The most important metrics for hotel revenue managers

October 14, 2016

The hospitality industry is one of the most comprehensive and detailed when it comes to analytics and its key performance indicators (KPIs). By measuring every aspect of its revenue streams, these KPIs can really reveal important information about the health of a property and help revenue managers make better decisions about how to better improve the profitability of the hotel.

We’ve put together a list of the most important metrics relevant to hotel revenue managers. This convenient cheat sheet begins with the most common terms and gets more specific toward the end. We’ll follow up this post specifically with a list of the most important metrics for hotel e-commerce managers—specifically those who deal with online distribution and the hotel website.

Key hotel revenue metrics

Occupancy (OCC)
This is the percentage that shows how many of your available rooms were sold for any given period. It is calculated by dividing the number of rooms sold by total number of rooms available and it could be applied to any specific period of time you want to analyze: daily, weekly, monthly, or yearly.

Average Daily Rate (ADR)
This is the second most common term that comes up in any hotel discussion. It represents the simple average of all rates guests paid for one night of their stay on any given night. Because guests each pay different rates for their respective stays, ADR sums them all up and blends them into one single average rate. It is calculated by dividing total room revenue for the night by total number of rooms sold. This can also be applied to any specific period of time, not just daily.

Revenue per Available Room (RevPAR)
The most comprehensive and important metric hoteliers depend on to make smart decisions is RevPAR. It blends occupancy with ADR but also includes the impact of your unsold rooms, giving you a true picture of profitability and success. It is calculated by dividing the total room revenue by the total number of rooms available (or alternatively, multiplying OCC by ADR for any given time period). It is the first metric a seasoned hotelier would want to look at when analyzing the health of a hotel business. 

Average Length of Stay (ALOS)
This metric identifies the average length of stay of your guests, which is calculated by dividing the total occupied room nights by the number of bookings. A higher number is better, as a low LOS metric means reduced profitability due to increased labor costs. For example, 7 one-night guests require more labor costs than serving 1 weeklong guest, even through the total room nights are the same.

If your LOS metric shows that for a certain time period you are accommodating more one-night stays than usual, then you can make revenue management adjustments and maybe increase your one-night rate while offering a more forgiving rate for 2+ night stays. Similarly, if you have a slow day in the week (usually Sundays), you can place a minimum LOS restriction on Saturdays, channeling more 2+ night guests to your demand pool and helping your slow days. 

Comp Set
For hotels, choosing a competitive set is one of the most important things you can do in order to get accurate metrics on how your hotel is doing compared to its competitors in any given market. Although it is highly subjective, most hotels choose their comp set based on factors such as neighborhood, type of hotel, number of rooms, facilities, ADR, and more. Essentially, all the hotels within a comp set should compete in that geographic market for the same type of customers (demand). 

Market Penetration Index (MPI)
Also referred to as an Occupancy Index, the MPI is a key comparison metric from one of the most essential reports in the industry called the Smith Travel Accommodations Report. Most hoteliers simply call it the “STR Report.” MPI compares your hotel’s share of business in your market to your competitors, giving you a picture of your share in the overall market occupancy rate (how big a slice of the pie you’re getting in your market).

You can calculate it by dividing your hotel’s occupancy rate by that of your comp set and multiplying the result with 100. Any number below 100 will mean that you are not getting your fair share of the demand in your market and any number over 100 means that you’re doing an excellent job and in fact stealing business from your comp set. MPI is the first metric that shows how you are doing compared to others in your industry.

Average Rate Index (ARI)
ARI is used to measure a hotel’s ADR performance compared to its competitive set. You find ARI by dividing your hotel’s ADR by your competitive set’s ADR and multiplying the result by 100. Analyzing fair share principle is same as MPI, where any number below 100 indicates poor performance, while anything above 100 is excellent. This metric can also be found on daily, weekly and monthly STR reports.

Revenue Generated Index (RGI)
Also known as the RevPAR Index, RGI blends MPI and ARI to show you a more complete performance snapshot compared with your competitors. MPI and ARI alone are not enough to show all the details. For example, you might have achieved excellent results in your MPI that are above 100 while your ARI might have suffered. It means that you sold your rooms at rates lower than your market can absorb. While you might have stolen occupancy share from your competitors, if your ARI is much lower than 100, then your comp set might have potentially reached the same revenue total as yours with less effort at a lower cost, increasing their profit per rooms sold. Your RGI metric will help solve that puzzle for you.