If you are new to Revenue Management you might quickly get overwhelmed by the amount of jargon RM´s use on a daily basis. You needn't worry! In this article we will be covering the ABCs of Revenue Management's most important terms.
Average Daily Rate (ADR) or Average Room Rate: A measure of the average rate paid for the number of rooms sold.
ADR = Actual daily room revenue / total rooms sold.
Average Length of Stay (ALOS): It is the average number of days guests stay at the hotel and can be calculated for a particular period of time.
ALOS = total occupied room nights in a hotel or segment / number of bookings in the hotel or segment.
Average Rate Index (ARI): ARI is a KPI that compares the performance of a hotel´s ADR to their competitive set during a specific and similar period of time. The information about the competitive set is available through third-party providers such as STR (Smith Travel Research). An ADR of above 100 means that the hotel is achieving more than its fair share of ADR, wheras a result below 100 suggests that the hotel is achieving less than its fair share, and the competitive set is achieving more than their fair share.
ARI = (hotel ADR / ADR of the competitive set) * 100
Best Available Rate (BAR): BAR is the best avaiable rate of the day to the Public (unqualified guests). The BAR rates, does not require pre-payment, include any addititonal services or benefits and the cancellation policy is the one normally followed by the Hotel.
Booking curve: An important tool that shows bookings over a period of time in a graph. It includes pickup, number of bookings, availability and yielding capacity of the hotel over time.
Booking window: Booking window can also be called Lead Time. It is the the number of days between the day a reservation is made to the actual arrival date to the hotel. This can be calculated for an individual guest, or an average can be taken for a group or segment.
Capacity: The set number of rooms in a hotel.
Central Reservation System (CRS): A system that is used by hotel groups to centralise key hotel information such as data from the Property Management Systems (PMS), inventory and rates to be able to manage the reservation process. A CRS provides hotel room rates and availability for many different distribution channels. The software is often acquired from a third-party vendor. Channel management The methods and systems used by hotels to update hotel information, room inventory and rates for each of the distribution channels.
Channels: The different methods by which or locations where a customer can books a room at the hotel.
Closed to arrival (CTA): A mechanism used by revenue managers to control inventory by blocking guests from arriving on a certain date, meaning no new reservations can be taken for guests arriving on this date. (You may stay through the date, but cannot arrive on that date)
CTD - Closed to Departure: A mechanism used by revenue managers to control inventory by blocking guests from departing on a certain date, meaning no reservations can be taken for guests departing on this date. (You may stay through the date, but cannot depart on that date)
Commission: The payment that a travel agent or OTA receives per reservation that is made through their channel. The charge is usually a fixed percentage of the room rate, ranging between 10% and 30% depending on the size and influence of the OTA as well as the size and popularity of the hotel.
Competitive set (comp set): The competitive set or "comp set" for short is the group of hotels by which a property can compare itself. Usually this group is made up of hotels that can be considered competitors as they have similar concept, pricing, target market and location.
Conversion: Once a customer transitions from shopping and/or enquiring into purchasing.
Day(s) Before Arrival (DBA): The number of days before the date of arrival.
Demand: Hotel demand is the level of interest in a hotel, specific room type, event, conferencing space or other. Revenue managers need to be aware of the demand in their market of reference to make informed pricing decisions. Seasonality, special events, holidays are all factors that might impact demand.
Types of demand might be:
Constrained demand: Demand for a particular date respective of a hotel's capacity (100% demand being full capacity).
Unconstrained demand: Demand for a particular date irrespective of a hotel's capacity.
Elastic demand: Demand that is sensitive to fluctuating pricing levels.
Inelastic demand: Demand that is not sensitive to fluctuating pricing levels.
Displacement Analysis: An analysis that is conducted to determine whether it’s beneficial to take rooms out of a specific inventory that could be filled by another segment of business and generate higher revenues. For example a hotel can calculate the value of the group booking compared to what transient bookings would generate by contrast, if the group booking generates more you would keep it, if transient bookings would generate more, the group inventory would be moved to transient segment of business. Dynamic Pricing The practice of selling the same product at different prices. Sometimes referred to as surge or demand pricing. It is a pricing strategy in which businesses set flexible prices based on current market demands.
Rate fence: Rate fences are restrictions that require customers to take on higher risk or forego flexibility. In exchange, appropriate discounted rates are offered which helps to prevent high-ended guests from trading down.
Forecast: Forecast is used in order to have a realistic picture of probable future of occupied rooms and rates to us and show the amount of revenue that is to be expectes based on forecast analysis, which includes predictions of occupancy and average rate.
Full Pattern Length of Stay (FPLOS): A pattern indicating whether a rate is open (available) for the arrival date and length of stay. FPLOS controls allow a hotel to accept a discount rate up to a peak period, removing the disocunt on the peak days and offering them again for longer lengths of stay, thus improving occupancy on the less popular days (shoulder days) and increasing overall revenues.
Gross Operating Profit Per Available Room (GOPPAR): A KPI that measures total revenue minus operational and marketing expenses per room.
GOPPAR = (Total Revenue – Controllable Expenses / Rooms Available for Sale)
Group Displacement: The process of evaluating a group’s total profitability in comparison to the profitability of making those rooms available to other types of travellers or channels.
Leisure traveler: Someone traveling for personal reasons not for business.
Length of stay: The number of nights a specific guest has booked at the hotel.
Lose-it Rate: The rate at which the hotel does not profit from selling the room, so it is better to leave the room unsold and not incur the variable costs that selling it would bring.
