Glossary

Average collection period is calculated so that a hotel or resort property can be sure they have enough cash on hand to meet its financial obligations. It is also used to calculate the effectiveness of a property's credit granting policy and collection efforts.

Managing the average collection period is an essential tool for hotels to manage efficient operations. It allows revenue managers to evaluate credit terms and determine whether they are too strict or too lenient.

While most hotels or resorts will seek to shorten their average collection period, there is a downside to this strategy. A very short average collection period can signal that the property’s credit terms are too strict. In some cases, this can cause guests to seek out competitor’s with more lenient collection terms.

Average collection period is calculated by dividing the number of days in a calendar year (365) by the accounts receivable turnover ratio. This ratio is determined by dividing credit sales for the year by the average amount of accounts receivable for that same year.

Average Collection Period = Average Accounts Receivable / (Annual Credit Sales / 365)

Average Annual Accounts Receivable = $50,000
Total Annual Credit Sales = $500,000
Number of Days in Year = 365

Average Collection Period = $50,000 / ($500,000 / 365) = 36.5

This indicates that an average of 36.5 days elapsed between when credit sales were made and when the full amount is collected from customers. 

Benchmarking is a technique for hotel revenue management. It allows a hotel to compare itself against competitors. Specific comparisons can be made based on hotel rates, products and services, and more. The most obvious use for benchmarking is to make rate comparisons, but revenue managers can also compare overall value offered by competitors versus the value offered by their hotel or property.

Benchmarking can be used to make specific changes that help a hotel or property compete better with other hotels. In addition to helping hotels compete over attracting bookings, it also helps them at the operations level. For example, by allowing hotels to compare how their employee salaries and benefits plan stacks up against the competition, helping them to attract and retain employees. It can also benefit a hotel by helping managers better understand regional price differences, insurance coverage, and more. Overall, the greatest benefit of benchmarking is to give revenue managers more data that can be used to improve overall efficiency.

Benchmarking only provides a complete picture if all appropriate line items are being used for comparisons. If larger line items are left out, benchmarking won’t provide a clear picture of market competitiveness, and results of benchmarking won’t lead to opportunities to improve operations. There is also no universal process for benchmarking, which can cause difficulties in comparing hotel properties against one another.

Benchmarking first requires calculating the right KPIs for your hotel. Examples include Average Rate Index (ARI), Fair Market Share, and Revenue Generation Index. There is no universally accepted method for benchmarking. Each hotel must decide the objective factors it will use to make comparisons.

An example of benchmarking in the hospitality industry is hotel star ratings. These ratings provide benchmarks for comparing across properties according to quality. It is a good benchmark for guests to provide feedback on their hotel experience. However, they can vary greatly from country-to-country and there is no uniform standard on which these ratings are based.

CPOR helps properties calculate the average costs of renting out a room. This cost directly impacts a property’s profit per available room (PROFPAR). Comparing CPOR to PROFPAR allows hotels to track and measure their overall efficiency. It also provides insights into strategies that can improve financial performance.

Understanding CPOR helps revenue managers measure costs, evaluate whether those costs are reasonable, and develop strategies to reduce them. And by reducing CPOR, hotels can increase RevPAR and GOPPAR, which are essential hotel KPIs for measuring a property’s overall profitability.

CPOR is just one of many hotel KPIs used in revenue management. While reducing CPOR is an effective strategy to increase margins without altering prices or developing new revenue streams, it does not provide direct insight into a hotel’s financial performance.

CPOR is calculated by dividing the total costs of room operations by the number of rooms sold. This can be calculated for different periods, including daily, monthly, and annually.

Total Cost of Room Operations Department = $10,000
Number of Rooms Sold = 160

CPOR = 200,000 (Total Cost of Room Ops) / 165 (# of rooms sold) = $62.50

Creating a Demand Calendar is a recommended step for revenue managers to take even before creating a hotel budget. It creates a picture of how past events have impacted hotel demand and allows forecasting for how future events will have similar or different impacts on demand. A Demand Calendar can help identify how much revenue each pertinent event brings to a hotel or property.

A hotel’s Demand Calendar can be integrated with its current on-the-books and pick-up reports. By doing so, revenue managers can obtain a much broader picture of how hotel or property demand is trending. It is also a useful tool to identify how specific school or bank holidays (both domestically and internationally) affect hotel demand. This information gives a hotel the ability to specifically target these holidays with special offers or promotional packages.

