All the Tricks to Increase Your Bonus as a Hotel Revenue Manager
20 June 2024
Two key metrics, RevPAR (Revenue Per Available Room) and RGI (Revenue Generating Index) have become the gold standards for evaluating a hotel's financial performance. RevPAR, calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate, provides a snapshot of how effectively a property generates revenue from its available rooms. RGI, on the other hand, benchmarks a hotel's RevPAR against its competitive set, offering insight into its market share and overall competitiveness.
RevPAR and RGI are not just numbers on a spreadsheet; they play a pivotal role in determining the compensation of revenue managers, the professionals responsible for maximizing a hotel's profitability. Bonuses and incentives for revenue managers are often directly tied to achieving or exceeding RevPAR and RGI targets.
However, in recent years, there's been a growing concern regarding the accuracy and transparency of RevPAR reporting. As the pressure to boost RevPAR intensifies, so does the temptation to manipulate the numbers. This practice, known as "gaming" RevPAR, involves using various tactics to artificially inflate the metric, creating a misleading impression of a hotel's financial health.
While these tactics might lead to short-term gains and fatter bonuses, the long-term consequences can be severe. Misleading RevPAR figures can deceive hotel owners and investors, leading to poor decision-making and potential financial losses. Moreover, the practice undermines the industry's integrity, eroding trust among stakeholders and harming the reputation of hotels that engage in such behavior.
In this post, we delve into the murky world of RevPAR manipulation, exploring the common tactics used, the motivations behind them, and the far-reaching impact on various stakeholders. We aim to shed light on this issue, promote transparency, and advocate for ethical practices in pursuing revenue optimization.
Common Tactics Used to Inflate RevPAR
The pressure to achieve impressive RevPAR figures has led some hotels down a slippery slope of manipulation. Here are some of the most prevalent tactics employed.
Removing Available Rooms from Inventory
A simple yet effective way to boost RevPAR is to reduce the number of available rooms. Revenue managers can boost RevPAR in a couple of ways:Out-of-Order: Rooms are taken out of inventory because they are unavailable due to maintenance, renovation, or other issues preventing guests from staying in them.
Out-of-Service: Rooms could technically be occupied, but something isn't fully functional (e.g., a broken TV). While this shouldn't prevent a room from being sold, some hotels might use this to reduce inventory.
The metric automatically increases by decreasing the denominator in the RevPAR calculation (available rooms), even if the revenue remains the same.
It's common for hotels to close sections during low season when demand is lower. However, this should be reflected in a lower RevPAR, a natural consequence of having too many rooms relative to demand. Manipulating the inventory to mask this natural fluctuation is a deceptive practice.
Hidden Strategy: Retail vs. Merchant Model
There's a hidden layer to discounting that can significantly impact RevPAR. It revolves around how hotels sell rooms to third-party agents:Retail Model: Rooms are sold at gross rates (including commissions), and these rates are used to calculate RevPAR.
Merchant Model: Rooms are sold at net rates (excluding commissions), resulting in a lower RevPAR.
From a revenue manager's perspective, selling more rooms at retail rates is advantageous because it inflates RevPAR, even if the net revenue is the same.
Example: Two identical hotels sell 100 rooms each at the same price for consumers. The retail hotel sells at $200/room (RevPAR = $200), paying a 15% commission ($3,000 total). The merchant hotel sells at $170/room (RevPAR = $170), with commissions already deducted. Both have the same net revenue, but the retail hotel appears more successful due to the higher RevPAR.
Reclassifying Revenue
Hotels may artificially inflate RevPAR by misattributing revenue from other departments to room revenue. For example, revenue from food and beverage, spa treatments, or parking might be incorrectly classified, creating a false impression of room performance.Package Deals: A Gray Area
Package deals, which bundle room rates with other services, offer significant opportunities for manipulation. The allocation of revenue between the room and other components can be arbitrary, allowing revenue managers to overemphasize the room portion to boost RevPAR.
This lack of standardized accounting practices for packages makes it difficult to assess the actual contribution of room revenue, further obscuring the accuracy of RevPAR.
The Pitfall of RevPAR-Centric Incentives
Revenue managers are often incentivized based solely on RevPAR, which can lead to unintended consequences. They might prioritize maximizing room rates, even if it means turning away guests who would spend more on other hotel services like meetings, dining, or spa treatments.This narrow focus on RevPAR can harm the hotel's overall profitability and create a missed opportunity to capture additional revenue streams.
Ambiguous Fee Accounting
The classification of various fees can be a source of manipulation. For instance, some hotels might include no-show fees, early departure fees, or charges for extra beds in room revenue, thereby inflating RevPAR.Similarly, revenue from minibars or other amenities included in the room rate might be entirely attributed to the room, even though it could be considered ancillary revenue.
This lack of clear guidelines and standardization around fee accounting creates a loophole for revenue managers to artificially boost RevPAR.
The Revenue Manager's Dilemma: Ethics vs. Incentives
The pressure to deliver impressive results can be immense in high-stakes hotel revenue management. Revenue managers often find themselves caught in a complex web of competing interests, where ethical considerations clash with powerful financial incentives.
The Pressure to Perform
- Revenue managers are constantly scrutinized to achieve or surpass RevPAR and RGI targets that hotel owners and management companies set. These targets are often ambitious and tied to factors beyond the revenue manager's control, such as market conditions and competitor actions.
