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HOSPITALITY INDUSTRY 5 min read

Evaluating hotel
performance: 6 key
factors

WRITTEN BY
Jochen de Peuter-
Rutten

The clear-cut measurability of KPIs is alluring. Occupancy percentages, profit indicators, return
on investment. These are the type of traditional performance measures on which many
hoteliers rely when it comes to evaluating hotel performance. Unfortunately, taken in isolation,
they are now thought to provide misleading signals, failing to adequately support the needs of
today’s organizations.

In order to capture the full picture of hotel performance, additional factors must be borne in
mind. Does your hotel take safety seriously? Does it embrace innovation? Are you providing
service excellence to your hotel guests? A more holistic view of the role your hotel plays in
today’s hospitality landscape yields a more representative impression of its performance.

How to evaluate hotel performance? Drawing on EHL Advisory Services' experts, we have
compiled the six elements that require your scrutiny. We give you: The X-factors of hotel
performance.

Finance
It goes without saying that, like any other commercial business, hotels are primarily profit-driven
enterprises. This requirement sees hotels pursue strategic management accounting
techniques, such as cost optimization, value chain analysis and benchmarking. In doing so, they
may choose between a market-orientation or sales-orientation business strategy to optimize
their financial outcomes. Equally, they may opt for a more a traditional rooms-revenue model or
lean towards a total revenue management approach, while the IT-savvy may seek to future-
proof their business by incorporating data science into their revenue management.Various
key performance indicators (KPIs) can be used to assess a hotel’s financial performance. Is the
business recording a solid return on its investments (ROI)? Are hotel operations as efficient as
they could be? This includes factors such as the average length of stay (ALOS), whereby longer
average stays are correlated with greater profitability thanks to the minimization of labor
involved in turning over rooms and processing new bookings. The gross operating profit per
available room (GOP PAR) also provides valuable insights by pinpointing which areas of your
hotel generate the most income and taking operational costs into consideration.

ALOS = occupied rooms ÷ number of bookings

GOP PAR = gross operating profit ÷ rooms available

 
Want to assess the performance of your hotel? Take the EHL
Pulse Taker evaluation online now.
 
Sales performance
Clearly, “finance” is a very broad topic which is influenced by a whole host of subset aspects.
Chief among these is sales performance. Whether a hotel’s sales skyrocket or dwindle is
influenced by a multitude of factors. Some of these are under the hotel’s control: its marketing
activities – is it leveraging its online marketing potential? – or the extent to which it is succeeding
in tailoring its offerings to specific segments. Other more “environmental” or market-driven
aspects are nigh on impossible to control: the rise of Airbnb or the sudden loss of incoming
tourists due to the COVID-19 health crisis. What sets successful hotels apart is how they choose
to react to these situations.

Metrics such as the revenue per available room (RevPAR), the average daily rate (ADR) or the
average occupancy rate (OCC) can be used to measure sales performance.

RevPAR = total hotel revenue ÷ no. of available rooms

ADR = total room revenue ÷ no. of rooms sold

OCC = no. of rooms sold ÷ no. of available rooms

The market penetration index (MPI) and the revenue generated index (RGI) can help evaluate
how a hotel is performing on the market. While the MPI will tell you how many guests are
choosing your hotel in comparison with other hotels in your location (results in excess of 100
being good and those under 100 being an indicator of poor performance), the RGI compares
your hotel’s RevPAR to the average RevPAR on your market (results equal to or greater than 1
being good and those under 1 lacking).

MPI = hotel occupancy ÷ market occupancy × 100

RGI = hotel RevPAR ÷ market RevPAR

Asset management
Various factors feed into the success of a hotel’s asset management, which, in turn, contributes
to financial performance. A hotel’s location, real-estate value and even furniture, fixtures and
equipment (FF&E) all play a part here. In a nutshell, asset management aims to maximize the
value of hotel property.

