Glossary of Terms



Average Length of stay (ALOS)

is the the total room nights in a hotel or ahotel market segment divided by the number of reservations in the hotel or segment. It is used to estimate the relative values of various segments and to keep track of hotel performance in attracting and keeping guests in house. IT has major revenue impact. . Formula:
Total occupied room nights / Total bookings.

Budget

Usually refers to the annual budget prepared in late fall that sets the financial plan for the property for the next calendar or fiscal year. It includes a daily occupancy, rate and RevPAR by major market segments and feeds into the Financial Budget for the property. This budget shows percent change vs. last year and previous year by month and quarter. Usually, the last quarter of the current year has not yet happened so these months are estimates that are replaced by actual figures as they occur. This latter situation may have a major impact on the reality of the budget. Another impact is that the budget must be agreed upon by the Management Company, the asset owners, and chain management; so the first, bottom up, budget usually gets amended several times during the last quarter of the year. Once the budget is finalized, it is almost always set for the entire year.

Closed to arrival (CTA)

is an inventory control mechanism used by revenue managers. It means that no new reservations can be taken for guests arriving on this date. It is used with other inventory control mechanism to provide stay pattern management.

Displacement Analysis for hotels

Since hotels have a fixed capacity, whenever they sell a room, they are taking a chance that they might be taking rooms out of inventory that could be requested later at a higher rate. One purpose of Revenue Management is to keep this from happening. With groups, it is usually worthwhile to do a displacement analysis, where we look at history to determine how many rooms from higher rated segments (usually Transient Rack) are usually sold on these days of the week during this season. Then, after the group business is added determine if there is any demand that cannot be accommodated. In other words, is the hotel going to be full and so some of the last people to book will be turned away. Multiply the number of guest rooms that will be denied times the average rate for that segment of business. If that is higher than the group revenue, then the group should be turned away. Obviously, if the profit from the ancillary in-house revenue from the group is higher than the profit from the ancillary revenue of the transient guests, then that has to also be factored into the decision.

Fallback rate

In telephone reservations, rates were quoted over the phone and often the customer would balk at paying the offered rate. If the room was likely to go empty due to low demand for that date, hotels were reluctant to let a live customer go away (resulting in no revenue) so, at end of the call, they would offer a lower rate for the dates chosen. This rate was usually set ahead of time and was the lowest rate they would accept and was called the "fall back rate." Often, the reservation agent was taught to pretend they were checking with a supervisor before offering the lower rate. Customers countered by never accepting the rate that was first quoted. Today, most hotels have abandoned this strategy in favor of directing phone customers to the internet where they always purport to have their lowest public rate. This practice was especially pernicious because it was offering the exact product to the customer at a lower rate. The better revenue management solution is to offer a lower rate only with different terms and conditions, like advance purchase or non-refundable. Then the discount is more understandable.

Forecast

In addition to the budget, a 30 60 90 day forecast is prepared each month (usually in the last week of the month). It includes the same statistics as the budget but is based on evolving information on bookings, no shows, cancellations and market trends. Usually the 30 day forecast is not changed during the applicable month and actual results during the month are reported against this 30 day forecast. Revenue Managers prepare the forecast and distribute it to all departments for their planning. There are four forecast types.

Function Room Occupancy

is the measure of how efficiently hotels are utilizing their function room space. It is recorded as an occupancy percentage. Formula:
Total occupied Function Room space/ Total square footage of function room space available.

Lose-it rate

This term refers to a rate where the hotel would be better off leaving the room unsold than sell at this rate. For transient individual reservations it is usually called a hurdle rate in an automated Revenue Management System. In non- automated Revenue Management, it is usually termed the Group lose-it rate because the complex calculation is only done for groups where the revenue result can have a major impact on the hotel revenue. This may result in turning down a large group for two reasons primarily:
1. Alternative group prospects make the odds of finding a better group at a rate high enough to take the chance of waiting for a better group to come along. This is like betting on the bird in the bush rather than the bird in the hand and it is often true if the dates requested are in a peak group season and if there is significant time left in the group booking window for those dates.
2. Displacement analysis shows that typical transient demand at higher rates will take these rooms later in the booking cycle. See also, Displacement Analysis.

Minimum length of stay (MinLOS)

is an inventory control mechanism used to optimize stay patterns. It is primarily used to ensure that a peak demand night does not get filled with one night stays thus blocking the days around it for longer lengths of stay.

Occupancy Index

is the measure of your property occupancy percentage compared to the occupancy percentage of your competitive set. It helps indicate how you are managing your inventory with demand against your competitive set. It is a good measure but needs to be coordinated with the rate index and ultimately the RevPAR Index. Formula:
(Hotel OCC/ competitive set OCC) *100 = Occupancy Index.

