RevPAR growth translated into profits

Hotel profitability is the primary measure of success for hotel owners, managers and operators. However, revenue and top-line data continue to be the focus of the industry.

There is, however, a clear relationship between top-line performance (RevPAR) and overall profitability (gross operating profit per available room). While examining the relationship between revenue growth and profit growth, generally, profit growth tends to be between 1.5 and 2.0 times the growth in revenue. So a 10% increase in revenues equates to a 15%-20% increase in profits (GOPPAR). Currently, with profit margins near peak levels and significant profit growth tough to come by, this ratio tends to be lower than in past years. If we look at individual hotel performance growth, the relationship is immediately apparent.

In addition to looking at percentage growth, we can also examine absolute growth in revenues. GOPPAR is a function of RevPAR growth. The correlation is much higher when looking at absolute RevPAR and GOPPAR growth.

For every rupee increase in RevPAR, full-service hotels see an increase in GOPPAR. There is also a fixed element in this relationship. The constant tells us that for a static RevPAR, GOPPAR actually decreases. This demonstrates the rising levels of operational costs, like labour costs, HLP costs, F&B Costs, R&M Costs, etc.

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Feel my bottom-line

Just concluded a two day public seminar on Contextual Selling with participants having sales experience from 1 – 15 years in selling heavy to light machines, real estate & hospitality, high-end cables etc.

Surprising to note that after all these years of selling, sales persons are unaware of the concepts of bottom line and top line. Some of the answers on top line were “management”, “high quality”, “top down approach” & “booker” while their take on bottom line ranged from “customer” to “low quality” to “bottom up approach” & “guest”. In an audience of 19 participants, not one came close to the concept of revenue and profits!

Organizations must seriously ensure their sales personnel understand the basic concepts of their financial statement as then only will they sell with a better understanding of their contribution to the organization.

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