Net Revenue Per Available Room (NRevPAR) a top KPI for hospitality industry in times of volatility.

Over the past few years the hospitality market has been nothing but low volatility. But we all know change is constant. As revenue managers enjoy further potential increases in RevPAR in times of a hot market, what is the plan during a deteriorating market as consumers begin to save more and spend less. Focusing on RevPAR is great but have we all been paying close attention to Net Revenue Per Available Room (NRevPAR) as the true KPI for Revenue Managers, if not now, you should consider it now.

What is Net RevPAR?

The NRevPAR metric is used to calculate the net revenue generated per available room in a hotel. In this context, net revenue refers to the room revenue generated, minus any costs associated with distributing the room. As a KPI, it provides a picture of how successful a hotel is at making money from each of its available rooms.

Before we dig deeper lets first break down RevPAR. If you live in the hotel or revenue management world we know this can easily be calculated by taking Occupancy % multiplied by Average Daily Rate (ADR) to get to a rough RevPAR. This tells us for every room available on the property we will generate this much revenue per day. It’s a great number to determine revenue growth, property valuation, management’s performance or basic intrinsic value of the property in the competitive market set.

RevPAR is the back of the pocket budget number for Revenue Managers, let’s grow by 2%-5% Year over Year RevPAR, Rolling 12, etc. It is a great statistic to show management the properties performance, as we can all think of it as the derivative of Occupancy and ADR.

Even though RevPAR paints a picture of performance. as an executive, manager or owner in hospitality or CRE it comes down to Net Operating Income (NOI). When you live and breath in Revenue Management or Marketing the main focus if “Revenue, Revenue, Revenue”. It’s cash in the door that serves as the life of the operation. Especially within Revenue Management and Marketing your budget is solely focused on the highest paid “heads in beds”.

As hot markets cool and lowering the properties rate is never The place we want to Start. maybe you don’t if you have been watching NRevPAR. NRevPAR has been in the hospitality industry since the beginning, just hasn’t been a top KPI for management until times of cooling or complete market saturation.

It’s time to accept the challenge on USGIN NRevPAR KPI.

Ideas for calculating NRevPAR

Management should think of NRevPAR as the Effective Gross Profit, Gross Revenues less Cost of Sales. Where the Cost of Sales should cover commissions, direct sales salaries and all technology costs related to revenue management. Also have your finance department or accountant break this information out by market segments or Channels in order to compare the value created from each segment.

Lets take a look at example.

Here we have three market segments with revenue and rooms available. Assuming all rooms are AVAILABLE for sale across segments. there are various different ways to allocate costs, one is through percent of revenues from those segments. We agree not all revenues are created equally. for simplicity we are going to just use % of revenue to allocate costs. so below we have calculated the percentage of revenue for each segment.

Channel Rooms Available Room Revenue RevPAR % of Rev
BAR 18,250 $400,000 $21.92 44%
DISCOUNT 18,250 $300,000 $16.44 33%
GROUPS 18,250 $200,000 $10.96 22%

Now lets take a look at the costs of sales. costs of sales can be subjective but we also need to be realistic. if you have sales people who are solely booking group or negotiated accounts you wouldn’t allocate thier costs to walk-in or discount guests. in this case we are going to allocate the costs to keep things simple. Let’s assume the salaries are directly related to Sales, Marketing and Revenue management. If these salaries were only selling group room nights, then you would want to allocate the salaries only to the group market segment.

Below we have listed out our salaries, Marketing budget and technology costs only related to revenue management. This would be booking engines, rate management tools, marketing tools etc. think of every technology system directly related to generating revenue for your properties with no sunken costs from other uses.

Item Costs
Salaries $150,000
Marketing $65,000
Technology $35,000
Costs of Sales $250,000

Bringing it all together.

now that we have DETERMINED the direct cost of sales to revenues we will allocate those costs using a percentage of Revenues (%). you can choose any method of allocation for your own kpi, and even have discretionary costs as you BELIEVE they should be applied. below we have allocated the costs using percentage of revenue which results in the FOLLOWING. also commissions from travel agencies have been broken out to determine the total “Distribution Costs” for each segment.

now by taking the total Room Revenue - Distribution costs = Net Revenue

From here you can calculate the KPI by dividing in the Rooms Available to get to a number you can track overtime and compare to different segments or channels. As you can see below the RevPAR for BAR equals $21.92 but the NREVPAR is $10.22, compared to discount is $16.44 and $13.97, respectively. in this case our discount strategy is contributing more net revenue then our BAR market segment.

By all means its not a bad thing we have revenue generating from BAR at a lower net contribution, its just a matter of what can be done in order increase the NREVPAR to the same level as the higher segments.

Channel Rooms Available Room Revenue RevPAR % of Rev Est. Cost of Sales Commissions Distribution Costs Net Revenue NRevPAR
BAR 18,250 $400,000 $21.92 44% $133,333 $80,000 $213,333 $186,667 $10.22
DISCOUNT 18,250 $300,000 $16.44 33% $100,000 $15,000 $45,000 $255,000 $13.97
GROUPS 18,250 $200,000 $10.96 22% $66,667 $75,000 $125,000 $6.84

Fine tuning NREVPAR

Now say you have the ability to make adjustments to technology contracts, negotiate lower commissions and maybe focus on a smaller marketing budget with a new discretionary line item. Well let’s see how this can ULTIMATELY change NREVPAR without any changes to salaries or Revenues. ultimately the goal is to generate the same revenue by making a few minor tweaks or managing the flow of revenue to lower cost segments or channels can directly raise NREVPAR.

Below we can see by focusing on the higher cost versus lower channels can quickly bring NREVPAR up to a better balance.

Channel Rooms Available Room Revenue RevPAR % of Rev Cost of Sales Commissions Total Distribution Costs Net Revenue NRevPAR
BAR 18,250 $400,000 $21.92 44% $111,111 $40,000 $151,111 $248,889 $13.63
DISCOUNT 18,250 $300,000 $16.44 33% $83,333 $15,000 $45,000 $255,000 $13.97
GROUP 18,250 $200,000 $10.96 22% $55,556 $75,000 $125,000 $6.84
Jerry Ward