Market Penetration Index (MPI): MPI is a KPI that compares the performance of a hotel´s MPI to their competitive set during a specific and similar period of time. The information about the competitive set is available through third-party providers such as STR (Smith Travel Research). An MPI of above 100 means that the hotel is achieving more than its fair share, wheras a result below 100 suggests that the hotel is achieving less than its fair share and the competitive set is achieving more than their fair share.
MPI = (hotel occupancy percentage / occupancy percentage of the competitive set) * 100
Minimum Length of Stay (MinLOS): An inventory control mechanism used by revenue managers to optimize stay patterns. This could help for example to ensure that a peak demand nights do not get filled with one-night stays.
Net rate: The rate after subtracting commisions.
No show: When a guest makes a reservation but does not make use of the room and does not notify the hotel they will not be coming. This means the hotel room cannot be put back on the market. Often hotels will charge the full amount or charge a no-show fee (if they have the creditcard details or have pre-paid).
Occupancy: Occupancy is a KPI usually represented as a percentage. It is the percentage of the available rooms that were sold during a specified period of time.
Occupancy = rooms sold / rooms available
Online Travel Agency (OTA): Online Travel Agencies are a third party selling the respecative hotel's rooms on it booking site. The amount of inventory to be sold by OTA's is usally agreed upon and the hotels pay a commission on rooms sold by OTAs.
Open Pricing: The method of pricing all room types, channels and dates independently of each other with the intention of maximising revenue.
Overbooking: The practice of accepting and confirming reservations beyond a hotels capacity. It can either be by error or as a strategy to fill the hotel to its capacity considering a certain percentage of rooms will be cancelled last minute or be no-shows.
Pace or Pickup: The pace at which reservations are made for a particular date or time frame that can be measured by rooms, average rate and revenue
Profits per available room (ProPAR): An emerging KPI that calculated average room profits, instead of the more conventional revenue. This factors in all costs a hotel incurs to acquire and host a guest.
ProPAR = total profit / total number of rooms
Property Management System (PMS): Hotels local software that is used by an individual hotel to facilitate and store data of reservations, check-in and check-out and guests profiles.
Rate parity: A strategy to maintain consistency in room rates where the same rate structure for a hotel exists across all its distribution channels. Is usually a legal agreement between a hotel and an OTA where they agree to provide the same rate for the same room on all the distribution channels.
Revenue per available room (RevPAR): A KPI used to assess how much revenue an hotel have made within a certain period of time.
RevPAR = occupancy * ADR
Revenue Generating Index (RGI) or RevPAR Index (RPI): A hotel KPI that can be used to determine whether a property is achieving its fair share of revenue compared to their competitive set. The information about the competitive set is available through third-party providers such as STR (Smith Travel Research). An RGI of above 100 means that the hotel is achieving more than its fair share, wheras a result below 100 suggests that the hotel is achieving less than its fair share and the competitive set is achieving more than their fair share.
RGI = (RevPAR of the property / RevPAR of the competitive set) * 100
Revenue Management: The practice of predicting customer demand and optimizing the price and availability to best match demand. The goal of Revenue Management is to increase and optimise revenue by selling the Right Room to the Right Client at the Right Moment, at the Right Price on the Right channel.
Revenue per Square meter of function space (REVPAS): A KPI used to measure the performance of a hotels function space.
REVPAS = total function room revenue / total square meter of function room space
Revenue per available seat hour (REVPASH): Similar to RevPar for rooms, REVPASH is a KPI used to monitor the performance of food and beverage outlets in a hotel.
REVPASH = total revenue per hour / total number of seats
Revenue Strategy: An approach to revenue management that encompasses the entire hotel business into a holistic plan to increase the company's revenue in the short and long term. A strategy includes ways in which the hotel will manage pricing, demand, distribution channels and products and services amongst many other elements.
Shoulder Date: Specific hotel hights that are next to dates that are highly desirable and expected to be sold out. For example, if Friday and Saturday are forecasted to be sold out and Sunday and Thursday are not these would be considered shoulder dates.
Stay Pattern Management: A process whereby revenue managers seek to optimise the hotels capacity by analysing stay patterns on the books. Revenue managers might use stay control techniques to ensure that the stay patterns do not result in un-sellable stays. Transient "Leisure and business guests where rooms are sold at rack, corporate, package, or government rates and corresponding revenue
Total Revenue Per Available Room (TREVPAR): It is a KPI that gives a preview of the total revenues of the hotel while RevPar only takes into account revenue generated by room sales. As such TREVPAR is an indication of overall financial performance of a property.
TREVPAR = Total Revenue/ Number of Rooms Available
Total Revenue Per Client (TREVPEC): It is is a KPI used to calculate the total revenue a hotel generated per guest.
TrevPAC = Total Revenue/ Number of Guests
Unconstrained Demand: The forecast of demand (in number of rooms) that is irrespective of the hotel capacity. Revenue Managers identify when unconstrained demand is above the hotel capacity as part of their revenue management strategy.
Regret: A regret represents a prospective client that has been shown a room rate online but the guest did not book the room. This could be for a numer of reasons from the guest deciding to cancel a booking or not completing it in full. Hotels often keep track of Regret statistics to assist in forecasting occupancy and setting prices.
Denial: The response that the hotel gives to clients that attempt to book the hotel once the hotel is fully booked at that time is called Denial. Hotels often keep track Denial statistics as a measure of unfulfilled demand, which can be used to yield more effectively.
Yield = (Actual sales/ Potential sales) or Yield = (RevPAR/ Rack Rate)
Yield Management: Yield or Revenue Management is the process of understanding, anticipating and reacting to customer needs and behaviors with the intent of maximizing revenue/profit out of the limited and perishable inventory of hotel rooms. A part of Yield or Revenue Management is implementing a variable pricing strategy.