This article is a guest article written by Agathe Pascal and Loïc Certain , Louvre Hotels Group.
The occupancy rate is one of the basic indicators to look at as part of a revenue optimization strategy , also known as revenue management.
We monitor the occupancy rate of our hotel, we hope to see it soar, and when it reaches 100%, it's the Holy Grail! Selling all your rooms every day of the year is every hotelier's dream. Indeed, selling more rhymes (often) with earning more.
But are you sure you know everything that is really hidden behind this notion?
1 – Calculation of the occupancy rate
The occupancy rate, or frequently abbreviated TO, is an indicator that calculates the occupancy performance of a hotel. It is calculated using the following formula:
The TO can be calculated per day or over a longer period . In this second case, the built capacity must be multiplied by the number of days in the period studied.
Be careful when the TO is studied over several months! You have to take the exact number of days per month to have a correct indicator. Furthermore, due to the fact that not all months have the same number of days, we cannot make a simple average of the monthly TOs to obtain our annual TO : we must start from the formula above with the annual total figures to know its exact TO over the year.
To be able to monitor your TO in a stable manner and compare it to that of your competitors, it is important to differentiate between built capacity (total number of rooms in the hotel) and available capacity (number of rooms open for sale for a given day).
In fact, the available capacity is variable (rooms may be closed for sale for work, for example) and does not make it possible to calculate an indicator that is stable over time, unlike the built capacity.
2 – What can impact the occupancy rate?
The TO can be impacted by many elements which are not all controllable by the hotel.
Exogenous factors
- Political and social context : due to strikes, demonstrations or attacks, demand and therefore TO can drop suddenly
- Environment : the construction of a new convention center or a new means of transport (airport, metro) will have a positive impact on the TO of nearby hotels
- Competition : the arrival of a competitor in a market can cause existing hotels to lose market share
- Demand : during an event period, demand may exceed supply, in which case the TO of hotels in the event area should be maximum
Endogenous factors
- Availability of rooms : if rooms are out of service due to work, then the TO will be limited
- Segmentation : if a hotel mainly targets business customers, then its TO will be lower during weekends and school holidays
- Pricing policy : if a hotel's pricing policy is not adapted to demand, then it will fill up with difficulty or too quickly
- Belonging to a group : belonging to a voluntary group or chain brings more visibility to an establishment and can allow it to attract more customers
- E-reputation : a survey carried out by Cornell [1] showed that a 1% increase in a hotel's overall review score can result in up to +0.54% in occupancy rate.
3 – How to use the occupancy rate?
The TO is an indicator which is used both to analyze the past and anticipate the future.
Anticipation of the future
It is essential to make a forecast of your TO day by day (or at least by week depending on the establishments) based on historical data as well as on a calendar analysis. It is also necessary to compare the weekdays to each other (compare a Monday with a Monday), except in the case of special events May 1 does not always fall on the same day of the week, Easter does not always fall on the same week of year for example).
Forecasting your TO for the coming year helps to adapt your pricing policy to best optimize your income : when you know that demand will be constrained on a date and therefore that your TO should reach 100% , you will need to adopt a qualitative filling strategy . To do this, you must divide your customer base into homogeneous segments in order to analyze the contribution of each and to protect the segments that contribute the most to turnover. On the contrary, in periods where a lower OR is anticipated , it will be necessary to rely on a more quantitative filling strategy because any room not sold one evening is lost forever.
Analysis of the past
Knowing your TO for each past day of activity allows you to have an image of your level of performance . We can monitor and compare the TO over different periods:
- Month by month
- Vacation vs. Except Holidays
- Weekdays vs. Weekends
- Event periods
- …
Each time, we can ask ourselves the following questions:
- Did I do better or worse than the previous year ? For what ?
- Was my prediction correct ? If not, why didn't I perform as well/perform better than I anticipated?
- Where do I stand compared to my competitors? ?
To answer this last question, we can strengthen the analysis by calculating its MPI ( Market Penetration Index ), or occupancy index. This indicator allows you to compare your TO with that of your competitive market , which is also called Compset. This information can be accessed using tools such as MKG, STR or In Extenso from Deloitte.
The MPI is calculated using the following formula:
We can be interested in its value at a given moment but it is its evolution which is the most revealing in terms of performance :
- A hotel that has an MPI above 100 benefits from a TO higher than the market.
- A hotel whose MPI increases between two periods gains market share in volume over its competitors.
4 – Is a 100% occupancy rate always optimal?
At first glance, it is true that a TO of 100% seems ideal for a hotel:
- Since this is a perishable service , any unsold room one evening represents lost revenue.
- Hotels have high fixed costs , selling as many rooms as possible allows these fixed costs to be spread as much as possible.
- The more customers there are in the hotel, the more it should increase its ancillary turnover thanks to breakfast, restaurant, spa, etc.
However, TO is not the only important indicator in Revenue Management . It should always be combined with the Average Price (AM) to calculate RevPAR, or revenue per available room, which gives a more holistic picture of a hotel's performance level. Thanks to this indicator, we realize that it is sometimes better to sell fewer rooms but to sell them more expensively , as we see in the following table:
| TO | 50% | 65% | 90% | 100% |
| PM | 250€ | 180€ | 100€ | 75€ |
| RevPAR | 125€ | 117€ | 90€ | 75€ |
In addition, the more rooms we sell, the more the total variable costs will increase (more linen to clean, more energy used, etc.) while an increase in the average price does not imply additional costs. Thus, an increase in PM will have a stronger positive impact on Gross Operating Income (GRO) , an indicator linked to the economic profitability of a company and which is therefore essential for a hotel manager.
So, the secret is to find your ideal balance between TO and PM to optimize your overall income.
NOTES
[1] Cornell Survey: The Impact of Social Media on Lodging Performance – 2012
SOURCES
ANDERSON, Chris K. The Impact of Social Media on Lodging Performance . Cornell Hospitality Report. 2012
MAHMOUD, Ahmed. The 100% Occupancy Dilemma for Hotels, what Hoteliers Need to Achieve? Hospitality Net [online]. 2017
Available at www.hospitalitynet.org/opinion/4080590.html
What is an occupancy rate? Revfine [online] Available on: Revfine