By David Lund
For a long time now in the hotel business we have been using REVPAR index to measure how effective our sales, marketing and revenue management strategies are. In this piece, I am going to talk about what I think should come next. I do not know about you, but I can remember when we did not use and compare the index. Things changed then and I think now is the time to shift gears once again. Recent global events have rocked our industry. We have been on a pleasure cruise for years and now it’s time to get real. Are you ready?
The advent of REVPAR index and its wide use and acceptance happened in the ’90s. I can honestly say that I remember seeing it for the first time and asking the director of sales what it was all about and I also remember thinking, Why are we using it? It was certainly a revolution if there ever was one in our industry. If you are not crystal clear on the REVPAR index and how it’s calculated and why our industry is so hooked on it like it’s the new wonder drug, read about it here. Back then, before we adopted STR in the mid-2000s, we did the call around. I know many hotels lied about their actual results. The call around looked like this:
Owners, managers and brands based their performance measurement on REVPAR index. So much so that many management agreements included a performance clause linked to the index. If the brand and management company did not achieve a positive index, then they could lose the flag. Powerful stuff. With the popularity of and mistrust of the “call around” a company aptly named STAR or STR emerged and has come to dominate our industry’s landscape with a sophisticated version of the call around that is widely used. It looks like this:
So why do we now need a future that includes a GOPPAR index? “Gross Operating Profit Per Room Available,” is the output of the REVPAR less the operating expenses. Expressed as an index, this will tell the reader how well we are doing relative to our competitive set when it comes to managing the expenses and payroll, plus the impacts of F&B and every other aspect of the operation. Talk about powerful stuff. I think it’s safe to say the managers and brands would be OK to wait as long as possible before they give this view to their operations up. I also think it’s the owners that will demand it. Owners usually get what they want especially now that the need is amplified.
But why do we need it and why now?
We need it because it is simply not good enough to be in great shape with our REVPAR index. This measurement is only an indication of what profitability should or could be. We need to know how effective the manager is when it comes to translating that revenue intake into operating profit. Owners pay brands a lot for their services. The future belongs to the brand that can deliver the profit. What would things look like if a number three or four REVPAR index brand delivered a number one or two GOPPAR performance? Lower fees and higher profits would be an exceptionally good hand to hold. Right now, owners don’t know the answer. But the answer is out there.
And why now? Now is the time because of two things that have developed. One, we have the ability and capacity to calculate and share this information without too much additional fuss. We all use USALI and measure the GOP the same way. Or at least most of us do. More than one company already has a good GOP data set so generating these indexes is entirely possible. Care needs to be taken to select a good comparable set especially around labor costs, unions, etc. Secondly, the recent events in our world have taught us a big lesson. The lesson is an important one. A lesson that can no longer be ignored.
The lesson is this: Profitability trumps revenue, and the owner’s risk needs to be mitigated by measuring how effective the manager is in turning revenue into profit. Without this thru-put being measured and understood, one’s investment is at a much higher risk. What if the brand that has the higher REVPAR index does not have the same corresponding GOP index? The old lesson that we don’t take ratios and percentages to the bank rings true once again. Dollars of profit are what matters and working with the brand that can deliver the most wins every time.
Powerful stuff indeed.
Who will win the prize that is waiting? Read more about the need for a new champ in another article here.
