In April 2020, U.S. hotel occupancy fell to 24.5%, the lowest monthly performance in history.

Now, more than two years later, the industry has roared back with YTD June 2022 RevPAR up 3.9% to 2019 levels. However, while revenue has generally returned, profit has not. GOPPAR remains down 13.5% to 2019 which has put additional pressure on owners and investors.

While RevPAR and GOPPAR have historically been closely correlated, this relationship has subsided during Covid as not all hotel revenues have rebounded equally and operating models have shifted in the face of changing consumer demand, labor challenges, and macroeconomic volatility. Therefore, it is time for the revenue management model to evolve as well and focus more on profit optimization via the maximization of total hotel revenue as opposed to just rooms.

RevPAR has been the hotel industry's primary metric and performance indicator for decades, and rightfully so. However, the reality is that RevPAR cannot be taken to the bank and, in a time when margin pressures are arguably at their highest point in the industry's history, RevPAR does not tell the whole story. There are three distinct areas that revenue managers can and should focus their efforts:

  1. Shift from a RevPAR-first mindset to a GOPPAR-first mindset

  2. Look for ways to optimize and generate additional ancillary (non-room) revenue

  3. Recognize that not all revenue is created equally; therefore, look to optimize the most profitable distribution channels

GOPPAR Mindset

Prior to the onset of Covid, RevPAR growth and GOPPAR growth were closely correlated. From 2017-19, U.S. RevPAR grew an average of 2.3% per year, with GOPPAR experiencing similar growth. The pandemic's significant impact on business mix (heavy leisure and limited group) coupled with shifts in consumer behavior (fewer trips, but longer length of stay) has resulted in a change to this paradigm. Through June 2022, RevPAR has broadly recovered relative to pre-pandemic levels whereas GOPPAR has not. With operators facing rising pressures from owners and lenders to fulfill their obligations, revenue managers have an opportunity to meaningfully impact the bottom-line by altering their mindset.

This mindset evolution starts with a keen understanding of consumer behavior and guest segmentation. Historically, revenue managers have focused on optimizing occupancy at the highest rate, with the assumption that ADR flows nearly 100% to the bottom-line. The adage that selling one room at $1,000 is better than selling ten rooms at $100 has been the underlying philosophy of the revenue management discipline. The challenge is that this attitude ignores the ancillary revenue contribution of each room and inherently favors the highest-rated segments. Instead, revenue managers should adopt a more micro-perspective of guest segmentation as follows:

Group: Group guests are given a lower rate, relative to the hotel's selling rate, in exchange for signing a contract guaranteeing a certain number of rooms. The agreement also includes an assurance of food and beverage in the form of banquet business which is often highly profitable (40-50% profit margin on average in the U.S.). Additionally, group guests typically behave in a predictable manner as they are bound by specific events, meetings, and meal functions. This limits variable costs as the hotel can accurately forecast staffing and other needs.

Leisure: Transient leisure guests typically book the highest rates but are the most unpredictable both with respect to their booking habits and the way in which they "consume" the hotel. Leisure demand patterns are highly seasonal and can vary significantly based on day of week and market events. While food & beverage usually exists, it comes via hotel restaurants which are often barely profitable (0-20% profit margin on average in the U.S.). This volatility in overall booking demand and consumption behavior often results in higher variable costs as forecasting staffing needs can be a challenge.

Corporate: Transient corporate guests are also given a lower rate, relative to the hotel's selling rate, in exchange for guaranteed annual room night volume. While food, beverage, and other ancillary revenues can be volatile, the behavior of these guests is highly predictable as they often spend most of the day outside the hotel. This results in lower variable costs as consumption can be easily forecasted. Additionally, distribution costs for this segment are often amongst the lowest in the hotel due to lack of commission. 

Once revenue managers shift to a profit-focused mindset, it is imperative to start looking beyond rooms. Total hotel revenue management, while not a new concept, has been heavily underutilized and is crucial for the industry's long-term recovery.

