Round 1: The Law of Averages
I’ve never been a fan of averages. Averages hide too much. If you measure using averages, everything gets compressed into a neat little package. That can be great sometimes, but without a second metric to measure, say variation, you really can lose a lot. For example, you can compress a symphony into a single note, but what does it really tell you?
If you insist on measuring using room rate averages, give yourself some better information definition unsung average room rate per category. Breaking up your average in this way gives you a wealth of information that a simple average does not. Specifically, it tells you what kind of rates you are getting in each category, and how well you are really doing in terms of getting your rates right.
Why is this important? Well if your average room rate is 333€, is it because you sold three deluxe rooms at 333€ each, or one suite for a thousand? Did your rate come from good revenue management practices or from selling many rooms too cheaply and one overpriced suite suite as a wedding gift? And if the latter is the case, can you really count on it happening again next week? Or tomorrow? Breaking down global averages into their component parts multiplies your analytical insight a hundred fold.
Average room rate: 453€
A pretty good average room rate. No need to worry.
The breakdown: (Classic @ 170€ + Classic @ 190€ + Suite @ 1000€) / 3 = 453€
Average room rate per category – Classic: 180€, Suite: 1000€
A nice rate for your suite, but is is sustainable? And is 180€ is quite low for a luxury classic room. Could you have charged more and still made the sale?
The breakdown: (Classic @ 170€ + Classic @ 190€) / 2 = 180€
Suite @ 1000€ / 1 = 1000€
With an average room rate per category, you get higher quality, actionable information.
What about Occupancy?
Another problem with average room rate comes down to its formal mathematical definition: The total of the observations (i.e. Total Sales), divided by the number of observations (total rooms sold). Practically, you take your total sales, lets say for the month, and divide it by the number of rooms sold that month. Made a million euros in July and sold 4000 room-nights? Congratulations, you made 250€ per room. Make half a million euros and sell 2000 room-nights? Guess what, you also made 250€ per night. Did you only manage to sell a single room the whole month? You guessed it, you made 250€ per night. Average room rate, even if you break it down by room category, does not include your occupancy figures, which means that you are missing some important information. And while its true that you can use the two numbers together, it makes direct comparison more difficult and less acurate.
It’s easy, but so is RevPAR
In fact, possibly the only good parts about a global average room rate is that it is simple and you have been using it for years. But the alternatives are just about as simple, and with just a bit of work, will provide you with tremendously more insight into your operation.
Next Time: Round Two: Revving it Up