RevPAR vs GOPPAR: Finding the Right Performance Metric for Hotel Revenue Management

I recently reviewed a fascinating research paper titled "Performance measures for strategic revenue management: RevPAR versus GOPPAR" by Zvi Schwartz, Mehmet Altin, and Manisha Singal, published in the Journal of Revenue and Pricing Management in August 2017. This study addresses a fundamental question in our industry: Is RevPAR (Revenue Per Available Room) an adequate proxy for profitability, or should we be focusing more on GOPPAR (Gross Operating Profit Per Available Room)?

Note: This reaction is strictly focused on the academic paper at hand and is not meant to suggest that GOPPAR or RevPAR are necessarily the latest or most advanced metrics that should be used in the hospitality industry. The industry continues to evolve with new performance measurements beyond those discussed in this paper.

The Theoretical Case for GOPPAR

Many industry professionals have talked about shifting to GOPPAR without properly understanding the deeper reasons beyond the obvious fact that GOPPAR includes expenses while RevPAR doesn't. This paper provides two critical theoretical frameworks that explain why RevPAR can be problematic:

1. Suboptimality: The authors mathematically prove that when a hotel maximizes RevPAR, it doesn't necessarily maximize GOPPAR. In fact, with a linear demand function, GOPPAR is never optimized when RevPAR is the target metric.

2. Bidirectionality: Within certain operational ranges, RevPAR and GOPPAR can move in opposite directions. This means revenue managers might make decisions that appear to improve performance when measured by RevPAR, while actually reducing profitability.

These theoretical insights provide a much more robust foundation for the argument to shift toward profit-based metrics than simply noting that GOPPAR accounts for costs.

The Practical Reality

Despite these theoretical concerns, the empirical findings were reassuring. The study found a high overall correlation (r=0.91) between RevPAR and GOPPAR across nearly 6,000 hotel/year observations. This suggests that for many properties, RevPAR remains a reasonable proxy for profitability.

However, the correlation weakens under specific conditions:

• Higher proportional revenue from F&B operations

• Substantial non-room rental income

• More luxurious hotel scale (luxury properties showed a correlation of 0.79 vs. 0.96 for economy hotels)

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The History of Performance Metrics in Academic Literature

The discussion around hotel performance metrics has a rich academic history. Sheryl Kimes' seminal work in 1999 on restaurant revenue management helped establish the foundation for performance measurement in hospitality. Since then, numerous scholars have contributed to the evolution of these metrics.

Brown and Dev (1999) were among the first to question RevPAR's adequacy, followed by Slattery's (2002) influential critique of "reported RevPAR." Younes and Kett (2003) proposed GOPPAR as an alternative, while Chen et al. (2011) demonstrated that RevPAR was not a predictor of shareholder returns. The current paper by Schwartz, Altin, and Singal (2017) represents the most comprehensive theoretical and empirical examination of the RevPAR-GOPPAR relationship to date.

The Benchmarking Challenge

One significant practical challenge in shifting to GOPPAR is the lack of readily available industry benchmarking reports. The paper noted that STR (now known as CoStar Group following its acquisition in 2019) collected GOPPAR data only annually and from a relatively small number of participating hotels in 2017.

Since the acquisition, CoStar has continued and expanded STR's data collection efforts. According to recent industry reports, CoStar's HOST (Hotel Operating Statistics) program has grown to include approximately 10,000-12,000 hotels globally that report profit and loss data, representing about 10-15% of the properties that report RevPAR data. This is a significant improvement, though still far from the comprehensive coverage of RevPAR reporting.

CoStar has also introduced more frequent GOPPAR reporting options, with quarterly benchmarking now available in many markets, though this still lags behind the daily and weekly frequency available for RevPAR metrics. In 2023, CoStar announced further investments in expanding their profit data collection infrastructure, recognizing the growing industry interest in profit-based performance metrics.

Despite these improvements, the hesitancy of hotels to share detailed profit information remains a significant barrier. As noted in recent industry publications, "Hotel owners and managers continue to be reluctant to disclose profitability numbers with the same frequency and transparency as revenue figures, creating an ongoing challenge for establishing robust GOPPAR benchmarking systems."

What This Means for Hoteliers

For practical application, I recommend a balanced approach:

1. Know your property's profile: If you operate a luxury hotel with significant F&B and ancillary revenue, be more cautious about relying solely on RevPAR.

2. Monitor your correlation: The authors suggest periodically calculating the correlation between your property's RevPAR and GOPPAR to determine if RevPAR remains a reliable proxy.

3. Consider a hybrid approach: Use RevPAR for daily operational decisions and competitive benchmarking, but incorporate GOPPAR for strategic planning and investment decisions.

4. Prepare for evolution: As the industry moves toward Total Hotel Revenue Management, we should expect the correlation between RevPAR and GOPPAR to gradually decline, necessitating greater adoption of profit-based metrics.

What performance metrics do you rely on most in your properties? Have you noticed situations where RevPAR improvements didn't translate to better bottom-line results?