What Is the RevPAR Formula? Plus Tips and How to Use It

By Indeed Editorial Team

Published 12 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Hotels use revenue management strategies to set prices that attract their targeted clientele and promote revenue growth. These strategies often track several performance metrics, one of which is revenue per available room. If you're working in the hotel industry, learning how to use the revenue per available room formula can help you accurately estimate a hotel's financial performance. In this article, we set out the revenue per available room formula, show you how to use it, discuss some tips and share other performance metrics you can use to assess a hotel's profitability.

What is the RevPAR formula?

RevPAR, an abbreviation for revenue per available room, is a key performance indicator many hotels use to determine how lucrative their business is. They can also apply this formula to decide whether they're charging too much or too little. Other hospitality establishments can use this formula, including bed and breakfasts, inns, motels and hostels. Here are the two basic variations of the formula that you might use:

RevPAR = Total rooms revenue / Total rooms available

RevPAR = Average daily rate × Occupancy rate

Many businesses use this formula to compare their current figure with previous calculations. For example, an increase in the current figure can indicate a rise in the average room or the occupancy rate. These comparisons can then guide how to increase revenue best.

How to use this formula

Consider using the following steps to learn how to apply this formula:

1. Prepare the necessary information

First, consider which formula you want to use for your calculations. Then, prepare the information you require. If you decide to use the first formula shown above, gather the total revenue from the rooms and the total number of rooms available. For example, a boutique hotel charges an average daily rate of $100, and seven rooms are in occupation. You can find out the total revenue from the rooms by multiplying the average daily rate by the number of rooms occupied, which amounts to $700. This boutique hotel has 10 rooms, so that's the total number of rooms available.

If you want to use the second formula shown above, prepare the average daily and occupancy rate figures. The average daily rate is $100, using the same boutique hotel as an example. Since there are occupants in seven out of 10 available rooms, you can find the occupancy rate by performing the following calculation:

7/10 × 100% = 70%

2. Apply the formula

Once you've attained the prerequisite figures, you may substitute them into your chosen formula. Applying the same figures in the first step, here's what your calculations might look like if you're using the first formula:

RevPAR = Total rooms revenue / Total rooms available

$700/10 = $70

Here are the calculations for the second formula, using the data provided in the previous step:

RevPAR = Average daily rate × Occupancy rate

$100 x 70% = $70

3. Review the results

Compare your results with the previous results to learn more about the state of the hotel's business. If your current figure is higher than the previous figures, then it's likely that there's an increase in the average daily or occupancy rate. Knowing this can help you decide whether to raise the rates. Following the previous example, if you increase the average daily rate to $120 and the occupancy rate drops to 60%, the revenue per available room increases to $78.

Tips for using this formula

Here are some tips and strategies to help you use this formula more effectively and increase the hotel's revenue:

Research consumer demand patterns

Since this formula involves the daily revenue earned from occupied rooms, increasing the pricing or the demand for rooms can result in higher revenue. Learning more about the patterns of customers who patronise the hotel can help increase revenue. For example, understanding when the peak periods of demand are can allow a hotel to charge more than its competitors while still attaining maximum occupancy. Additionally, this enables the hotel to maintain its regular pricing during intervals of low demand as it can use the revenue earned during peak periods to pay for its costs.

Provide excellent customer service

Making it a priority to deliver exceptional service to customers can impress them and encourage them to return. This is especially true if they're first-time customers or the market is highly competitive. One way of providing good service is to ensure that all amenities are functional and aesthetically pleasing.

An easier way to create a more profound impact on a customer is to put in extra effort to ensure their satisfaction. For example, if it starts raining as a guest is leaving the hotel to explore the area, a staff member could offer them an umbrella. This type of customer service can increase the word-of-mouth referrals that the hotel enjoys, attracting more clientele and boosting its reputation.

Enforce longer length of stay requirements

A great way for a hotel to increase its total revenue is by requiring a minimum length of stay. You can combine this strategy with promotional offers to entice customers. For example, you might advertise a package for an upcoming holiday, where the customer gets to spend an extended weekend in the best suite. Encouraging customers to make bookings for a longer period also lessens the turnover work the hotel's staff performs. In the long term, this can help a hotel minimise its costs.

Use predictive intelligence

Predictive intelligence, or predictive analytics, is a type of data analytics that involves creating personalised experiences for each customer. To do this, hoteliers first gather information on their customers' behaviour patterns and characteristics to form a profile. They can then use the profile to determine the marketing strategies that might engage their target clientele.

For example, if a hotel's main client base consists of artists and patrons of the arts, hosting regular art installations and classes is a great way to increase revenue. It can also boost the hotel's reputation as a supporter of the arts. Predictive analytics can also help determine future occupancy rates by assessing past booking trends.

Other useful metrics for hoteliers

Here are some other useful metrics you can track as part of a revenue management strategy:

ARPAR

This key performance indicator finds the adjusted revenue per available room. ARPAR includes the costs for occupied rooms, such as cleaning, water, energy usage, internet accessibility and toiletries. This metric is a great way for hoteliers to understand the effectiveness of their pricing strategies. Here's the formula for this metric:

ARPAR = (Average daily rate - Variable costs per occupied room + Additional revenue per occupied room) × Occupancy rate

TRevPAR

TRevPAR is an abbreviation for total revenue per available room. This metric considers the total revenue for every facility in the hotel, including swimming pools, spas and restaurants. This is a great measurement for accountants and hotel managers who want a more holistic understanding of a hotel's profitability. Here's the formula for calculating this metric:

TRevPAR = Total revenue / Total number of rooms

GOPPAR

Hoteliers use the GOPPAR metric to find the gross operating profit per available room. Gross operating profit is the amount that a hotel makes after subtracting all operating expenses, such as internet and electricity bills. This metric can indicate the overall operational profitability of an establishment. Here's the formula for calculating the GOPPAR of a hotel:

GOPPAR = Gross operating profit / Total available rooms