Evaluating hotel performance: 6 key factors
The clear-cut measurability of KPIs is alluring. Occupancy percentages, profit indicators, return on investment. These are the type of traditional performance measures on which many hoteliers rely when it comes to evaluating hotel performance. Unfortunately, taken in isolation, they are now thought to provide misleading signals, failing to adequately support the needs of today’s organizations.
In order to capture the full picture of hotel performance, additional factors must be borne in mind. Does your hotel take safety seriously? Does it embrace innovation? Are you providing service excellence to your hotel guests? A more holistic view of the role your hotel plays in today’s hospitality landscape yields a more representative impression of its performance.
How to evaluate hotel performance? We have compiled the six elements that require your scrutiny. We give you: The X-factors of hotel performance.
It goes without saying that, like any other commercial business, hotels are primarily profit-driven enterprises. This requirement sees hotels pursue strategic management accounting techniques, such as cost optimization, value chain analysis and benchmarking. In doing so, they may choose between a market-orientation or sales-orientation business strategy to optimize their financial outcomes. Equally, they may opt for a more a traditional rooms-revenue model or lean towards a total revenue management approach, while the IT-savvy may seek to future-proof their business by incorporating data science into their revenue management.Various key performance indicators (KPIs) can be used to assess a hotel’s financial performance. Is the business recording a solid return on its investments (ROI)? Are hotel operations as efficient as they could be? This includes factors such as the average length of stay (ALOS), whereby longer average stays are correlated with greater profitability thanks to the minimization of labor involved in turning over rooms and processing new bookings. The gross operating profit per available room (GOP PAR) also provides valuable insights by pinpointing which areas of your hotel generate the most income and taking operational costs into consideration.
ALOS = occupied rooms ÷ number of bookings
GOP PAR = gross operating profit ÷ rooms available
Clearly, “finance” is a very broad topic which is influenced by a whole host of subset aspects. Chief among these is sales performance. Whether a hotel’s sales skyrocket or dwindle is influenced by a multitude of factors. Some of these are under the hotel’s control: its marketing activities – is it leveraging its online marketing potential? – or the extent to which it is succeeding in tailoring its offerings to specific segments. Other more “environmental” or market-driven aspects are nigh on impossible to control: the rise of Airbnb or the sudden loss of incoming tourists due to the COVID-19 health crisis. What sets successful hotels apart is how they choose to react to these situations.
Metrics such as the revenue per available room (RevPAR), the average daily rate (ADR) or the average occupancy rate (OCC) can be used to measure sales performance.
RevPAR = total hotel revenue ÷ no. of available rooms
ADR = total room revenue ÷ no. of rooms sold
OCC = no. of rooms sold ÷ no. of available rooms
The market penetration index (MPI) and the revenue generated index (RGI) can help evaluate how a hotel is performing on the market. While the MPI will tell you how many guests are choosing your hotel in comparison with other hotels in your location (results in excess of 100 being good and those under 100 being an indicator of poor performance), the RGI compares your hotel’s RevPAR to the average RevPAR on your market (results equal to or greater than 1 being good and those under 1 lacking).
MPI = hotel occupancy ÷ market occupancy × 100
RGI = hotel RevPAR ÷ market RevPAR
Various factors feed into the success of a hotel’s asset management, which, in turn, contributes to financial performance. A hotel’s location, real-estate value and even furniture, fixtures and equipment (FF&E) all play a part here. In a nutshell, asset management aims to maximize the value of hotel property.
Overviews and detailed analyses of hotel businesses on the whole can yield useful information on the revenue generated by different asset categories – how much different room types bring in, how profitable the restaurant is or how lucrative the spa area has become, for instance. A combination of operational and property knowledge allows hotel asset managers to identify potential new streams of income. Assets can also be better leveraged by completing strategic refurbishment projects or considering acquisitions, for example.
As you can tell from the above three X-factors, hotel performance remains well characterized by certain traditional criteria. To be clear, we are not suggesting the wheel needs reinventing as regards hotel performance evaluation. It simply requires a few more spokes to round off and relativize any insights gained from metrics.
No other X-factor better exemplifies this more holistic approach to hotel performance evaluation than service excellence. Service excellence is “the ability of service providers to consistently meet and occasionally even exceed customers’ expectations”. This strong orientation towards guest satisfaction relies upon various efforts and strategies, such as reliably delivering on promises, providing a personal service and pro-actively managing customer feedback. Providing service excellence is a challenge – and doing so consistently, to the point where people seek out your hotel thanks to this virtue in particular, requires a comprehensive service culture as embodied by the likes of the Ritz-Carlton.
Success in service excellence keeps guests coming back for more and the enthused reviews rolling in. So much so that there has been speculation as to whether it is the new marketing. It can be assessed with the help of review scores, and customer focus and brand standard evaluations, for example. An integral component of business viability in today’s hospitality landscape, service excellence deserves a seat at the table in the evaluation of hotel performance.
Innovation in the hotel environment can be found in review processes, by consulting consumer trends and employing fitting IT systems, for instance.
Current innovation trends in the hospitality industry include sustainable tourism, voice search and the instrumentalization of big data. The ever-expanding list includes facial recognition check-in and mobile room keys. Hotels’ ability to keep up with the times simply must feature among contemporary X-factors, while recognizing disruptive innovation ahead of time can set hotels apart.
Health and safety
When you think “health and safety”, think “risk analysis, quality labels and safety procedures”. It has always been important for hotels, as employers, to keep a close eye on workplace health and safety. Guests, too, want to spend their time in a clean, hygienic, safe environment. Meeting food safety standards is crucial for any hotel restaurant, and your legal team will thank you for staving off any potential lawsuits arising from safety-related liability issues, of course.
The COVID-19 pandemic has shone a particularly bright spotlight on health and safety. The respective regulations have become far more stringent, and guests’ expectations have become significantly higher in a very short space of time. In response to this, major hotel brands have made it their mission to instill confidence in their customers by implementing strict protocols.
Evaluating hotel performance not only in financial terms but with a view to long-lasting success thus relies upon much more than your average metrics. This wider set of strategic, financial and operational dimensions is better able to reflect the reality of hotel performance in order to be a successful hotelier, gain a comprehensive view of performance drivers, understand how your hotel’s performance stacks up against the competition and implement continuous improvement plans.
Wishing you every success!
Article by Jochen de Peuter,
Source EHL Insights