- The consequences of failing to meet these targets can be severe, ranging from missed bonuses and lost promotions to even termination. This creates a high-pressure environment where revenue managers might feel compelled to resort to desperate measures to maintain their job security and financial well-being.
The Role of Hotel Management Companies
- Hotel management companies often play a pivotal role in shaping the ethical landscape of revenue management. The contracts they negotiate with hotels and the incentive structures they implement can either encourage or discourage RevPAR manipulation.
- Some management companies might be vested in inflating RevPAR figures to demonstrate their effectiveness to hotel owners. This can create a perverse incentive structure where revenue managers are implicitly encouraged to engage in unethical practices to meet unrealistic expectations.
- On the other hand, some management companies prioritize transparency and ethical practices, establishing clear guidelines for revenue reporting and holding revenue managers accountable for their actions. These companies foster a culture of integrity, where long-term sustainability and guest satisfaction are valued over short-term gains.
The revenue manager's dilemma is complex and has no easy answers. The pressure to perform and the allure of financial rewards can create a toxic environment where ethical boundaries are blurred. The industry must recognize this challenge and implement measures to promote transparency, accountability, and ethical decision-making in pursuing revenue optimization.
Rethinking Incentives: A Shift Towards NetRevPAR and Profitability
The reliance on RevPAR and RGI as primary performance metrics for revenue managers has inadvertently created a system that can incentivize short-sighted decisions and prioritize individual gain over long-term hotel profitability. To address this issue, the industry needs to consider alternative incentive structures that align the interests of revenue managers with those of hotel owners and investors.
NetRevPAR: A More Comprehensive Metric
One promising alternative is NetRevPAR (Net Revenue Per Available Room), which considers the costs associated with generating revenue, including distribution costs, marketing expenses, and commissions paid to third-party booking channels. By considering revenue and expenses, NetRevPAR provides a more accurate picture of a hotel's financial performance and incentivizes revenue managers to make decisions that benefit the bottom line.
Balancing Retail and Merchant Rates
NetRevPAR can help address the issue of revenue managers favoring retail rates over merchant rates to inflate RevPAR. By factoring in commission costs, NetRevPAR encourages a more balanced approach, where revenue managers consider the overall profitability of each booking channel rather than just the top-line revenue.
Focusing on the Bigger Picture
The industry can create a more sustainable and equitable system by shifting the focus away from RevPAR and RGI towards NetRevPAR and profitability. This approach incentivizes revenue managers to consider the long-term financial health of the hotel rather than resorting to short-term tactics that might boost RevPAR but harm profitability in the long run.
Management Contracts and Profit Sharing
Hotel management contracts should also be revised to reflect this shift in priorities. Instead of focusing on RGI, contracts could include profit-sharing agreements, where management companies receive a portion of the hotel's profits, aligning their interests with the owners. This would encourage management companies to prioritize decisions that maximize profitability rather than simply meeting RevPAR and RGI targets.
Challenges and Considerations
Transitioning to a NetRevPAR and profit-focused incentive structure is not without its challenges. It requires a shift in mindset and a willingness to embrace new metrics and accounting practices. However, the potential benefits for hotel owners, investors, and the industry are substantial.
Rethinking incentives and prioritizing profitability can foster a culture of transparency, accountability, and long-term sustainability in the hotel industry. This will benefit individual stakeholders and strengthen the industry's overall reputation and resilience.
Conclusion: Focus on Long-Term Value
Some revenue managers and hotel management companies undermine the trust of owners, investors, and guests by prioritizing short-term gains and personal bonuses over accurate reporting. This deceptive practice distorts a hotel's financial health and leads to inflated prices, misinformed decisions, and, ultimately, dissatisfied customers.
The path forward is clear: the industry must embrace transparency and ethical practices in RevPAR reporting. This requires a shift in mindset, away from chasing inflated metrics and towards a focus on long-term profitability and guest satisfaction. By incentivizing revenue managers based on NetRevPAR, we can align the interests of all stakeholders and foster a more sustainable and equitable system.
Furthermore, hotel management contracts should emphasize profit sharing over RGI, encouraging management companies to prioritize the hotel's financial well-being. Collaboration between owners, investors, management companies, and revenue managers is essential to create a system of accountability and transparency that benefits everyone.
The hotel industry thrives on trust. By upholding ethical standards and prioritizing accurate reporting, we can build a stronger foundation for the future, where guests can make informed decisions, investors can trust the data they receive, and hotel owners can make sound business choices.
Key Takeaways
- RevPAR manipulation is practiced, intentionally or not, but it is never discussed and has far-reaching consequences for all stakeholders.
- Common tactics include inventory manipulation, selling methods, commission manipulation, creative accounting, package deal deception, and ambiguous fee accounting.
- The pressure to meet targets and financial incentives can tempt revenue managers to engage in shady practices.
- Hotel management companies play a crucial role in shaping the ethical landscape of revenue management.
- Shifting the focus from RevPAR and RGI to NetRevPAR and profitability can promote transparency and long-term sustainability.
- Collaboration between stakeholders is essential to create a system of accountability and trust.
- By prioritizing ethical practices, the hotel industry can build a stronger foundation for the future.