True story about pricing for your hotel business. Often when I used to speak to people about the hotel, during an interview for a job or just as a matter of conversation, invariably the conversation jumps to how much ARR we should be able to get.
As if ARR is the most important part of the puzzle. Yes while it is true that ARR includes real money going into the bank, I don’t think that it is the most important metrics that we need to watch.
ARR or Average room rate can still make you bankrupt if you sell 1 room only at a really high ARR. What you should be measuring instead is the RevPAR or Revenue per available room.
After all you made a hotel to sell all rooms. If you made a 50 room hotel, it is important to try and sell all the rooms every night. That ensures that the money you spent is being used well. If not, I am sure it would have made more commercial sense to try and build lesser rooms.
RevPAR formula is Total Rooms Revenue/ No of available rooms.
or another way to put it is
ARR * OCCUPIED ROOMS/ No of available rooms
By consistently measuring this number and by increasing either the rate or the occupancy as given in the above formula, you can increase your Total revenue.
Why is it more important that ARR.
Simple because Revenue is King. It pays the bills and the interest.
In order to determine, how to increase your total revenue follow a simple grid.
|Upto 60% Occupancy||60 – 80% Occupancy||Above 80% Occupancy|
|Reduce Rate, Increase Occupancy||Charge Rates as per competitive set||Increase rates, Sacrifice Occupancy|
If you are still in the process of opening your hotel, having a plan to determine your hotel pricing might help.
Even before you open the hotel, understand the competition and make a plan of action around the existing hotels before you determine what your pricing should be.