How AI Boosts the RevPar Equation for Hospitality Brands
Profitability for hotels seems like a pretty straightforward formula: book as many rooms as possible, for as many nights as possible. But it's not always that simple, as their is another factor that is as equally as important as the number of rooms booked, which is the Revenue Per Available Room (RevPAR). With RevPAR, hotels know exactly how much they're making from every room, every night— whether it's booked or not.
RevPAR is a long-standing revenue management strategy in the hospitality business, giving hotels insights into how much to charge for various room types depending on the day, week, month, or season. Today, RevPAR can be increased with even better targeting and effectiveness thanks to artificial intelligence (AI) tools that automate the data analysis processes required for making the calculations.
For example, most hotel chains and hospitality brands employ some kind of property management system (PMS) to help manage operations, such as booking, pricing, and reservations. All of these activities create massive amounts of data that can be used to optimize RevPAR and can be analyzed in real-time with AI alogrithms.
But before your sales and marketing teams are ready to use AI for RevPAR, you'll need a clear understanding of what goes into the RevPAR equation, how it affects key performance indicators (KPIs) in hospitality, and the specific ways that AI can boost RevPAR for your hotel or hospitality brand.
Breaking Down the Basics of RevPAR
The exact formula for RevPAR is a simple, but powerful way of determining the overall profitability of each property:
RevPAR = (Average Daily Room Rate) x (Occupancy Rate)
For example, the 1occupancy rate of your hotel for all rooms combined might come in at 90 percent, with the average room cost being $150 per night. The RevPAR would then be calculated as follows:
($150) x (0.90) = $135/night
The $135 is how much your hotel is making per room, per night, regardless of whether it's booked or not. Now let's take another scenario, where 95 percent of your rooms are booked at $130 per night:
($130) x (0.95) = $123.50/night
In the second scenario, you might actually think you're generating more revenue simply because you've filled more rooms. But RevPAR shows that you're better off charging more and having slightly fewer rooms filled. RevPAR is an indicator of whether or not you're charging enough for your rooms.
Of course, there are other factors that will impact a rooms profitability. Unoccupied rooms, for example, don't have costs associated with housekeeping, or booking.
Still, RevPAR shifts the focus from booking-oriented marketing to maintaining profitability with regularly priced rooms.
Finally, it's important to understand how your Average Daily Rate (ADR) works in tandem with RevPAR. ADR is one of the two figures feeding into the RevPAR calculation, and is the average revenue earned from rooms divided by the number of rooms sold. While RevPAR measures the average rate you get from rooms — occupied or not — ADR measures how much you make per room you actually sell. ADR, therefore, provides a better measure of profitability for rooms you actually sell. It can be compared side-by-side with RevPAR to give you a clearer picture of your property's performance.
Applying AI to Hospitality Management
Now let's talk about how AI tools and technology are applied specifically to the hospitality industry and set the stage for how AI can be used to increase RevPAR. In general, AI is used in tandem with data residing on a hotel's PMS to gain greater customer insights to achieve goals like increasing lifetime customer value and minimizing customer churn.
One of the most critical areas that AI is in play in hospitality is pricing and occupancy optimization. Hotels have always been faced with adjusting their pricing on a dynamic basis, depending on seasonal changes and travel patterns. Today, AI software can quickly and efficiently analyze these trends - combined with data in a property's PMS - to help predict well in advance how hotels should adjust their rates during summer, the holidays, low season, and so forth.
The same goes for occupancy maximization, where AI can anticipate room demands based on several external factors, like overall hospitality market conditions or local events in the area. These insights can inform both pricing and marketing efforts designed to fill as many rooms as possible at the right price point.
Boosting RevPAR Numbers with AI
Predictive and dynamic pricing with AI has a direct and powerful impact on RevPAR. Instead of pricing based on guesswork, AI helps hotels make more accurate, data-driven pricing decisions that are designed to keep RevPAR as high as possible at all times.
Once you've determined the best price point, AI can also be extremely valuable in marketing efforts to fill your hotel without lowering rates. You can integrate an automated analytics software with your marketing software, for example, to send previous customers highly personalized, targeted ads and promotions based on data collected during their past stays and personal preferences gleaned from that data.
Hospitality brands can also integrate AI software into their booking platforms, up-selling and cross-selling more intelligently during the path to purchase. You can even create a holistic Revenue Management System (RMS) to predict demand for an entire year based on past performance, all while using an AI to monitor competitor pricing and adjust year's accordingly.
Running a profitable hospitality brand means more than just filling your hotel to the brim. You need to understand RevPAR, and understand why it may sometimes be better to charge more and leave some rooms empty. By using predictive AI software, you'll be able to make faster decisions based on RevPAR that will give you more insight into operations and pricing. Harnessing that data will help you maximize your revenue per room and maintain profitability.
To learn more about how Ki can help boost the RevPar equation, download the '4 Step Automated Process' Digital Brochure.
1 Occupancy Rate is the percentage of rooms occupied at any given time as a percentage. The formula is as follows: Occupancy Rate = (Number of Occupied Rooms) / (Number of Total Rooms). For example, if a property has 45 occupied rooms out of a total of 50 available, the occupancy rate calculation is 0.90 or a 90% Occupancy Rate.
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