# GOPPAR – undervalued metric for Revenue Management

In Revenue Management the biggest emphasize is on RevPar which is a function of ADR and Occupancy. The RevPar metric become popular because it’s easy to calculate and compare. However, the lack of complexity also creates some pitfalls, which are described below. The need for more complex method created a new metric called GOPPAR (Gross Operating Profit Per Available Room). In following article I will explain the mathematics and advantages of this metric.

Let’s start with downturns of RevPar. First of all, it only takes the room revenue into consideration while for some hotels, room revenue accounts for no more than 50%-55% of total revenue. Usually it occurs in hotels with strong F&B section or/and meeting&conference business. If we compare e.g. two hotels (same size) – hotel X (with ADR \$70, Occ 70%, Othr Rev \$500,000) and hotel Y (with ADR \$70, Occ 60%, Othr Rev \$1,000,000) we can see that hotel X has 15% higher RevPar. What would indicate that it performs better than hotel Y. However, the Hotel Y will have higher Total Revenue (and with similar cost structure), it will also have higher profits – what in the end of the day is most important. Secondly, RevPar penalise bigger properties compare to small ones because it’s easier to have higher occupancy in 100 rooms property than in 1,000 rooms. Especially, this issue has higher impact on RevPar when the hotel experience significant seasonal variations in demand. Fortunately, the properties with different size are not compare to each other, however using only RevPar is still harmful for them. Thirdly, as RevPar is strongly used as performance indicator, it cannot be used as a metric of hotel value. Moreover, even if a correlation between RevPar change and hotel value change is often highly correlated, it’s not adequately correlated to the income capitalization value of a hotel property. Those reasons created a need for a new metric and GOPPAR is trying to satisfy those needs.

GOPPAR as stated before is GOP per available room per day. It doesn’t take into consideration the revenue mix, therefore it doesn’t accurately evaluates revenue performance, but it can be used much wider to calculate the hotel’s profitability and profit’s potentials.  The biggest advantage of using GOPPAR is incorporating the operating efficiency per unit to total revenue to evaluate hotel management’s performance. Secondly, GOP is calculated by room and day, therefore  it’s more fair than RevPar because it doesn’t penalize big or seasonal properties for its size. However, economy of scale decreases the fixed costs per room, therefore the GOPPAR for big properties is very sensitive to situation on the market. Thirdly, for hotel valuation purpose, GOPPAR creates a bridge between cash flow or EBITDA and RevPar. Therefore, GOPPAR has much more higher correlation with hotel value than RevPar (on sample of 30 hotels, GOPPAR’s correlation is apprx 85%-90%, while RevPar is 70%-75%)(Younes, Kett, 2003)

Traditionally, Gross Operating Profit (GOP) is the sum of total revenue (Rev) minus all operational costs, split into variable costs and fixed costs. The suffix “n” in below formula stands for set of differentiated revenue sources and suffix “m” stands for different fixed costs categories.

When translating  GOP into GOP per available room metric, I need to:

• reformulate revenue minus variable costs using a variable for the gross profit margin,
• replace revenue items by the product of the average daily spending and the number of booked room nights
• divide the equation by the inventory of room nights.

Besides the total (GOPPAR) all variables in the equation are useful and interesting indicators of performance. Starting with Margins (m) for the different revenue sources (n), Average Daily Spending (ADS), which is related to pricing and demand (and gives insights into customer behavior and marketing effectiveness) and all items of Fixed Costs per available room (FCPAR) are useful for longer-term benchmarking of effectiveness of the business. Occ is of course important and plays an important role for marketing and strongly correlates with ADR, which in this model is referred and ADS. (Hoogenboom, 2012)

However, one year later Hoogenboom proposed a extended version of GOPPAR model:

•  m – gross profit margin
• ADS(G) – Average Daily Spending per guest
• g – average Group size
• ADA(R) – Average Daily Arrivals per resource
• R – number of available Resources for rent
• ALOS(R) – Average Length Of Stay per resource
• FCPAR – Fixed Costs Per Available Resource
• n (index) – various profit centers
• m (index) – various departmental or undistributed cost categories

The were three reasons behind expanding the previous GOPPAR model:

