Hotels are labor-intensive businesses with complex operations that need to monitor their performance to ensure they’re profitable. That’s where KPIs come in: like any other business, key performance indicators (KPIs) are metrics that help hotel owners and managers better understand the performance of their business.
For hotels, KPIs are legion. Yet, there are a few financial KPIs that are the most important ones and that any hotel manager or owner should track for their business. In this article we’ll discuss what are these KPIs and how you should calculate them.
We’ve also included a free simple template which you can download here to follow along. Let’s dive in!
1. Occupancy Rate
Occupancy rate is undeniably one of the most important KPIs for hotels. It represents the percentage of rooms that are occupied over a given period, vs. the total number of available rooms.
Occupancy rate should be closely monitored and tracked at the very least monthly to account for seasonality. It’s also vital to track this metric over a week to account for variations from weekday to weekends and adapt room rates as well as staffing.
This KPI can easily be calculated over a period (like a month) as follows:
Occupancy rate = Occupied rooms / Total available rooms
For example, if your hotel had 500 nights booked the last month vs. 30 available rooms, occupancy rate for the month is:
Occupancy rate = 500 / ( 30 * 30 ) = 55%
2. Average Length of Stay (ALOS)
This KPI is widely tracked in the hospitality industry. It measures the average number of days guests spend at the hotel during a given period. The metric is important because it enables the business owners to manage bookings efficiently.
The metric may provide more detailed and more useful insights if segmented into categories, such as ALOS per a given age bracket or salary range. It is calculated as follows:
Average Length of Stay (ALOS) = # Room-Nights / # Bookings
For example, the guests of a hotel spend 350 room nights in a given month against 210 bookings. The ALOS is:
Average Length of Stay (ALOS) = 350 / 210 = 1.4 nights per booking
3. Average Daily Rate (ADR)
The average daily rate (ADR) evaluates the average rental income a hotel room generates in a day when it is occupied. ADR is a critical metric for hospitality industry businesses because it helps the owners determine the effectiveness of their pricing strategy.
Tracking ADR enables businesses to determine what pricing strategy to adopt to increase revenues without hurting demand. Calculating ADR provides insights into the average rate an occupied room can generate on a given day during a specified period.
ADR is also particularly great for predictive marketing and demand forecasting. Assuredly, ADR assists hoteliers in forecasting seasonal trends, adjusting pricing strategies accordingly, and maximizing income per room.
ADR = Total revenue / Total booked nights
Suppose a hotel sells 125 booked rooms whose revenue adds to $15,000. The ADR would be:
ADR = $15,000 / 125 = $120
4. Revenue Per Available Room (RevPAR)
RevPAR is a very common metric in the hospitality industry and one of the most important KPIs for hotels. It’s a simple metric though: RevPAR is the average revenue earned per available room.
Unlike average daily rate (ADR), RevPAR is impacted by occupancy: if occupancy rate increases, so does RevPAR and vice versa.
RevPAR can be calculated with 2 formulas:
RevPAR = Revenue / # available rooms
RevPAR = Average Daily Rate * Occupancy Rate
5. Revenue Per Occupied Room (RevPOR)
RevPOR is another important metric for hotel and lodging businesses. It’s the average revenue earned per occupied room.
Unlike RevPAR, RevPOR isn’t impacted by occupancy rate. Because it represents the average revenue earned per occupied room, it’s simply a metric that tells us how well a hotel makes on average when a room is occupied. Yet it doesn’t tell us how well the hotel is doing as a whole, which is when we use RevPAR instead.
RevPOR = Revenue / # occupied rooms
As you may have noticed, Average Daily Rate and RevPOR are very similar. The only difference between the two is that RevPOR includes all sources of revenue (including extras like mini-bar, laundry, room service, etc.). Instead, Average Daily Rate only refers to the booking revenue for the room itself.
Gross Operating Profit Per Available Room (GOPPAR) is a financial metric we use to assess the profitability of a hotel business.
Like RevPAR, GOPPAR is straightforward: it’s the gross operating profit earned on average per available room. So GOPPAR calculates the margin after all operating expenses have been deducted.
It’s very important not to confuse GOPPAR with Gross Profit per available room. Indeed, even though we use the term “Gross Operating Profit” we effectively look at EBITDA here. In other words, we include salaries, food and beverage supplies, laundry costs, etc.
GOPPAR = Gross Operating Profit / # Available rooms
For example, if a hotel has 50 available rooms and it generates a gross operating profit of $3,000,000 over a year, GOPPAR would be:
GOPPAR = $3,000,000 / (50 x 365) = $164.4
7. Cost Per Occupied Room (CPOR)
Cost Per Occupied Room (CPOR) is the sum of all expenses per occupied room.
As for GOPPAR, there are different ways to calculate CPOR as hotel managers don’t always include the same expenses in the calculation of CPOR.
For CPOR we recommend using all room-related expenses only. For example you would include housekeepers salaries but not management. That way, you can compare CPOR to RevPOR and get a better picture of the profitability of am occupied hotel room. In other words, how much money do you earn per occupied room after all room-related expenses have been paid for.
CPOR = Gross operating expenses / # occupied rooms
Assuming a hotel has 50 occupied rooms on average in a particular week and it cost the business $25,000 to operate the rooms during that period. Then CPOR is:
CPOR = $25,000 / ( 50 x 7 ) = $71.4
8. Labor Cost Ratio
Labor cost ratio is a financial metric many labor-intensive businesses use to monitor and improve their performance.
Like restaurants for example, hotels are businesses that require a lot of staff to operate. After all, a hotel must have staff to welcome guests (reception), clean rooms (housekeeping, laundry), managing bookings, and so on.
As such, staff salaries represent a big chunk of a hotel’s operating expenses.
Tracking this metric helps the business to avoid overstaffing in poor economic conditions or understaffing when business is booming.
Labor cost ratio = Labor costs / Revenue
On average hotels have a labor cost ratio of around 17% to 25%.
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