A Demand Calendar must be updated regularly in order to provide accurate insights. Ideally, the calendar is updated each time an event that impacts demand is identified. Many hotels update their demand calendars at least once every week. A Demand Calendar must also account for demand exceptions. These exceptions can be considered outliers until the event is repeated and can be reasonably counted on as having a significant impact on demand. 

A Demand Calendar is organized by months and days. Pertinent data is plotted on the calendar for managers to see a visual representation of all the factors that impact hotel demand. There are a number of layouts that can be used to create a demand calendar. The visual layout that works best for a given hotel depends on the specific factors used to create the calendar.

EBITDA is used to evaluate the profitability of a hotel’s operations. It is specifically used to analyze the profits of the products and/or services sold at a hotel property. EBITDA is sometimes used as a more reliable calculation for profitability in place of simple earnings or net income. 

EBITDA calculations can be limiting because they don’t include the costs of capital investments, such as property and equipment. For this reason, using solely EBITDA to evaluate profitability can be misleading. 

EBITDA calculations can be limiting because they don’t include the costs of capital investments, such as property and equipment. For this reason, using solely EBITDA to evaluate profitability can be misleading. 

EBITDA can be calculated in two ways. The first is by subtracting expenses from revenue. In this case, expenses do NOT include interest, taxes, depreciation, and amortization. The second is by adding net income, interest, tax expenses, and depreciation and amortization together. 

In this example, we’ll use the latter of the two formulas mentioned above.
EBITDA = Net Income + Taxes + Interest Expense + Depreciation and Amortization (D&A)

Net Income = $2,000,000
Taxes = $325,000
Interest Expense = $6,000
Depreciation and Amortization (D&A) = $3,000

EBITDA = $2,000,000 (Net Income) + $325,000 (Taxes) + $6,000 (Interest) + $3,000 (D&A)
EBITDA = $2,334,000

The purpose of forecasting is to make future predictions that are as accurate as possible. These predictions can then be used to set room rates, schedule promotions, and manage group bookings. 

Depending on the design of your forecasting model, hotels can predict arrivals, departures, number of nightly guests for a specified date range, and more. Forecasting in the hotel industry is used for everything from anticipating room bookings to predicted housekeeping costs.
 

One major benefit of forecasting is identifying potential periods of low demand in advance. When a hotel knows that it might have challenges filling rooms during a particular period, it can adapt new strategies and identify proactive solutions to meet those challenges. 

In many respects, the accuracy of a forecast depends on the design of the forecasting model used. 

Forecasting models can account for a number of factors. In a basic forecasting model, commonly used metrics include the number of rooms on the books, occupancy rate on the books, and expected pick up (number of anticipated bookings between current date and forecasted date). These metrics can be used to anticipate the number of room bookings and forecast occupancy rate for that date range.

A more advanced forecasting model will provide a more detailed breakdown of the metrics mentioned above. For example, rooms on the books will be broken down by guest demographic, and room pickups will include forecasting room nights and the average room rate. 
 

GOP is used to calculate a hotel’s profits before accounting for the indirect costs associated with the production of those profits. Examples of those costs include interest payments and tax. Some examples of expenses included in a calculation of gross operating expenses include costs of goods sold, costs of raw materials, rent, housekeeping costs, food and beverage costs, and other overhead expenses -- which other hotel KPIs such as GOPPAR do account for.

GOP is a valuable KPI for hotels to evaluate year-to-year operational performance. One of the major benefits of calculating Gross Operating Profit (GOP) is for the purpose of internal comparison. For example, the GOP for the previous year can be compared to the GOP for the current year to give revenue managers an idea of whether operational efficiency has improved or declined.

All the expenses that are necessary to keep a hotel running must be included in the calculation to achieve effective accuracy. However, these expenses do not include all of a hotel (or company’s) costs. Some critics argue, then, that the GOP isn’t an accurate measurement of a company’s profitability because it fails to account for all the costs incurred by the business. 

GOP is calculated by subtracting Gross Operating Expenses from Gross Operating Revenue. 

