Steve Pinchuk on the usage of metrics for yielding and accounting
Revenue management professionals quite often get into the RevPAR vs. GOPPAR debate.
Revenue management professionals quite often get into the RevPAR vs. GOPPAR debate. The pitfalls of RevPAR and the advantages of GOPPAR as a metric or vice-versa have been highlighted on several occasions.
According to the vastly experienced RM professional, Steve Pinchuk, one needs to be clear whether the discussion is about a metric for yielding or accounting. Pinchuk, who is scheduled to speak at the forthcoming Travel Distribution Summit Asia 2010 (to be held in Singapore, April 28-29), categorically says, “A good RM system should focus on profits since it should be able to capture and net out variable costs.”
In an interview with EyeforTravel’s Ritesh Gupta, Pinchuk spoke about the utility of GOPPAR and RevPAR, and several critical issues. Excerpts:
What is your opinion about GOPPAR as a metric for the hotel industry?
Steve Pinchuk: First we need to be clear whether we are talking about a metric to use in yielding or in accounting. GOPPAR has the advantage of taking into account the non room revenues.
Typically, about 50 percent of a full service hotel’s revenues come from room rates. If a property has a lot of ancillary revenues, then GOPPAR will show things that are not seen when utilizing RevPAR.
GOPPAR should be used for both yielding and accounting, although there could be differences in how it is calculated as a yielding metric versus an accounting metric. I would prefer to use GOPPAR for all hotels so I can compare a large full-service hotel’s potential against a small limited-service hotel and take into account total profit potential in the larger full-service hotel. If rooms drive ancillary revenues, then we need to yield based on these total revenues.
It is being mentioned that GOPPAR can’t exist without RevPAR, and though it presents a more holistic view of a hotel’s performance, GOPPAR does not adequately and realistically assess a hotel’s revenue management strategy. What do you make of this assessment?
Steve Pinchuk: I am far more concerned with the fact that we are still talking revenues and not profits.
When yielding rooms, RM must measure on profits and not revenues since the cost of services varies based on the service or ancillary revenue stream being used. A good RM system should focus on profits since it should be able to capture and net out variable costs. It is important that only the variable costs associated with selling a room and the bundled service are counted to net from revenues if the metric is used for yielding. Fixed costs, costs that will exist regardless of who books the room or the ancillary service, should not be counted when yielding between possible bookings.
However, for profit accounting, a deeper view of costs must be utilized. I think we should be yielding based on ProPAR (Profit per available room), where the profit calculation, like GOPPAR, takes into account all the revenue streams associated with the room sale.
Net ProPAR would be the profit net of all costs, both variable and fixed, and would be used to look at net profitability (accounting) and not just who to sell a room to (yielding).
Recently, it was pointed out that GOPPAR, by incorporating all aspects of a hotel’s operations, casts too wide a net to be a functional metric for revenue management, particularly on the room side. Though GOPPAR may establish a tidy industry-wide performance benchmark, it ultimately compares apples with oranges. Do you believe that RevPAR should be the standard by which hotels measure the performance of their rooms divisions?
Steve Pinchuk: That depends on the hotel. In a limited service hotel, the revenues from non-room rates is minimal, and REVPAR is sufficient. For luxury resorts, casinos, anything with high-ancillary revenues, GOPPAR is a better indicator of true profitability.
I am not certain why it is said that GOPPAR casts too wide a net to be a functional metric for RM. GOPPAR takes a lot more data and effort and is worthwhile unless there are very small ancillary rooms revenues. I would not call them apples and oranges; I would call them different types of grapes. If I am trying to maximize my fruit consumption, then the fact that the grapes are different, however, still all grapes, does not matter.
According to a section of the industry, RM departments should not only focus on cost of sale reduction but should evolve to become Profit Management departments where cost of supply is incorporated into algorithms leading to a Gross Profit model, which in turn will better inform “value” offers and segmentation integration. What’s your take on this?
Steve Pinchuk: RM should be tasked with profit optimization, not profit management.
RM needs to yield based on profitability and not revenues. RM should include everything that can be done to increase profits levels and not just yielding existing demand.
RM is already in the position to evolve into profit optimization. In past jobs, my RM teams have been called the “Profit Police.”
Can you provide an insight into the hurdles related to gathering complete enterprise value information, while understanding the rewards it can bring from a marketing, special offers/CRM, and revenue management perspective?
Steve Pinchuk: Gathering the cost information is an exercise of patience and requires someone with a broad vision to assure that all incremental costs are captured. Applying that information requires demand forecasts on the number of guests who will want each ancillary revenue stream so that the unconstrained demand streams can be optimized and constrained where necessary. When we start gathering enterprise value information it should be used to value guests, as well as determine the offers that they should receive. I have a pending patent on using customer behavior lifecycle data to predict future customer needs and values.
Steve Pinchuk is scheduled to speak at the forthcoming Travel Distribution Summit Asia 2010 (to be held in Singapore, April 28-29) http://events.eyefortravel.com/tdasia/index.php/revenue-management-a-pricing
For more information about the summit, contact: Marco Saio, global events organizer, email: [email protected] , phone: (+44) 020 7375 7219.