Occupancy not the metric to focus on to maximize revenue

Although occupancy is a common metric used throughout the hotel industry, revenue strategists said it’s not the most important one to focus on when it comes to maximizing revenue.

“Along with occupancy comes cost per occupied room,” said Tim Kolman, senior solutions engineer for Duetto, who has also worked as a revenue manager for such companies as Hyatt Hotels Corporation, Concord Hospitality and CSM Corporation. “If you’re basing your decisions on occupancy without cost per occupied room, you are making the wrong decision.”

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Sloan Dean, senior vice president of revenue optimization at Ashford Hospitality Trust and a member of the Hospitality Sales & Marketing Association International Americas board of directors, said revenue per available room is a step in the right direction, but the metric is not ideal.

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“If you really want to maximize profit, some type of [gross operating profit per available room] or net revenue minus customer acquisition costs is more what you need to be looking at,” Dean said.

Kolman agreed, adding the best metrics for revenue managers to focus on if they want more contributed to the bottom line include: average daily rate; demand, not necessarily occupancy; pace; cost per occupied room; and ancillary revenue potential.

“If you are looking at these holistically, when looking at CPOR and additional revenue it becomes more of a GOPPAR versus RevPAR, which it truly should be. The combination of all of these listed will make up GOPPAR,” he said. “The industry needs to continue to evolve from the traditional RevPAR … into a more cost per acquisition, gross operating profit metric.”

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Higher Occupancy, Lower Profits?

But why is occupancy not the metric to focus on? In some cases, sources said, higher occupancy can lead to higher costs and lower profits.

Kolman posed the following scenario for a 100-room hotel:

80 percent occupancy at $100 per night

    • 80 x $100 = $8,000
    • CPOR = $20
      • 80 x $20 = $1,600
      • $8,000 - $1,600 = $6,400 profit

100 percent occupancy at $80 per night

    • 100 x $80 = $8,000
    • CPOR = $20
      • 100 x $20 = $2,000
      • $8,000 - $2,000 = $6,000 profit

Over 365 days, this is a difference of $146,000 in profit.

“The other thing to keep in mind if you’re running a higher occupancy strategy is that in the long run, if you are running extended periods of high occupancy, you will have a lot more cost associated with refurbishments,” Kolman said.

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“I would say typically the more occupancy, the higher your [gross operating profit] will be. Since we’re in a high-margin business … typically you’re pretty safe in saying an extra body in the building leads me to at least a few cents more in take-home house profit,” Dean said.

He said there are some exceptions, however. Some high-occupancy situations can lead to lower profits if hoteliers are focusing on occupancy instead of maximizing total revenue.

“There’s definitely peaking out on a certain day and preventing stay through availability by maximizing occupancy on Tuesday/Wednesday, maybe not maximizing profit for the entire week as a stay pattern,” Dean said. “Occasionally, there are citywides or certain events that if you lowered your rates you could sell out, but if you maintain your rates you may reach additional occupancy but not necessarily peak occupancy.”

Shift the Business Mix

To shift from high-volume bookings to high-profit bookings, sources said hoteliers should consider shifting the business mix.

While raising price points across all segments is a step in the right direction, Dean said it’s really about a remix of business.

“Instead of having a low-rated wholesale piece of business and trying to sell retail transient or high-rated corporate transient … it’s taking certain types of groups that are higher-rated retail customers versus discount or wholesale,” he said.

Kolman agreed that raising rate is not always the answer, but rather shifting the mix is key. He posed the following scenario of a 100-room hotel at 75-percent occupancy that doesn’t change occupancy or rate. Instead the business mix is shifted:

  • 20 percent of business is rack at $200 ADR
  • 60 percent is discount at $150 ADR
  • 20 percent is group at $160 ADR

If 10 percent of the business is shifted from discount to rack, and ADR or occupancy is not changed, the hotel will earn:

  • +$136,875 in top-line revenue
  • +$5 in ADR
  • +$3.75 in RevPAR

“Plus distribution costs may go down as rack is booked direct with a lower cost per acquisition than discount, delivering more to the bottom line,” Kolman said.

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He said it’s important to know the demand potential by segment/channel. “You can’t shift your business if you don’t know what you are missing.”

For example, he listed the following segments:

Extended-stay

  • Higher costs for one-four nights compared to 30-plus night stays
  • High risk in high occupancy in one-four nights (could limit the amount of extended-stay guests if you peak over certain periods).

Economy / Select-service

  • Higher costs for complimentary breakfasts.

Full-service/Luxury

  • The market segment ancillary spend is different. Corporate guests are more likely to eat in restaurant or order room service. Leisure guests are more likely to eat offsite.

All-inclusive resort

  • Longer length of stay usually will result in lower costs. Guests tend to leave the resort the longer they stay, which helps the resort save on costs.

Family-friendly resort with many outlets

  • Once guests are onsite, they are a captured audience and spend money in the different outlets at the resort.

Additionally, Kolman said the industry is used to looking at historical data to determine demand, but there is technology out there that can look at future demand as well as regrets and denials. In the past, the industry used regrets and denials as a tracking method but moved away from it due to human error. When the human error is taken out of the equation, tech-based analysis can help in a long-term strategy. This technology is one of the reasons why online travel agencies have been successful, Kolman said.

Overall, he said the most successful revenue directors are those who shift the business mix rather than make decisions based on an ADR or occupancy play—because those strategies are detected more easily by the competition.

“You can fly under the radar and blow the competition away because they can’t identify the strategy if it’s not an ADR or occupancy play,” he said.

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