Ancillary Revenue Optimization

Hotels invest an incredible amount of time and resources in generating room night demand. Starting with high-level awareness marketing campaigns to direct sales efforts and everything in between, demand generation is one of the largest expenses for most hotels. Yet, when a hotel succeeds in capturing that demand and the guest physically arrives at the property, little is done to optimize the spend of that guest. This is a major opportunity and one that revenue management is uniquely positioned to address. The generation of incremental, ancillary revenue has the potential to directly influence the bottom-line. Some opportunities are as follows:

Creation of a Dynamic Pre-Arrival and Front Desk Upsell Program

Front Desk upsell programs are not new, but most are based on static methodologies. The strength of revenue management lies in the implementation of variable and dynamic pricing. Why not then apply this same methodology to an upsell program given that upsell revenue has nearly 100% flow-through?

Demand-based (variable) pricing for ancillary services

The hotel industry has historically been averse to implementing variable pricing outside of rooms. Given the ubiquity of variable pricing across most industries (e.g., Uber/Lyft, toll roads, etc.), customer acceptance is generally high. Since hotels already change their room rates depending on seasonality, demand levels, and guest segments, they should consider adopting demand-based pricing models for any service that fulfills the following criteria:

  1. Constrained Capacity (i.e., number of rooms is static)

  2. Perishable Inventory (i.e., today's rooms cannot be resold tomorrow)

  3. Relative Demand Predictability (i.e., how many rooms will be sold next week)

  4. Varying Customer Segments (i.e., group guests vs. leisure guests)

Utilizing the above framework, revenue managers have an opportunity to implement variable pricing models to many areas across their hotel, including cabanas, spa treatments, restaurant reservations, overnight and daily parking, and golf tee times. While some of these pertain specifically to resorts, the framework can be applied broadly to all sectors across the lodging industry. If done properly, this framework can not only positively impact profit, but also increase guest satisfaction.

The implementation of variable pricing for ancillary services should be approached using basic revenue principles: when demand exceeds supply prices go up, and when supply outweighs demand prices go down. As an example, hotels rarely vary their pricing for overnight or daily parking; however, demand fluctuates significantly based on hotel occupancy, supply is constrained by number of parking spaces, and there are varying customer segments (e.g., overnight hotel guests vs. guests attending a hotel event).

Therefore, akin to the way in which revenue managers change room rates, so too should they adjust parking prices. Not only should the daily parking rate change based on demand, but rates should also vary based on the customer type. Given that parking revenue has an 80% profit margin in the U.S., this strategy can result in meaningful GOPPAR increases. 

Not All Revenue Is Created Equally

The major challenge with a RevPAR-focused mindset is that it treats all revenue equally. Aside from the obvious differences (e.g., spa revenue is different from parking revenue), there are tangible differences within room revenue itself stemming from distribution costs. As an example, one dollar generated from a third-party is not the same as one dollar from a direct booking channel. Commission, marketing fees, and other booking costs can have an impact on profit and, as such, should be a key revenue management focus.

While this may seem like an academic exercise, there is real practical application, particularly for hotels that are constrained by capacity, either due to excess demand or staffing limitations resulting in an inability to sell all available rooms. In the immediate aftermath of Covid, most hotels adopted the "anything and everything" strategy for generating demand. While this strategy was a necessity in most markets, conditions have changed. Although not universal, many hotels and markets now have an opportunity to optimize demand based on booking channel profitability. Revenue managers should be cognizant of the GOPPAR contribution within a booking instead of just its RevPAR impact.

The above framework provides revenue managers with a strategic way to optimize profit instead of maximizing revenue. It all starts with the adoption of a wholistic strategy grounded in a GOPPAR-first mindset, with the recognition that RevPAR does not tell the whole story. Much in the way the broader lodging industry has reinvented itself during Covid, so too should the revenue manager. Individuals in this function should start to think of themselves as total hotel revenue optimizers, with a deep understanding of how each revenue channel contributes to the hotel's overall profitability.

By Zach Demuth Head of Americas Hotels Research, JLL Hotels & Hospitality Group