You need to evaluate data to know how your business is doing. That’s as true for the hospitality industry as it is for any other type of business. When it comes to hotels, there are particular metrics you can look to when measuring your performance. These are known as key performance indicators or KPIs.
This article will explain KPIs’ importance for the hotel industry. We’ll also go over the seven most important KPIs for the hospitality sector and the steps to make a KPI report of your own.
- What Is a KPI?
- What Are the Different Types of KPIs in the Hospitality Industry?
- What Are the Most Important KPIs for Hotels?
- Making a KPI Report
- Final Thoughts
What Is a KPI?
Key performance indicators, or KPIs for short, are measurable values that show how a company or organization is doing about its objectives. For example, the average room rate shows how a company or organization is doing relative to its goals. Using KPIs, business owners and managers can see how their targets are met using data and calculations.
Key performance indicators cover all aspects of the hotel industry, from financial management to operations, along with all departments with measurable outcomes, such as marketing and front-of-house. For accurate data and metrics to improve performance, you need to choose KPIs relevant to the specific sector you’re working in.
What Is the Importance of KPIs?
Any industry needs to have a good record of previous performance, successes, and how these metrics relate to their goals. In the hospitality industry, KPI data is invaluable for analyzing and evaluating hotel performance.
By tracking KPI data, hotel owners can make informed decisions based on previous performance and use that data to understand the hotel’s trajectory clearly. Moreover, hotel data analytics give the business insight into various factors influencing performance.
KPIs provide hoteliers with valuable learning opportunities, as knowing your strengths and weaknesses can help maximize your property’s potential. Hoteliers can also use KPIs to gauge their progress and challenge themselves to move forward.
What Are the Different Types of KPIs in the Hospitality Industry?
Regarding the hospitality industry, the KPIs can be split into four categories: operational costs, financial performance, guest experience, and competitive benchmarking.
Let’s take a look at each:
Hotel properties can improve their performance and profitability by using several operational KPIs. The more a hotel monitors these costs, the more it can increase profitability by reducing them.
Some examples include:
- Energy management
- Water consumption
- Labor costs as % of sales
- Employee performance
Hotels must closely monitor several financial KPIs to ensure profitability is maximized. It is essential to monitor and analyze metrics such as total room sales, occupancy rates, and reservations in addition to total revenue.
- Gross operating profit
- Occupancy rate
- Average daily rate
- Average room rate
- Revenue per available room
- Net revenue per available room
- Revenue per occupied room
- Gross operating profit per available room
- Cost per occupied room
- Marketing ROI
In addition to measuring a hotel’s financial KPIs, it’s crucial that they also track and measure their revenue-generating metrics. In other words, the guests. An organization’s guest experience KPIs are significant since they determine whether or not guests will become repeat customers.
Some of these include:
- Online rating
- Customer satisfaction
- Loyalty programs
To understand a hotel’s performance, it is critical to benchmark its performance against industry best metrics and the competition. You can compare the performance of your property with that of your competitors using competition benchmarking.
To measure your hotel’s performance, you can use several benchmarking KPIs.
- Average rate index
- Market penetration index
What Are the Most Important KPIs for Hotels?
Although KPIs are crucial for measuring hotel performance, they are not equally impactful. In the hospitality industry, a few KPIs are more important than others.
To ensure your business’ success, keep track of these 7 KPIs:
- Average Daily Rate (ADR)
The ADR measures how much revenue you earn from renting a room for occupancy on a single day. The average rate per occupied room is one of the most important metrics because it allows you to determine the average amount of revenue collected daily for all the occupied rooms. To avoid unrepresentative figures, ADR always excludes unoccupied rooms.
This KPI measures an essential aspect of your hotel’s financial performance. Moreover, ADR plays a vital role in forecasting pricing and marketing. This way, management can plan and work with flexible prices according to the seasons.
Here’s how it works:
- Room revenue / number of rooms sold (occupied) = ADR
- Average Length of Stay (ALOS)
Using this measure, you can determine the length of stay of guests by multiplying the number of occupied rooms by the number of bookings. Hotel guests are counted based on the number of nights they stay at the hotel when calculating the number of occupied spaces.
A hotel’s final score represents its clients’ average length of stay. Usually, a higher score indicates higher overall spending than a lower score.
You can use ALOS data to make pricing decisions. For example, if your ALOS is low, you could consider increasing your room rates for short stays or offering better deals for more extended stays. A hotel’s revenue is heavily influenced by the length of stay of its guests.
The calculation is as follows:
- Total occupied room nights/number of bookings = ALOS
- Market Penetration Index (MPI)
MPI plays a vital role in measuring KPIs. In terms of the hospitality industry, this shows how your hotel compares to your competitors.
A score below 100 indicates you are doing poorly and below the market average. Alternatively, if your score exceeds 100, you perform better than most competitors.
Here’s how it works:
- (Hotel occupancy % / market occupancy %) x 100 = MPI
- Occupancy Rate
If you want to track occupancy rates, you can do it daily, weekly, monthly, or annual. Measuring this metric involves counting the number of rooms, identifying the empty rooms, and identifying the booked rooms.
