RevPAR and hotel economics
Calculate RevPAR, test a price increase, split a hotel's profit between owner and operator, and compare an OTA booking with a direct one.
Industry brief, with a one-minute summary: Hotels and travelKey takeaways
- RevPAR joins price and volume in one number: occupancy x ADR.
- Revenue management: the team changes prices every day by channel and date, based on bookings so far, events in the city, and competitor prices.
- Housekeeping cleans departing and staying rooms; its speed limits how early new guests can check in.
- Front desk handles arrivals, upgrades, and complaints.
Key idea
RevPAR joins price and volume in one number: occupancy x ADR. A higher price that lowers occupancy can still raise profit, because fewer occupied rooms also mean less spending on cleaning and other costs that come with each guest.
Worked case
Should a hotel in Bangkok raise its prices?
The prompt
An illustrative 300-room hotel in Bangkok runs at 75 percent occupancy with an ADR of THB 4,000. Each occupied room night costs THB 600 in cleaning, laundry, amenities, and energy. Management thinks a 10 percent price increase would lower occupancy to 70 percent. What are RevPAR and yearly rooms revenue today, and does the price increase raise profit?
The structure
- Compare contribution per available room before and after
- RevPAR = occupancy x ADR
- Contribution per available room = occupancy x (ADR minus variable cost per occupied room)
Working it through
1. RevPAR today
75 percent of THB 4,000.
RevPAR today (THB):0.75 × 4,000 = 3,0002. Yearly rooms revenue
300 rooms x 365 nights x THB 3,000, in THB millions.
Rooms revenue (THB millions):300 × 365 × 3,000 ÷ 1,000,000 = 3293. RevPAR after the increase
ADR of THB 4,400 at 70 percent.
RevPAR after (THB):0.7 × 4,400 = 3,0804. Contribution per available room today
Occupancy x (ADR minus 600).
Contribution per available room today (THB):0.75 × (4,000 - 600) = 2,5505. Contribution per available room after
Fewer rooms to clean, higher price.
Contribution per available room after (THB):0.7 × (4,400 - 600) = 2,660
The recommendation
Yes, the hotel should raise prices by 10 percent if the occupancy estimate holds, because contribution per available room rises from THB 2,550 to THB 2,660. First, RevPAR rises from THB 3,000 to THB 3,080 even with occupancy falling to 70 percent. Second, fewer occupied rooms also save THB 600 of cleaning and energy per night. The risk is that the lost guests are loyal corporate clients who also spend in the restaurant and spa. As a next step, test the new rate in quieter periods and compare it with competitors' prices.
Worked case
How a managed hotel in Riyadh splits its profit
The prompt
An illustrative managed hotel in Riyadh has total revenue of SAR 100 million a year and a gross operating profit (GOP) of SAR 35 million. The operator charges a base fee of 3 percent of revenue and an incentive fee of 8 percent of GOP. The owner also sets aside 4 percent of revenue as a reserve for furniture, fittings, and equipment (FF&E). What does the operator earn, and what is left for the owner before property tax, insurance, and financing?
The structure
- Owner's cash = GOP minus base fee minus incentive fee minus FF&E reserve
- Operator: base fee on revenue, incentive fee on profit
- Owner: what remains after fees and the reserve
Working it through
1. Base fee
3 percent of SAR 100 million.
Base fee (SAR millions):100 × 0.03 = 32. Incentive fee
8 percent of GOP.
Incentive fee (SAR millions):35 × 0.08 = 2.83. Operator total
Base plus incentive.
Operator fees (SAR millions):3 + 2.8 = 5.84. Owner after fees and reserve
GOP minus fees minus 4 percent of revenue.
Owner cash before property costs (SAR millions):35 - 5.8 - 100 × 0.04 = 25.2
The recommendation
The owner should judge this hotel on the SAR 25.2 million it keeps, not on the SAR 35 million of GOP, because the operator takes SAR 5.8 million in fees and 4 percent of revenue goes to the FF&E reserve. First, the operator's base fee of SAR 3 million and incentive fee of SAR 2.8 million come with almost no capital at risk. Second, the owner has paid for the building, so its return is the SAR 25.2 million set against what the hotel cost. The risk is that GOP falls while the base fee stays. As a next step, compare the SAR 25.2 million with the cost of the building.
Direct booking or OTA?
OTAs bring guests the hotel might never reach, especially from abroad, but charge a commission, commonly in the range of 15 to 25 percent of the room price. A direct booking through the hotel's website still has costs (website, search advertising, payment fees, loyalty points), but usually far less. Hotels try to move repeat guests to direct booking with member rates and loyalty points, while using OTAs to fill rooms in quiet periods.
Worked case
The cost of an OTA booking
The prompt
An illustrative hotel in Lisbon sells a room night at EUR 200. An OTA booking costs an 18 percent commission. A direct booking costs about 5 percent in website, advertising, and payment costs. How much more does the hotel keep per direct night, and what is the gain from moving 1,000 room nights a year from the OTA to direct?
The structure
- Net rate per night = price minus distribution cost
- OTA net rate
- Direct net rate
Working it through
1. OTA net rate
EUR 200 minus 18 percent.
OTA net rate (EUR):200 × (1 - 0.18) = 1642. Direct net rate
EUR 200 minus 5 percent.
Direct net rate (EUR):200 × (1 - 0.05) = 1903. Gain from 1,000 nights
EUR 26 more per night.
Yearly gain (EUR):(190 - 164) × 1,000 = 26,000
The recommendation
The hotel should push repeat guests to book direct, because each direct night keeps EUR 190 against EUR 164 through the OTA, EUR 26 more. This means moving 1,000 room nights a year gains about EUR 26,000. The risk is losing bookings: an OTA booking that fills a room that would otherwise stay empty is still profitable, so the shift should never come at the cost of empty rooms. As a next step, track the share of repeat guests who book direct each month.
Hotel operations in one day
- 1Revenue management: the team changes prices every day by channel and date, based on bookings so far, events in the city, and competitor prices.
- 2Housekeeping cleans departing and staying rooms; its speed limits how early new guests can check in.
- 3Front desk handles arrivals, upgrades, and complaints.
- 4Food and drink, events, and banqueting run as separate departments with their own staff and costs.
- 5Maintenance and energy management; a refurbishment every 7 to 10 years keeps the hotel competitive.
A hotel in Paris runs at 80 percent occupancy with an ADR of EUR 150. What is its RevPAR, in EUR?
A resort in the Maldives reports RevPAR of USD 540 and an ADR of USD 900. What is its occupancy, in percent?
A 250-room hotel in Dubai has RevPAR of AED 500. What is its yearly rooms revenue, in AED millions? Use 365 nights.
Occupancy rose from 70 to 80 percent, but RevPAR fell. What must have happened?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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