Overviews and detailed analyses of hotel businesses on the whole can yield useful information
on the revenue generated by different asset categories – how much different room types bring
in, how profitable the restaurant is or how lucrative the spa area has become, for instance. A
combination of operational and property knowledge allows hotel asset managers to identify
potential new streams of income. Assets can also be better leveraged by completing strategic
refurbishment projects or considering acquisitions, for example.

Service excellence
As you can tell from the above three X-factors, hotel performance remains well characterized by
certain traditional criteria. To be clear, we are not suggesting the wheel needs reinventing as
regards hotel performance evaluation. It simply requires a few more spokes to round off and
relativize any insights gained from metrics.

No other X-factor better exemplifies this more holistic approach to hotel performance
evaluation than service excellence. Service excellence is “the ability of service providers to
consistently meet and occasionally even exceed customers’ expectations”. This strong
orientation towards guest satisfaction relies upon various efforts and strategies, such as reliably
delivering on promises, providing a personal service and pro-actively managing customer
feedback. Providing service excellence is a challenge – and doing so consistently, to the point
where people seek out your hotel thanks to this virtue in particular, requires a comprehensive
service culture as embodied by the likes of the Ritz-Carlton.
Success in service excellence keeps guests coming back for more and the enthused reviews
rolling in. So much so that there has been speculation as to whether it is the new marketing. It
can be assessed with the help of review scores, and customer focus and brand standard
evaluations, for example. An integral component of business viability in today’s hospitality
landscape, service excellence deserves a seat at the table in the evaluation of hotel
performance.

Innovation
Innovation in the hotel environment can be found in review processes, by consulting consumer
trends and employing fitting IT systems, for instance. The Hospitality Innovation Industry
Report distinguishes between technological and non-technological innovation.

Technological innovation Non-technological innovation

Management innovation, e.g.:
agile management principles
Technology innovation, e.g.:
collaborative user-oriented and
adapting to new technological
supplier relationships
capabilities online interaction with
Organizational behavior, e.g.:
guests
optimizing work processes
technology-assisted
establishing alternative employee
personalization
management approaches
Service innovation, e.g.:
fostering internal leadership 
unique, superior services
Marketing innovation, e.g.:
a compelling value proposition 
creating online brand communities
Process innovation, e.g.:
introducing new loyalty programs
standardization
utilizing social media analytics 
modernization
Business model innovation, e.g.
bringing together consumer
incorporating:
experience, e-commerce, big data
the Internet of Things
and digital transformation, and
blockchain
revenue growth analytics
3D printing
artificial intelligence

Current innovation trends in the hospitality industry include sustainable tourism, voice search
and the instrumentalization of big data. The ever-expanding list includes facial recognition
check-in and mobile room keys. Hotels’ ability to keep up with the times simply must feature
among contemporary X-factors, while recognizing disruptive innovation ahead of time can set
hotels apart.

Health and safety

When you think “health and safety”, think “risk analysis, quality labels and safety procedures”. It
has always been important for hotels, as employers, to keep a close eye on workplace health
and safety. Guests, too, want to spend their time in a clean, hygienic, safe environment. Meeting
food safety standards is crucial for any hotel restaurant, and your legal team will thank you for
staving off any potential lawsuits arising from safety-related liability issues, of course.

The COVID-19 pandemic has shone a particularly bright spotlight on health and safety. The
respective regulations have become far more stringent, and guests’ expectations have become
significantly higher in a very short space of time. In response to this, major hotel brands, such as
Hilton, Four Seasons and Accor, have made it their mission to instill confidence in their
customers by implementing strict protocols. EHL Advisory Services is also doing its part.

Evaluating hotel performance not only in financial terms but with a view to long-lasting success
thus relies upon much more than your average metrics. This wider set of strategic, financial and
operational dimensions is better able to reflect the reality of hotel performance in order to be a
successful hotelier, gain a comprehensive view of performance drivers, understand how your
hotel’s performance stacks up against the competition and implement continuous improvement
plans. Should you need a little help appraising where you stand, EHL Advisory Services’ pulse-
taker will point you in the right direction.

Wishing you every success!