The occupancy rate is calculated by dividing occupied rooms by the total number of rooms available and multiplying by 100. Your hotel can use this KPI to evaluate its daily performance, giving you constant feedback. It may be a good idea to run promotions on certain days of the week if you notice lower occupancy or to streamline your staff if not every staff member is needed.
Here’s how it works:
- (Number of occupied rooms/number of available rooms) x 100 = Occupancy rate
- Online Reviews
Published reviews and feedback influence hotel bookings. Sites like Tripoto, TripAdvisor, or Make My Trip allow people to review properties, and they have pictures whichthatassist you in deciding whether to book the property. With everyone having access to the Internet and sharing their experiences about a hotel, it’s essential to read the reviews.
Feedback and reviews on your hotel’s website can make or break your reputation, and you can show your customers that you care about what they think about your property by responding promptly to their negative reviews. Hotel guests’ star ratings can indicate how efficiently the hotel operates and where improvements can be made.
Ratings and reviews can help hoteliers improve customer satisfaction and attract new clients by making changes.
- Revenue per Available Room (RevPAR)
RevPAR, or revenue per available room, is another metric for measuring the property’s performance in the hotel business. A hotel’s RevPAR metric helps evaluate its operational performance. A measure such as this can also serve as a coach for achieving future investment goals. The RevPAR of a hotel could serve as a productivity indicator for investors. It also indicates how much a hotel can charge and how successful it is at selling its available inventory.
Average revenue is calculated for a certain period (usually given as a daily average) based on your income across all bookings. This KPI is calculated by multiplying the average daily rate by the occupancy rate. You can also divide the revenue per room by the number of available rooms.
RevPAR calculates revenue per available room. Generally, a high RevPAR indicates a reasonable occupancy rate and a high average daily rate.
Here’s how it works:
(Average daily rate x occupancy rate or total revenue from night) / total number of rooms available = RevPAR
- RevPAR Room Type Index (ReRTI)
ReRTI was developed in response to changes in the hospitality landscape over the last few years. It helps revenue managers determine whether the sale of high-value rooms contributes proportionally to RevPAR.
ReRTI analyzes which room types are the most profitable and assesses whether free room upgrades can help or hinder a hotel. If the room scores higher than one, it contributes more than it should be based on your other rooms. If the score is below 1, the room is underperforming.
Here’s how it works:
(% total RevPAR x number of specific room types) / (% inventory x number of specific room type) = RevPar Room Type Index
Making a KPI Report
Through KPI reports, business leaders can quickly and easily assess their organization’s performance about specific strategic goals. A modern KPI report makes all the underlying data accessible via interactive dashboards. A KPI report makes it easy to spot trends, recognize relationships, or identify outliers in data, even for non-technical users. As a result of these insights, better business results can be achieved.
Reports are usually where the analysis takes place.
- How are those KPI numbers calculated?
- Why do the data points fluctuate?
- Is there a reason for this?
Historical data is used to answer these questions.
Types of KPI Reports
There are three different types of KPI reports that you can make based on what information you want to ascertain from your KPIs: analytical, operational, and strategic.
The Analytical Report provides details behind the KPIs. It is possible to use them across all business areas. Reports like these are designed to answer questions arising from peaks and troughs in KPI data. Typically, static reports show historical values, while interactive reports display metrics dynamically, allowing users to investigate the data.
The primary focus of Operational Reports is the day-to-day activities of an organization. The information they provide helps those involved in those activities make decisions and take action. For example, in the hospitality industry, a report on occupancy rates can be used to determine if changes to the pricing are needed.
Business strategic reports aim to provide a clear and meaningful picture of the health of the company and the direction in which it is heading. A company’s performance against goals and objectives is shown in these reports.
How to Create a KPI Report in 5 Steps
Creating a report isn’t difficult so long as you follow these simple steps:
- Create an overview
It can take the form of an outline document that answers the following questions about the report:
What is the report’s objective/goal?
Who will be the audience?
What will be the purpose of the Report? Is it operational or strategic? Is it static or interactive?
Is it going to be distributed soon?
- Define the KPIs
You’ll better understand your KPIs and metrics once you’ve established your overall objective. KPIs should answer questions such as, how well are sales performing compared with their goals? Does the company’s growth meet expectations? The tricky part of these KPIs is getting the data that fuels them. Is it currently available? Is it possible to automate it? How reliable is it? These are just a few of the questions you’ll need to answer.
- Present your KPIs
The information should be presented in the most straightforward way possible using charts/graphs and tabular data. Make sure the charts are relevant, focused, and in context. Maintain a logical flow of information by presenting your KPIs in a logical order.
- Build a prototype
Create a first draft, use dummy data (if there is none), and distribute this to colleagues and stakeholders. Help to encourage consensus by providing one point of feedback in the report itself.
- Refine and release
Finalize and distribute the report. The efficiency of reports must be adjusted and evolved just like any business process. Keep information relevant and up-to-date by integrating regular reporting reviews and maintenance cycles.
Regardless of their industry, all businesses should keep track of their key performance indicators. Whether they are trying to make sure they can manage their operational costs, increase their profits, or find new revenue opportunities, KPIs are how businesses determine whether they are in line with their goals. For the hospitality industry, that means measuring the occupancy rate, customer reviews, average length of stay, and the revenue generated per room. Using this data, you can make informed decisions regarding your hotel’s future.