Pros and Cons of RevPAR vs GOPPAR
By Natasa Christodoulidou Assistant Professor, California State University | October 23, 2016
Co-authored by G. Keong Leong, Ph.D,Associate Dean in the College of Business Administration and Public Policy at California State University Dominguez Hills
Revenue Management, also known as yield management, may be defined as the process of analyzing, anticipating, and impacting consumer behavior to maximize the profits from a fixed perishable resource, primarily hotel guest rooms and airline passenger seats (Christodoulidou, Berezina, Cobanoglu, 2012). Revenue management, including overbooking and dynamic pricing, has been an enormously important innovation in the service industry (Netessine & Shumsky, 2002). For example, a number of airlines overbook their reservations for a particular flight by 14% since on average they expect a 10% to 20% no shows on flights. The Marriott hotel chain credits its revenue management system for generating additional revenue of about $100 million per fiscal year. These are serious considerations that need to be constantly evaluated and revisited in establishing performance metrics.
Shoemaker and Shaw (2008), established the rules for the revenue management process in the hospitality industry as follows:
- Set the most effective pricing based on current conditions and knowledge.
- Limit the number of reservations accepted for any given night or room type based on profit potential.
- Negotiate volume discounts with groups (bearing in mind that one should not displace a higher rated individual business, but keep a few guest rooms at bay for a particular night).
- Match market segments with the right room type, price, and packing needs based on demographic information and data available.
- Enable reservation agents to be effective sales agents rather than merely order takers; they can market the property and upsell based on the information provided.
Hence, inventory control and revenue management, may appear to be similar in methodology, as executing one, may lead to the other one. The idea behind this is that with inventory control, at least in theory, one can better manage guest room inventory. In order for this to occur, guest room prices may need to increase or decrease, depending on many variables such as holidays, food and beverage minimum spent during conference and event weeks, and ancillary revenue generated by facilities in the hotel. Historically, in manual oriented systems, whenever a change in price happens, hotel operators had to update all channels manually.
This rarely exists anymore as the use of property management systems (PMS), works interchangeably with the Central Reservation Systems (CRS) of the hotel. In this way, for a particular hotel property, only one central database exists. For example when a reservation is made by a potential guest from a third-party website like Kayak, it will interface with the hotel CRS, access the current price of the particular hotel room, and therefore ensure rate parity. This is one way hotels can control their revenue management process. This method is quite popular and has worked well in the past for many hotel properties.
As part of the Revenue Management methodology, we have two models that have evolved in the last decade, the Revenue per Available Room (RevPAR) and the Gross Operating Profit per Available Room (GOPPAR).