Pump Up the Revenue, Not the Volume - Part Two

By Jack Chang Chin Liang, Project Executive, Seven Seas, Malaysia.

The hospitality industry is still suffering from the current economic crisis. The past decade has not only seen the greatest gains but has also witnessed the greatest losses. Just as the industry was bravely recovering from the Sept 11 aftermath, and booming in 2005, the world economy in 2008 entered, what is often described the “The Great Recession”. Two years on, the hospitality industry is trying hard to bounce back to its once glory days, in line with the airline industry, and in the process of reclaiming lost ground as an industry, the methodology and process in churning out profits and gains has somewhat evolved. This industry has historically measured itself with a standard metric used globally – Revenue Per Available Room (REVPAR) and Revenue Per Available Customer (REVPAC).

With so much evolving in the past decade, in terms of how business transactions are conducted, technology has digitized our life. Is it still considered that REVPAR and REVPAC is the best yard stick to gauge the performance of a hotel’s performance, or does it paint a cob web picture? REVPAR measures the industry’s fundamental structure, literally and physically, the latter on the revenue generated on the physical assets (hotel rooms). It is a foregone conclusion that REVPAR is now obsolete in today’s technology driven world, and it is of utmost importance to know that technology is not just merely a way to boost productivity but a critical and profitable-channel for delivering (new and additional) customer-oriented services. The most profitable hotel organizations of the 21st century will be those that are able to capture the increasing purchasing power of the customers – regardless whether they are in the hotel compound or for that matter, anywhere in the world. Then, in comes REVPAC, which cast customers under the limelight as the fundamental driver of value creation in the hospitality industry and not the physical assets of rooms anymore. REVPAC came with all the hype and excitement on how to use the latest tech gadgets and rocket science technology to ease and please guest. But it was not soon after that most people found out that REVPAC was only possible to a small, unique league of hotels. Those that have bottomless coffers to implement tomorrow’s technology, hoping that the revenue generated from their ‘gemstone’ guest would balance out their investments for such implementations. Some fell short, some made it through, and some suffered with the beta-version technology that was not fully tested nor certified. It was then that revenue optimization analysts went back to the drawing board once more, going back to REVPAR but this time tinkering around with the formula on how to incorporate the benefits and strength that REVPAC had to offer. They knew that the current and traditional revenue centre’s such as food and beverage had to be accounted for, with some whizz technology flavoring here and there, just nice, so as to make it logical and reachable to the industry as a whole, and not just the ones with limitless funds.

With that, comes the birth of a new approach - Gross Operating Profit Per Available Room (GOPPAR). GOPPAR is a yardstick on the profits registered by hotels and is directly linked to the capacity in terms of rooms and has an open variable that would vary from hotel to hotel, which is the ‘operating profit’. It was time that people realized that what mattered most in business operations are profits and not just revenues (top line). GOPPAR offers a holistic approach in optimization, as it captures the aerial view of all revenue centres’ that has contributed to the profit for a particular guest during a defined timeframe. Revenue centre’s include but are not limited to food and beverage outlets, internet services, spa centre’s, karaoke outlets, e-cash cards or e-wallets in the hotels premise and so on. The latest technology can be deployed at large or even sprinkled lightly, and still, GOPPAR would be relevant for each and every hotel. Another point that makes GOPPAR a perfect KPI (key performance indicator) is, since gross operating profit is defined by the various revenues subtracted by the operational cost, it enables one to have a significant internal insight on the efficiency and cost control within. It’s like having a drilled in, in-depth performance appraisal on the hotel’s operation as a whole by just touching the surface of a few parameters. In addition, GOPPAR provides an overall more robust performance measurement, especially when comparing the fiscal financial sheets of hotels with different capitalization or in different markets. Furthermore, GOPPAR has a significant correlation with a hotel’s bottom line and thus its underlying value as a whole.

In the years to come, drastic changes will take place in the hospitality industry especially in creating value for customers as revenue is generated behind the scenes while technology and new methodologies are implemented to yet again trim down operating costs. Means of knowing them better and reading their minds and desires in hope of better services which will ultimately result in more profit will be intensified. Management teams will be multi-tasking more than ever, being equipped with operational knowledge for multiple roles. For now, we will do with GOPPAR, as a key performance index to measure the performance and profitability of the hotel’s management and operation till the next wave hits us. REVPAR and REVPAC by all means, but without GOPPAR as the fundamental milestone defeat the purpose of being in business and that is to maximize profits.

The author is a Mechanical Engineering graduate from University Malaya who has previously done stochastic optimization work and research for automobile manufacturers’ Mercedes Benz Malaysia and also Proton Holdings. He has also done internship with Accenture and had a course work attachment with Motorola Technology and is now researching multi-objective optimization for the Hospitality Industry with Seven Seas Computers Sdn Bhd, Malaysia.