General Managers have high pressure on increasing occupancy rate which directly generates revenue. Unfortunately, higher revenue doesn’t always equate to increased profitability. A hotel with lower occupancy than competitors of similar size can enjoy higher profits. It is a proven fact.
In order to maximize profitability, hotels must focus on distribution. Revenue management exactly shows the real picture that how much other resources are contributing. Revenue management focuses on filling maximum rooms. The variation in room rates is tolerable to an extent. High occupancy doesn’t mean high profitability. REVPAR and occupancy alone are not sufficient to measure profitability.
Let’s try to understand this with help of a hypothetical scenario having two properties Hotel A and Hotel B. both hotels have only 10 rooms but implement different strategies: Hotel A is focusing on maximizing occupancy, Hotel B prioritizes revenue management.
Hotel A achieves 100% occupancy by lowering the room rate, generating X in revenue. Hotel B achieves a lower occupancy but sells each room for higher price thereby gaining more profit. The profit difference is not much but if you consider some more factors like cost per occupied room, amount of preparation of the room for occupancy, housekeeping , on toiletries, inspection and Now the difference increases. The gross profit of hotel B is increased overall.
From the study, we can depict that operational expenses with occupancy also increase. Hence Average Daily Revenue (ADR) contributes more to generate more revenue. But this is profitable only when the lower occupancy rate is compensated by the gain in ADR. Hence, high occupancy by itself is not a good indicator of profitability and managers must prioritize implementation of revenue policies.
Occupancy forecasting is a routine task in hotels but profit forecasting is not so common. Earlier the trend was to stick to one rate and maintain the prestige of brand but now the time has changed. As per the variance in occupancy and other expenditure, room prices may vary which increases use of solutions like dynamic pricing and channel management decisions. The hotel managers couple all the values together and come up with optimal pricing strategies.
High occupancy does not signify that room rate has to be increased. The date of occupancy forecast is a crucial factor when it comes to adjusting pricing. A study done on mid-sized hotel suggests that during the high occupancy demand, we must increase room rents but if it is a continuous scenario and occupancy is high for a longer period then we must adjust prices. Booking pace or pickup refers to the rate of at which hotel is receiving bookings.
Considering these parameters, along with occupancy reports, can help in developing effective revenue policy. We should make a note that high profitability is a systematic revenue management strategy – not high occupancy!