Countless inns are participating in the Living Social and Groupon craze (not sure if I should use the word “fad” there, which implies a short-term shelf life) and, as seen in previous postings from Janet and me, there are a number of “rules of thumb” that can make participation worthwhile.
One thing that is happening, however, is the monstrous effects it has on Occupancy and Average Daily Rate (ADR) calculations…typical discussion mileposts among innkeepers concerning the strength of their businesses. The voucher bookings send occupancy soaring but the revenue margin on each voucher is miniscule compared to the “normal” operating rates. Consider this example from this 10 room inn in Pennsylvania:
2010 revenues were about $156,000 and occupancy was 31.7%. They sold 1156 rooms in 2010 giving them an annual ADR of $135. Like many inns, they are seasonally slow in January-May and participated in a coupon drop with a net income per coupon (after discount to purchaser and the company) of $47.25. They sold 413 coupons for a windfall check of almost $20,000…nice bucks in the slow season.
Using their 2010 performance, with these additional 413 room-nights sold, their occupancy for the year LEAPED from 31.7% to 43%! But because their revenue for the additional 413 rooms was so low, their ADR fell from $135 to $112.
With these indicators, was the coupon drop worth it?
Don’t know yet. The hotels have been using RevPar as their measuring indicator forever. RevPar is the Revenue per Available Room and is calculated by dividing the total room revenue by the number of rooms in the facility times 365 (days per year). This combines the Occupancy level and the ADR into one number and makes comparisons so much simpler.
In our guinea pig inn above, the RevPar for 2010 prior to the coupon drop impact was $42.76. With the addition of 413 room nights at $47.25 each, RevPar increased to $48.10. This makes an easy correlation when comparing performance indicators from year to year or from inn to inn.
So was the coupon drop worth it?
Some of you just now said, Yes! (I heard you!) but I am not sure you are right. RevPar does NOT take into account your expenses and the ultimate impact on Net Operating Income…the REAL driver of the strength of your business. If the inn’s expenses for the coupon drop are above $47.25 (the revenue received for each one) …their NOI dropped unfavorably. And, as you have seen in previous postings, an inn’s variable costs (for housekeeping labor, those little soaps, laundry, breakfast, etc.) can easily be $30 or more.
RevPar needs to become the measurement of choice in the B&B industry to replace Occupancy and ADR. It’ll take a generation or two to evolve, but with the current discounting crazes that will, most likely, become routine marketing tools (thus throwing the traditional indicators into a roller-coaster tizzy), RevPar is the only one that makes sense when comparing performance from year to year or from inn to inn. Scott