Is occupancy a relevant factor in measuring a hotel’s revenue ?
Occupancy somewhere or the other has a direct connection with the revenue generation for hotels. “More the occupancy, more the revenue”, which implies that the number of occupancies is directly proportional to the revenue generated. But experts say that occupancy is not the most important metric when it comes to generating revenue, it is the cost per occupied room which matters the most. Income generated by the hotel having fewer rooms but more ARR fetches more revenue than the hotel having more occupancy and less cost per room.
Earlier hotels were more concerned about the occupancy in hotel business only because it was the only metric used to measure a hotel’s performance. Hoteliers and the managers used to keep the room rate same throughout the year regardless of season, timing, or vacation period. Why was this done ? Because this was the only metric that was available to the hoteliers and hotel managers.
A particular occupancy target would not ensure profitability because there is another factor involved in it called “ADR” or otherwise called Average Daily Rate.
Pricing adjustments done on the basis of occupancy tend to lead to a loss rather than making a substantial contribution towards the success of the hotel’s revenue. To say that “occupancy” is the sole driver of hotel’s revenue would be incorrect as many more factors are taken into account. Be it booking through the website or any 3rd party website, occupancy is the least relevant factor to be considered. Online travel agencies sometimes focus mainly on occupancy because to maximize bookings and filling the occupancies is their sole objective, but direct hotel booking focuses on providing the best room rates coupled with good occupancy rate.
Let us take an example of how this works out:
First instance – A hotel is dependent on OTAs for its bookings and occupancy as well as its revenue.
The occupancy of the hotel is 90% of the 100 rooms he owns but the average room rate is 5000 whereas the ideal average room rate should be 5500 INR.
If we calculate the above stats we would find that: Total Rooms – 100 Rooms Percentage of Occupancy per day – 90% of the total rooms, i.e. (90/100)*100 = 90 rooms, which means that the per day income of the hotel is – 90*5000 = 450000 INR (The total income of the hotel per day with an average room rate of 5000 (INR) The commission of the OTA is 20%, so the remaining amount left with the hotel is 450000 – (450000*(20/100)) = 450000 – 90000= 360000
This is the income that the hotel makes when it focuses on occupancy rather than the price per room. Had it been the ideal price, then the income would have been more Let the occupancy be 85% of the total rooms i.e. 85 rooms Taking the average room rate of 5500 INR the total income comes to 85*5500 = 467500 Deducting the commission of 20%, the amount comes to 467500-(467500*(20/100)) = 374000 INR Rate difference is 374000-360000 = 14000 INR So the above calculations show that when an hotelier focuses more on occupancy he tends to lose his side on income, more the occupancy, more is the booking but your income front diminishes.