PERFORMANCE MEASURES USED IN THIS SIMULATION
This section presents the ten performance measures (PMs) used in the Hotel Business Management Training Simulation game and the decision rules to determine if there is a performance gap (PGs). Those ten performance measures are:
- 1. Occupancy
- 2. Rooms Revenue
- 3. Total Revenue
- 4. Market Share based on Number of Rooms Sold
- 5. Market Share based on Revenues
- 6. Revenue Per Available Room (REVPAR)
- 7. Average Daily Rate (ADR)
- 8. Yield Management
- 9. Operating Efficiency Ratio
- 10. Profit Margin
Performance measures (PMs) provide a benchmark to monitor managerial decisions. There are performance gaps (PGs) if you fall below the objectives you set, norm, rule of thumb, or the results of your competitors for each of the performance measures.
1. OCCUPANCY RATE
Occupancy rate is an important operational ratio that indicates the percentage of rooms sold (rented) at a particular property in a given time period. A property's occupancy rate along with the property's average daily rate (ADR) are the foundations for the property's financial performance.
Decision Rules: When does a company have a performance gap?
A company has a performance gap if the performance is lower than:
- • The objective set by the management at the beginning of the business period.
- • Lower than the industry average
- • Lower than competitors results.
2. ROOMS REVENUE
Revenue generated from room sales at a particular property in a given time period.
Decision Rules: When does a company have a performance gap?
A company has a performance gap if the performance is lower than:
- • The objective set by the management at the beginning of the business period.
- • Lower than the industry average
- • Lower than competitors results.
3. TOTAL REVENUE
Total revenue generated from all business activities at a particular property in a given time period.
Decision Rules: When does a company have a performance gap?
A company
has a performance gap if the performance is lower than:
- • The objective set by the management at the beginning of the business period.
- • Lower than the industry average
- • Lower than competitors results.
4. MARKET SHARE BASED ON NUMBER OF ROOMS SOLD
Market share based on number of rooms sold refers to the percentage of a market's total room sales that is sold by a particular company over a specified time period. Market share is calculated by taking the company's total room sales over the period and dividing it by the total number of rooms sold in the market over the same period.
Decision Rules: When does a company have a performance gap?
A company has a performance gap if the performance is lower than:
- • The objective set by the management at the beginning of the business period.
- • If your actual market share is lower than your fair market share, there is a performance gap. In other words, if the market share variance is negative, there is a gap.
- • Lower than competitors results.
5. MARKET SHARE BASED ON REVENUES
Market share based on revenues refers to the percentage of a market's total room’s revenue that is generated by a particular company over a specified time period. Market share based on revenues is calculated by taking the company's rooms revenue over the period and dividing it by the total rooms’ revenue in the market over the same period.
Decision Rules: When does a company have a performance gap?
A company has a performance gap if the performance is lower than:
- • The objective set by the management at the beginning of the business period.
- • If your actual market share is lower than your fair market share, there is a performance gap. In other words, if the market share variance is negative, there is a gap.
- • Lower than competitors results.
6. REVENUE PER AVAILABLE ROOM (RevPAR)
Revenue per available room (RevPAR) is an important metric used to measure financial performance in the hospitality industry. The metric, which is a function of both room rates and occupancy, is one of the most important measures of health among hotel operators. The RevPAR provides rooms revenue information for each available room, which enables managers and operators to compare their performance to their competitors with varying sizes.
Decision Rules: When does a company have a performance gap?
A company has a performance gap if the performance is lower than:
- • The objective set by the management at the beginning of the business period.
- • Lower than the industry average
- • Lower than competitors results.
7. AVERAGE DAILY RATE (ADR)
Average Daily Rate (ADR) is another important financial performance metric that represents the average room rate (rental income) per occupied room in a given time period. ADR along with the property's occupancy are the foundations for the property's financial performance.
Decision Rules: When does a company have a performance gap?
A company has a performance gap if the performance is lower than:
- • The objective set by the management at the beginning of the business period.
- • Lower than the industry average
- • Lower than competitors results.
8. YIELD MANAGEMENT
Yield management is the process of understanding, anticipating and influencing consumer behavior in order to maximize yield or profits from a fixed, perishable resource (such as airline seats or hotel room reservations).
As a specific, inventory-focused branch of Revenue Management, Yield Management involves strategic control of inventory to sell it to the right customer at the right time for the right price. This process can result in price discrimination, where a firm charges customers consuming otherwise identical goods or services a different price for doing so.
NOTE: the most contentious issue is room rate potential and there are several viable options used in industry). We shall use the “HIGHEST RATE CHARGED BY HOTEL.
Decision Rules : When does a company have a performance gap?
A company has a performance gap if the performance is lower than:
- • The objective set by the management at the beginning of the business period.
- • Lower than the industry norm.
- • Lower than competitors results.
Industry Norm (Rule of Thumb)
- a. Higher than 90: Think about raising room rates
- b. Between 70 and 90: good.
- c. Between 30-70: Acceptable, but a lot of work needs to be done to bring it up
- d. Lower than 30: BAD.
9. OPERATING EFFICIENCY RATIO
Operating efficiency ratio is also known as GOP ratio and managerial efficiency ratio, measures management’s overall ability to produce profits by generating sales and controlling the operating expenses they have the most direct control.
It is a measurement of what proportion of a company's revenue is left over, before taxes, after paying for variable costs of production as wages, raw materials, etc. A good operating margin is needed for a company to be able to pay for its fixed costs, as interest on debt, insurance, etc.
Decision Rules: When does a company have a performance gap?
A company has a performance gap if the performance is lower than:
- • The objective set by the management at the beginning of the business period.
- • Lower than the industry norm.
- • Lower than competitors results.
Industry Norm (Rule of Thumb): Lower than Norm is a gap!
- a. Industry norm is between 30 to 40%
- b. Higher than 40: Very tight cost control. This may work as a good short-term strategy but it may not be a long-term strategy. Because if you have a very tight cost control, you are likely to budget too little on your operating expenditures. As a result, the quality of your product and the customer satisfaction scores are likely to decrease in the long term, which is likely to have negative impact on the demand for your product.
- c. Between 30 and 40: good.
- d. Lower than 30: Either you do not do a good job controlling your cost or your sales are low or both. Increase sales while lowering cost.
10. PROFIT MARGIN
Profit margin is a ratio of profitability calculated as net income divided by revenues. It measures how much out of every dollar of sales a company actually keeps in earnings.
Decision Rules: When does a company have a performance gap?
A company has a performance gap if the performance is lower than:
- • The objective set by the management at the beginning of the business period.
- • Lower than the industry average
- • Lower than competitors results.