, making it harder to maintain even that high RevPAR.

Preventative Measures

That was an extensive list of risks, so let's look at a few ways of preventing some of those risks.
  1. Constant Re-evaluation: Management should regularly review the KPIs they use for performance evaluation, considering various metrics that account for customer satisfaction, customer acquisition costs, and long-term sustainability.
  2. Consult Multiple Perspectives: Front-line staff, customer service teams, and even guests can offer valuable insights not captured by RevPAR. Their input can help identify potential areas for improvement.
  3. Look for Lagging and Leading Indicators: While RevPAR is a significant lagging indicator, leading indicators like online reviews, customer surveys, or employee satisfaction could provide a more rounded view.
  4. Understand the Full Context: Utilizing complementary metrics like NetRevPAR, which is RevPAR after deducting the Customer Acquisition Cost (CAC), Gross Profit (GP), Gross Operating Profit (GOP), or Customer Lifetime Value (CLV), could offer a fuller picture of the hotel's performance.
  5. Pilot Testing: New strategies to improve KPIs other than RevPAR can be tested on a small scale before full implementation.
Hotels can align their strategies more closely with long-term success, customer satisfaction, and overall profitability by adopting a more holistic approach to performance measurement that complements RevPAR.

Time to switch from RevPAR to NetRevPAR

Switching focus from RevPAR (Revenue per Available Room) to NetRevPAR (Net Revenue per Available Room) could mitigate some risks associated with a narrow focus on top-line revenue. NetRevPAR considers not just the revenue generated but also the costs associated with generating that revenue, offering a more comprehensive view of a hotel's financial health. Here's how focusing on NetRevPAR could minimize risks:

More Holistic Financial Perspective

  • RevPAR only considers revenue and can inadvertently encourage cost-indifferent behavior if the revenue numbers are strong.
  • NetRevPAR, on the other hand, factors in the costs, such as customer acquisition costs (CAC), including distribution costs and commissions to third-party booking sites. This forces the management to consider both sides of the profit equation.

Incentivizes Cost Efficiency

  • With RevPAR, there's little direct incentive for management to control costs, especially if these costs are boosting occupancy or room rates.
  • NetRevPAR pushes the management to scrutinize how revenue is generated, promoting cost-efficiency and possibly leading to a more sustainable business model.

Aligns with Profitability Goals

  • RevPAR can be misleading when not considered alongside profitability. High revenue does not always translate to increased profits.
  • NetRevPAR is more closely aligned with the ultimate goal of most businesses, which is profitability, thereby encouraging strategies that are sustainable in the long term.

Better Resource Allocation

  • RevPAR does not give insights into whether the revenue is being generated cost-effectively, potentially leading to resource wastage.
  • NetRevPAR can guide better resource allocation by highlighting current expenditures' effectiveness at generating net revenue.

Encourages Balanced Customer Acquisition Strategies

  • RevPAR might encourage hotels to keep filling rooms, regardless of the cost to acquire customers, which could include hefty commissions to third-party booking sites.
  • With NetRevPAR, the focus could shift to more cost-effective booking strategies or loyalty programs that offer a better return on investment.

Improved Risk Management

  • NetRevPAR allows for a more nuanced understanding of financial risk, as it accounts for the cost structures behind revenue streams. This can be invaluable in periods of economic downturn or heightened competition where cost management becomes crucial.
By shifting the focus to NetRevPAR, hotel management can encourage a more balanced and responsible approach to growth that considers revenue, costs, and profitability.

Final thoughts

For four decades, the hotel industry has leaned on RevPAR (Revenue per Available Room) as the bellwether metric for success. While RevPAR has its merits and provides a quick snapshot of revenue-generating efficiency, it tells an incomplete story. RevPAR's singular focus on revenue generation, absent the context of costs and profitability, has led many organizations down the path of short-term gains at the expense of long-term sustainability.
The time has come for the industry to evolve and adapt by shifting its attention to NetRevPAR (Net Revenue per Available Room). Unlike RevPAR, NetRevPAR considers the crucial element of cost, aligning more closely with the ultimate business goal: profitability. This comprehensive metric encourages better resource allocation, incentivizes cost-efficient strategies, and fosters a more holistic understanding of financial health and risk management.
In an increasingly competitive and dynamic marketplace, where customer acquisition costs are rising and profit margins are under pressure, NetRevPAR offers a more nuanced, complete, and actionable picture of performance. By making this shift, hotels can ensure they are surviving and thriving with a business model built for resilience and long-term success.
The industry has relied on RevPAR as its guiding star for 40 years; now it's time to navigate by a more complete constellation. NetRevPAR is that next step, providing a fuller, more nuanced understanding of what it truly means to be a successful and sustainable business in the hospitality world.