GOP = Gross Operating Revenue - Gross Operating Expenses

Gross Operating Revenue = $4,380,000
Gross Operating Expenses = $1,460,000

GOP = $4,380,000 (Revenue) - $1,460,000 (Expenses) = $2,920,000

Hotel managers regularly calculate and observe labour cost ratios to find opportunities to save on salary costs. It is also used for identifying major inefficiencies in labour costs. As the labour cost ratio for a hotel decreases, it can be seen as increasing the efficiency of its labour force. In other words, a lower labour cost ratio is viewed favorably for a hotel’s bottom line. 

The major benefit of calculating the labour cost ratio for a hotel is to see if the hotel is overspending on employee wages or salaries. These ratios can be broken down by department to further analyze labour costs, as well as identify areas in which the company can reduce these costs. 

Employee satisfaction plays a large role in creating a healthy guest experience at a hotel, and also impacts employee productivity -- i.e. how much value employees produce per wage/salary dollar paid. Therefore, managers must assess many other methods of increasing sales revenue before solely focusing on reducing labour costs. 

The Labour Cost Ratio is calculated by dividing labour costs by total sales. The result is then multiplied by 100 to represent the final ratio as a percentage. 

Labour Cost Ratio = (Labour Costs / Total Sales) x 100

Labour Costs = $840,000
Total Sales = $20,260,000

Labour Cost Ratio = ($840,000 (Labour Costs) / $20,260,000 (Total Sales)) x 100 = 4.15%

MPI allows hotel managers to analyze how a property is performing based on industry standards as well as competitors with similar offerings. Instead of managers simply focusing on internal improvements to its occupancy rate, MPT allows hotel managers to assess whether their occupancy rate is above, below, or near average for its region. 

One of the major benefits of calculating your Market Penetration Index is in setting room rates. Understanding how you stack up against industry averages will allow you to set more competitive prices in order to increase occupancy rates. 

Another benefit of MPI is that hotel operators can preselect competing hotels and/or properties that they want to compare against, rather than simply comparing against industry averages. This allows hotels to make more specific comparisons if they’re looking to be more competitive amongst particular market segments. 

The main limitation of Market Penetration Index pertains to the competitive set that a hotel chooses for comparison. If this set isn’t an accurate representation of the market or the property’s true competition, it can skew the index and lead to inaccurate price decisions. 

MPI is calculated by dividing a hotel’s occupancy rate percentage by the average market occupancy percentage. Many revenue managers then multiply the resulting number by 100 to obtain a whole number percentage.

An MPI of 100% means that a hotel is receiving an appropriate (or full) market share of bookings. And while an MPI below 100 means that a hotel is receiving less than its expected market share, an MPI above 100 signals that a hotel is receiving more than its expected market share (based on the competitive set the hotel is comparing  itself against). 
 

MPI = (Hotel Occupancy % / Market Occupancy %) x 100

Hotel Occupancy % = 56%
Market Occupancy % = 74%

MPI = (56 / 74) x 100 = 76%

The Net Profit Ratio is a profitability ratio used by hotel revenue managers to understand profitability after certain costs. It is a KPI that removes taxes to provide a more accurate picture of the relationship between net profits and net sales.

A higher net profit ratio signals a more efficient hotel management. A lower ratio means that managers should look for opportunities to improve hotel efficiency. Net Profit Ratio is often reported on a trend line so that managers can compare a hotel’s performance over time. 
 

The main benefit of using Net Profit Ratio as a KPI is that it reveals the amount of remaining profit after factoring in operational costs such as production, administration, financing, and income taxes. In conjunction with an analysis of how a hotel is efficiently utilizing its working capital, Net Profit Ratio is one of the most useful KPIs for revenue managers to evaluate a hotel’s overall performance. 

A significant limitation of Net Profit Ratio as a KPI is that it should not be used as a measure of a hotel’s cash flow. This is because it does not include non-cash expenses, such as accrued expenses, amortization, and depreciation. It is also better used as a short-term metric because it does not account for a hotel’s actions to maintain long-term profitability. 

The Net Profit Ratio is calculated by dividing net profit after tax by net sales. The final ratio is expressed as a percentage by multiplying the result by 100. 
 

Net Profit Ratio = (Net Profit After Tax / Net Sales) x 100

Net Profit After Tax = $3,250,000
Net Sales = $36,550,000

Net Profit Ratio = ($3,250,000 / $36,550,000) x 100 = 8.89%

Occupancy rate is used to determine a hotel’s performance. By tracking occupancy rate, hotels can more accurately determine the Average Daily Rate of rooms, forecast future trends for low and peak seasons, and apply other revenue management practices.  

