How is revenue calculated in hotels? Definition and how to maximise it
by Beonprice - 14 November, 2022
Revenue is a valuable metric used to calculate the total sum of all income generated from a company’s business activities. Whatever industry you’re in, your revenue is a direct reflection of the overall financial health of your company. The more revenue you generate, the healthier your business is, and the more likely it is to succeed in the long term. However, there are a few ways to calculate revenue and the factors you need to take into consideration can vary by industry.
So, how is revenue calculated in the hotel industry? And how can you maximise your hotel’s revenue?
Let’s take a look.
The Uniform System of Accounts for the Lodging Industry (USALI)
The first point to clarify before we can answer the question “How is revenue calculated in the hotel industry?” is what revenue means in hospitality.
The Uniform System of Accounts for the Lodging Industry (USALI) has published a specific accounting system for the hospitality sector. This system includes a number of definitions relating to revenue so that hotels can conduct a comparative analysis between different operations and departments.
According to USALI, all services within a hotel can be included in one of the following categories:
- Room sales.
- Food and beverages, including revenue generated from room service, restaurants, bars, room minibars, conferences, meetings, events, and functions.
- Revenue from other operational departments, including health clubs/spas, golfing and other recreational activities, retail, business centres, and minor operating departments such as vending machines, guest communications, and in-room entertainment (movies, etc.).
- Miscellaneous revenue generated from other indirect sales, such as rented spaces for gift shops and other guest-related service providers.
Room revenue is usually calculated as a stand-alone metric. Anything other than room sales is classified as ancillary revenue. The total sum of all room and ancillary revenue is known as your total operating revenue. It’s important to understand these different concepts before you can calculate the different types of revenue in your hotel.
How is revenue calculated?
Generally speaking, when we talk about revenue in its simplest form, we are referring to room revenue. When we talk about total revenue, we are talking about the revenue generated from all departments and business activities.
There are a number of room revenue KPIs that you should be monitoring on a regular basis. The most important of these is revenue per available room (RevPAR). This formula helps you calculate how much revenue your hotel is generating from room sales. Keeping track of this metric can help you optimise your hotel’s overall performance. However, this metric only takes into account actual room sales. This means you also need to track other key metrics to fully understand how much revenue your rooms are generating.
These additional room revenue business intelligence metrics include:
- Occupancy rate: the number of available rooms in a hotel that are occupied at any given time.
- ADR: your average daily rate.
- RevPOR: revenue per occupied room (all revenue generated from an occupied room, including room service and laundry service, for example).
- GOPPAR: gross operating profit per available room (regardless of whether rooms are occupied or not).
- TRevPAR: total revenue per available room (regardless of whether rooms are occupied or not).
- NRevPAR: net revenue per available room (takes into account distribution costs associated with selling a room).
- ARPA: average revenue per account (the average amount of revenue generated per customer account over a given period).
- EBITDA: earnings before interest, taxes, depreciation, and amortization (used to measure a hotel’s overall financial performance).
How to maximise your total revenue
Although room revenue has traditionally been the primary focus of revenue management until now, the revenue management model of the future is shifting towards the concept of total revenue management. This is where revenue from your ancillary services is also taken into account.
Although it’s important to create marketing and pricing strategies to help you sell more rooms, it’s equally important to promote these additional revenue streams. That way, you can continuously maximise your total revenue, not just your room revenue.
And what’s the best way to do this?
Ultimately, the best way to maximise your total revenue is by getting to know your customers. How much are your customer segments willing to pay in line with demand trends and market positioning? What experience are they looking for when they book with your hotel? Which pain points in the guest lifecycle can you improve in order to boost your ancillary revenue streams?
The more you are able to improve your overall guest experience, the more revenue you will generate from both your rooms and your ancillary services. And that is the key to maximising your total revenue and establishing yourself as a successful and reputable business.