Which Top Line Revenues Result in the Most Bottom Line Profits?
By Amy Bair Career Services Analyst, Florida International University's Chaplin School of Hospitality and Tourism Management | October 25, 2015
Co-authored by Gregory T. Bohan, Instructor, Florida Atlantic University College of Business.
Thanks to the Age of Technology, Revenue Management has risen to the top of the Agenda for virtually every hotel Executive Committee meeting. The question to be answered historically has been "How do we maximize our revenue stream?" But that question has been expanded to "How do we maximize our revenue stream and ensure that dollars coming in on the top line survive the journey to the bottom line?" The simple answer is focus on optimizing room rates. The numbers make the case.
The answer to that question has remained unchanged for as long as anyone in the industry can remember. For most full-service hotels (notable exceptions being casino hotels and similar facilities with high revenue generating ancillary departments) and virtually all select service hotels, Rooms Departmental Profit far exceeds, on a percentage basis, departmental profits from any other operating departments. While Total Revenue Management focuses on expanding revenues from all departments, the fact that the percentage "drop" from the Rooms operation is typically higher means that, even in this very mature era of revenue management, it still makes sense to focus heavily on driving room revenues whenever possible – particularly by increasing ADR rather than increasing occupancy since increases in ADR come with virtually no attached increases in variable expenses.
The focus on increasing RevPAR via increases in ADR is evident by an examination of industry statistics. As shown in the following table, on a per-available-room basis, Rooms revenue dominates the income stream for virtually every type of hotel studied:
Source: (PKF Hospitality Research 2015)
According to PKF Hospitality Research's Trends in the Hotel Industry USA Edition 2015, in 2014 average daily rate (ADR) experienced a 4.5 percent increase due to demand exceeding supply which allowed operators to drive ADR higher. Generally, it appears that trend will continue since the pace of increases in demand itself seemed little impacted by the increase in rates which was well above underlying inflation. With both higher ADR and higher occupancy, the REVPAR increase in 2014 was 8.2 percent over the previous year. Total hotel revenues in 2014 increased by 6.9 percent, the biggest gain since 2007 but still less than the increase in rooms revenue as evidenced by the jump in RevPAR.