1. The “R” in GOPPAR – in previous model R represented “rooms”, however, in hospitality very often rooms are not the only resources to rent. Hostels e.g. have beds, while resorts have multi-bedroom apartments. Therefore abbreviation GOPPAR should stand for: Gross Operating Profit per Available Resource.
2. ADS – The ADS in previous model didn’t give much information about the spending behaviour.  Therefore it was decomposed into into the product of average daily spending per actual guest and the average group size.
3. Occupancy – due to author, occupancy has low forecasting power and doesn’t say much about the customer. Therefore it is divide into product of average daily arrivals and average daily length of stay divided into number of possible resources to rent. (Hoogenboom, 2013)

GOPPAR might be also calculated in an simple matter as:

where Rev(total) is the annual Total Revenue (aggregated Room, F&B and other departments Revenue), C(total) are all fixed and variable costs, Rooms(total) is number of available rooms. When the GOPPAR equation is explained, it’s time to show an example of such metric. I will be using one provided by HVS’s Younes and Kett.

In this example GOPPAR of Hotel A was calculated as:

We can also see that hotel A has the highest GOPPAR while having ex aequo the lowest RevPar. So, having bottom line result as jury, the hotel A is doing better then the competition.

Very often different departments work directly with one of those metrics because it’s their job. E.g. Finance manager don’t care about the ADR and is interested only in Total Revenue, while Revenue Manager is interested in Total Revenue but knows nothing about the profit margins. And this quite reasonable for big hotel chains. Moreover, Jean Francois Mourier, the founder of RevPar GURU states that while GOPPAR is indeed interesting metric to measure overall hotel performance, it is unlikely to be used in Revenue Management because “GOPPAR by incorporating all aspects of hotel operations, casts too wide a net to be a functional metric for revenue management, particularly on the room site”. Similar concern has Patrick Landman from Xotels, who states that: “The problem is if we lump all of them together [all operational costs] we don’t fully understand the results from our pricing, contracting and distribution strategies.” However, there are professionals who believe that the GOPPAR is a future most important metric for Revenue Management. One of them, might be Juston Parker, CEO of Parker Hospitality Group who stated that: “The entire Revenue Management team needs to look at GOPPAR and how they can manage it better. From the sales expenditures to the types of business booked. Even the housekeeping managers should know how they impact GOPPAR. “. On the other side, I really like attitude of Steve Pinchuk, CEO of Profit Optimization Strategies. When asked about the opinion that GOPPAR doesn’t realistically assess the revenue management’s strategies, he answered that: “I am far more concerned with the fact that we are still talking revenues and not profits.”

Therefore, I believe that any of those metrics should be used alone. Only when the performance is compared using few of them, we have full and reliable information. But if we have to choose one, I would say to use RevPar when evaluating pricing strategies and revenue management systems implementations (for properties with room revenue/total revenue >65%). While using GOPPAR to evaluate the overall performance of a hotel and for properties that relation room revenue/total revenue <65%.

Bibliography:

1. Hoogenboom, Erik., (2012). The powerful tool for performance management, ‘The GOPPAR Model” – a generous container of KPIs for hospitality. Economic & information management for hospitality and healthcare.
2. Hoogenboom, Erik., (2013). THE GOPPAR Model – extended version –  a generous container of KPIs for hospitality. Economic & information management for hospitality and healthcare.
3. Kett, R., Younes E., (2003). GOPPAR, a derivative of RevPar.
4. Landman, P., (2012). RevPar… GOPPAR… Something is missing. http://www.xotels.com/en/revenue-management/nrevpar
5. Mourier, J., F., (2010) Going with GOPPAR? Not so fast, RevPar is still the best metric for RM. http://www.eyefortravel.com/revenue-and-data-management/going-goppar-not-so-fast-revpar-still-best-metric-rm
6. Parker, J., GOPPAR (Gross Operating Profit per Available Room) – Best Measurement of Success. http://hotelexecutive.com/business_review/1920/goppar-gross-operating-profit-per-available-room-best-measurement-of-success
7. Pinchuk, S., (2010). Steve Pinchuk on the usage of metrics for yielding and accounting. http://www.eturbonews.com/14836/steve-pinchuk-usage-metrics-yielding-and-accounting

Author: Mateusz Konopelski

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• 20 July 2016 at 16:54