Price elasticity

This is one of the most important concepts in Revenue Management as well as economics in general. The simple definition is a measure of the relative price sensitivity of a group of guests. It is usually stated as a negative decimal % change in demand for rooms caused by a change in price. This applies to any rate change, both increases and decreases. For example, if you lower your rate by 5% and demand increases by 30%, then elasticity a negative 6.0 and your rates for this segment are called "highly elastic" because a small change in price results in a relatively large change in guests. If you lower your rate by 30%; but your demand goes up by 1%, your elasticity is negative .03 which is a relatively inelastic measure. Finally, if you increase rates 5% and only lose 5% of your guests, then your elasticity for that group of guests is negative 1. This is called "unit elasticity" and means that raising your rate will not increase or decrease total revenue. Usually, price elasticity is different for various guest segments and so this is an important tool for Revenue Managers to use to optimize their business mix to achieve maximum revenue for the property.

Rate Fences

This is a term used to indicate the terms and conditions of a discount rate that will keep that rate from resulting in lower hotel revenues because all the higher priced customers simply purchase the lower rate. In general, no discount rate should ever be offered without fences, like advance purchase required, minimum stay length, non-refundable, etc. An example of how to use them: If all your business travelers are paying $100 per night, and book within 5 days of arrival and you need to encourage some extra, non business revenue, you may want to offer a $79 rate for guests booking two weeks in advance. This advance purchase requirement is a "fence" that keeps the guests already willing to pay $100 from buying your rooms for $79.

Revenue Index

is the measure of your property ADR compared to the ADR of your competitive set. It helps indicate how you are pricing your rooms against your competitive set. It is a good measure but needs to be coordinated with the occupancy index and ultimately the RevPAR Index. Formula:
(Hotel ADR/ competitive set ADR) *100 = Revenue Index.

Revenue Management System (RMS)

is an automated or manual system for processing all the various information streams that are necessary for setting optimum rates and restrictions for a hotel property. Today, most hotels that can afford one use an automated RMS however most hotels utilize spreadsheets to track their past performance and make the necessary forecasts to set future rates strategies. Most manual systems require less capital investment; but they are limited in the number of segments they can realistically track and forecast.

Revenue per Square foot of function space (REVPAS)

is a measure of how effectively hotels (especially group and convention hotels) are at renting their function space. This is a relatively new measure and there are still some discussions on how best to calculate it. It is a helpful measure for revenue managers to use to augment their function room occupancy percentage which is an efficiency measure. Formula:
Total Function Room revenue/ Total square footage of function room space.

RevPAR Index (RPI)

is the measure of how an individual hotel is performing in RevPAR against its main competitors. It is calculated by dividing hotel RevPAR by the RevPAR of the competitive set. An RPI below 100 means the market is outperforming the hotel; whereas an RPI over 100 means that the hotel is outperforming the competitive set. For strategies to improve RPI subscribe to our insider newslettrer and interactive RevPAR analyzer. Formula:
(Hotel RevPAR/ competitive set RevPAR) *100 = RevPAR Index.

Smith Travel Research (STR)

is a private company from Tennessee that has gained the trust of hoteliers around the globe by providing a clearing house where hotels can enter their own operating data (specifically ADR, Occupancy, and total rooms). Smith Travel Research then aggregates this information with data from other hotels in the same market and allows participating hotels to compare their RevPAR and other measures against their competition. For a detailed review of how this is accomplished, see RevPAR Index..

Stay pattern management

is a revenue management process that seeks to make optimum use of hotel capacity by ensuring that the stay patterns on the books do not result in un-sellable stay patterns remaining to be booked. Examples of stay pattern tools are daily rate differentials, minimum and maximum lengths of stay, and closed to arrival dates.

Unconstrained Demand

This is a term that is used in Revenue Management to mean the number of rooms that would be requested by the market in the absence of pricing and inventory constraints. This has always been a concept that has sent me back to my philosophy books to contemplate how many angels can sit on the head of a pin. It is difficult to imagine a situation of a hotel with unlimited rooms and a zero price. So, obviously, this definition cannot be taken literally; instead, revenue managers must place some realistic boundaries on this concept. What it really seeks to determine is how many rooms will be consumed if you do not raise your rate to try to curtail demand. Also, if you can sell more rooms than your hotel has left in inventory, how many more will you sell? Then, you have an estimate of how many requests you want to deny, or curtail through pricing increases.

Unconstrained Demand by segment

The other concept that needs to be included in this discussion is that the demand for rooms comes from at least a few different segments and each segment has different price and profitability implications for the property. For example, the group segment may have a built in catering revenue stream with a 60% margin. Obviously, that is very attractive over a transient room at the same price that may have propensity for only spending half as much in an F&B outlet with a 20% margin.