Without first understanding occupancy rate, most other key hotel KPIs can’t be understood meaningfully. For example, hotels still incur some operation costs for unoccupied rooms. So comparing occupancy rate with average daily rate and costs of room operations allows revenue managers to make decisions that increase a hotel’s overall profitability. 

Increasing hotel occupancy rate is a favorable outcome, but managers may have to reduce room rates to achieve 100% occupancy. Some hotels may achieve maximum profitability at a 75 or 80 percent occupancy rate, based on other key metrics. A 100% occupancy rate doesn’t always equate to maximum profits.  

Occupancy rate is calculated by dividing the number of rooms sold by the number of rooms available. As a KPI, it can be calculated for any given period revenue managers are interested in, such as weekly, monthly, and annually.
 

Total Number of Rooms Sold = 180
Total Number of Rooms Available = 300

Occupancy Rate = 180 (# of Rooms Sold / 300 (# of Rooms Available) = 0.6 x 100 = 60%
 

Price Positioning is used to evaluate whether changes to a hotel’s daily rates are needed. The decisions made after determining price positioning can help a hotel or property keep its rates competitive. The goal of successful price positioning is to make consumers recognize your product and/or service as unique and clearly distinct from the competition. 

A clear Price Positioning strategy helps revenue managers improve consumer value perception of a specific hotel or property. Evaluating a hotel’s position relative to its competitors tells revenue managers whether your prices are above, below, or at industry average. It also helps managers perform price comparisons for specific seasons or during relevant promotions. 

The limitations of Price Positioning depend on which strategy a hotel opts to choose. For example, skimming and penetration pricing are limited because they rely on capturing consumer attention in the short-term. Consequently, a hotel cannot use skimming or penetration as a long-term Price Positioning strategy.

Furthermore, the limitation of surrounding pricing is that a hotel must be able to provide that additional value in terms of facilities, services, or amenities. And the limitation of equal pricing is an inability to break in due to aggressive competition.
 

Hotel revenue managers typically use a matrix to display price positioning. There are several strategies a hotel can take with its price positioning. 

Penetration pricing is used most frequently in newer hotels. It is a strategy to set prices among the most affordable in the market. As its name suggests, it is used for new hotels and properties to penetrate a new market and can be effective if it doesn’t drive down market rates overall. 

Equal pricing sets hotel rates at values comparable to the competition. When using this strategy, other factors in a hotel’s value proposition are often used to further attract consumers. 

Surrounding pricing is a strategy that puts your most affordable room rates among the cheapest on the market. However, your most expensive room rates are then set closer to the same rates offered by your surrounding competitors. When using this strategy, a hotel must offer additional value through facilities, amenities, or services that competitors aren’t offering. 

Skimming pricing is a strategy that sets rates above the highest rates of a hotel’s competitors. Hotels that charge the highest rates often achieve increased profitability. However, the hotel must clearly offer more value than its competition and consumer reviews must back this up for this strategy to be effective. 

Rate fences are used to help revenue managers differentiate and optimize products and/or services. For example, a hotel might offer special holiday rates to attract new customers. But a hotel can set rate fences so that existing or returning clients are unable to book a room at the same special rates as new customers. This is how a hotel can use a “flash sale” to attract new customers while not giving away all of its rooms to customers that are willing to pay a standard rate. 

Rate fences allow revenue managers to increase room yield and optimize revenue. They can also be used to protect room inventory during high demand periods and to generate more long term stays. 

Other benefits of setting rate fences include avoiding revenue loss from last-minute cancellations, increasing demand potential with conditional discounted offers, targeting specific niche markets, and offering promotional campaigns through targeted sales channels. 
 

One of the challenges of setting Rate Fences is that customers must perceive the restrictions placed on their bookings as acceptable. Revenue managers must balance the need to protect a hotel’s interests with the potential to allow customers to book at lower-than-average market rates. 

There are two main types of Rate Fences: physical and non-physical. Non-physical Rate Fences can be further broken down into multiple categories, such as fences based on customer demographic, fences based on transactional characteristics, and fences based on controlling availability. 

