RevPar is probably the most important element in developing revenue management strategies, setting targets and understanding results. This data often results in incorrect corrective actions undertaken in your strategy. However, if analysed properly, RevPar can help us to develop our revenue optimally.
What is RevPar and how to calculate it
Let’s see, first, what the definition of RevPar is and how to calculate it from the data at our disposal.
RevPar is the abbreviation for Revenue Per Available Room and indicates the ratio between the revenue generated and the total of rooms available at a property, regardless of whether they have been sold or not. It differs from ADR (Average Daily Rate) because ADR is the ratio of turnover to rooms sold.
How is RevPar calculated?
In order to define RevPar over a definite period of time, simply divide the turnover by the number of available rooms.
If, for example, we have a hotel with 30 rooms and in January we generated a €100,000.00 revenue, in order to calculate the monthly RevPar we need to multiply the 30 rooms by the 31 days of the month, obtaining 930 (the total number of rooms available in the month), and then divide the revenue of 100,000 by 930. Our RevPar will therefore be €107.52. In the same way, we can calculate the daily, weekly or annual RevPar.
What is the meaning of RevPar
Now that we have understood how to calculate RevPar, we need to understand its meaning and find the right key to read and interpret it.
First, we have said that RevPar indicates the ratio between revenue and 100% of available rooms. In other words, it is an average rate that takes into account both sold and unsold rooms. The latter, in particular, are the ones we need to focus on.
In fact, a room left empty has a negative impact on the RevPar as it affects the final average rate by €0.00.
For example, if our property has 10 rooms and, on a definite day, we were able to sell half of them (5) at an average rate (ADR) of €100.00, our RevPar will be €50.00 because the 5 unoccupied rooms produced a revenue of €0.00.
It is clear, therefore, how this element helps us to focus attention not only on the bookings received, but also on those that we could have generated, not only on the rooms occupied but also on those that we could have sold.
The age-old issue of unsold rooms
If unsold rooms have a negative impact on RevPar, it follows that the higher the occupancy rate is, the closer the RevPar figure will tend to be to ADR and vice versa. While setting targets, a Revenue Manager should be able to find the best rate that allows for the highest percentage of occupancy.
Variable costs and fixed costs
If it is true, in fact, that an unoccupied room represents a saving in variable costs (e.g. utilities, cleaning, services), at the same time it involves not only a missed earning opportunity, but also a general loss as there are, in any case, fixed costs to be covered (personnel, taxes, management costs, maintenance, etc.), regardless of whether the room has been sold or not.
An empty room is better than an occupied room?
From a strictly accounting point of view, and without going into the merits of commercial logic or product valorization, if a property had, for example, a variable cost per room of €20.00 and a fixed cost of €30.00, the lack of sales would represent a loss of €30.00.
If, however, the room were sold at a rate of €40.00 (net of taxes and any intermediation commission), we would have a loss of only €10.00.
On the other hand, if we were able to sell the room at a rate of €70.00, we would be able to cover both fixed and variable costs, and we would have a profit of €20.00.
RevPar and Revenue Management: the bottom rate and the search for the right rate
From the analysis of fixed and variable costs comes the concept of the bottom rate, that is, the minimum rate at which we allowed ourselves to sell a room in order to cover at least the variable costs, but which allows us, in any case, to improve occupancy and give continuity to the work of our accommodation facility at 360 degrees (just think about the extra services we can sell to guests to generate ancillary revenue).
How do you choose the best rate?
A necessary clarification concerns the search for the optimal rate to sell on our own distribution channels (website, OTA, tour operator, etc.).
We won’t talk here about the parameters and the continuous analysis that is at the basis of the Revenue Manager’s job (for this, we recommend reading the previous articles), but it must be stressed that decision making process is, or at least should be, the result of an in-depth study that takes into account many elements. For this reason, before using a bottom rate, we should have discarded every possible cause why the previous rate did not work.
In any case, in the revenue management strategy, it is crucial to look at the RevPar as a tool to evaluate the results achieved and as a compass to set future targets and guide sales and pricing actions.