Here are some examples of the most common types of Rate Fences: 

1. Physical Rate Fences
   • Room Location
   • Room Size
   • Room View
   • Amenities
2. Fences Based on Transactional Characteristics
   • Time of Purchase
   • Quantity of Purchase
   • Location of Purchase
3. Fences Based on Buyer Characteristics
   • Age
   • Industry Affiliation
   • Purchase Frequency
4. Fences Based on Availability
   • Geographic Criteria
   • Distribution Channels

SRevPOR is used to help spa managers optimize time management by allowing them to analyze the differences between internal and external utilization levels. This ultimately helps them make informed changes to a spa’s revenue management strategy. SRevPOR is often used alongside a hotel’s RevPOR calculation.

SRevPOR is an effective KPI for analyzing a hotel’s strategic marketing plan. It allows managers to measure the amount of spa revenue being generated per occupied room in the hotel, as well as identify trends based on seasonal demand, promotions, and other factors. 

SRevPOR can vary greatly depending on seasonality and the specific client mix staying at a hotel in any given period. It can also vary depending on the size of the spa and viability of local business. As such, it should be analyzed in conjunction with factors, such as Occupancy Rate and RevPOR. 

SRevPOR is calculated by dividing total spa revenue by the total number of occupied rooms. For the most accurate SRevPOR calculation, spa revenue should only include revenue from treatments, product sales, facility fees, and other ancillary sales. 
 

SRevPOR = Total Spa Revenue / Total Number of Occupied Rooms

Total Spa Revenue = $28,000
Total Number of Occupied Rooms = 460

SRevPOR = $28,000 (Spa Revenue) / 460 (# of Occupied Rooms) = $60.87
 

TRevPAR is often used as a benchmarking tool for all-inclusive hotels and resorts. It is a more inclusive metric for displaying how effectively a hotel is using its space to generate revenue. It allows managers to see how a hotel is generating revenue regardless of whether or not rooms are sold. 

TRevPAR can be a preferable metric for board members and accountants because it provides a broader and more generic evaluation of a hotel’s performance. It provides a more comprehensive view of how well a hotel is generating revenue because it includes revenue generated from amenities from room service sales, restaurant sales, bar sales, and more. This bigger picture view allows for more effective pricing adjustments to be made. 

A hotel’s management board and accountants should be careful making decisions solely based on TRevPAR calculations. The main limitations of TRevPAR stem from how it does not account for costs incurred by the hotel (as GOPPAR does), and it does not factor in Occupancy Rate. 

TRevPAR is calculated by dividing a hotel’s total revenue by the total number of available rooms. Total Revenue should include revenue from accommodations, breakfasts, bar sales, mini bar sales, spa sales, and any ancillary sales. 

We’re calculating TRevPAR annually in the following section:

Total Revenue = $3,080,000
Total Available Rooms = 15,680

TRevPAR = $3,080,000 (Total Revenue) / 15,680 (Total Available Rooms) = $196.43
 

Evaluating Unconstrained Demand helps hotels identify when that demand exceeds the hotel’s capacity. Identifying these periods will help hotel revenue managers identify when they might need to change revenue management strategies by raising room rates. In other words, identifying Unconstrained Demand helps revenue managers maximize revenue during periods of high demand.

Identifying Unconstrained Demand is essential for determining the value of a hotel’s ‘Last Room Available’. It also helps revenue managers apply any possible length of stay restrictions for periods of higher demand. By capturing, organizing, and evaluating a hotel’s historical guest data, managers can calculate potential Unconstrained Demand.

Using Unconstrained Demand to forecast a hotel’s revenue potential is useful because it allows revenue managers and hotel executives to identify their ‘ideal’ demand scenario. 
 

Unconstrained Demand does NOT account for a hotel’s current capacity. Some might say that a Demand Forecast that places too much value on Unconstrained Demand can be overly optimistic. This is because it does not account for any constraints that might reduce demand, therefore, reduce a hotel’s revenue potential. 

A hotel can implement its own system for calculating Unconstrained Demand. There is no universal system for making these calculations, but a hotel manager can use their existing Demand Calendar to help with these calculations. 
 

Some examples of data used to calculate Unconstrained Demand include room nights booked, expected pick up, total bookings, and total number of rooms available. Again, managers should designate a specific time period for which calculations of Unconstrained Demand are made.