REVENUE MANAGEMENT GLOSSARY
At Rented, we spend every day talking about Revenue Management Tools and Services with our vacation rental manager clients. Many of them have the same question, “What do all these terms mean?”
The language of revenue management helps to convey the key data points that should be understood and tracked for performance. Here’s a list to get started speaking all things Revenue Management and maximizing the benefits of using a dynamic pricing tool.
The data that is stored in your system of record, typically this is your property management system. Authoritative data is important, it is your historical data and relevant to your specific portfolio of properties. From this historical data, you’ll know the high and low pricing, plus the trends that are specific to holidays, and events. The authoritative data is stored in the ‘system of record’ in your property management system.
Of the total annual nights, removing owner stays and maintenance holds, will give you the available occupancy. Of the nights available to sell, how much has been sold? When calculating the occupancy information for your reporting, or owner reporting, you do not want to include nights that are ineligible to be booked at all due to holds. Looking at the true occupancy of available nights to total booked is the correct way to calculate these metrics.
Average Daily Rate (ADR)
ADR is the calculated average nightly rate for a property or group of properties. We calculate by dividing the total rental revenue by total nights sold. Knowing the ADR of the property, or groups of properties can help identify potential pricing issues and help to maximize revenue. When comparing your inventory ADR to the market, this can also show you trends in pricing that you will take into account when adjusting your pricing. Also, take into consideration that ADR is not inclusive of all revenue, so will not include fees or taxes, only looking at the base rental rate per day booked.
This is the number of days between when the reservation is made in advance of arrival. Booking windows can apply to a single property, block of properties, or the entire portfolio of properties. Booking windows show trends, and also insights into how guests behave based on a wide variety of factors. Short stays might show reduced booking windows for a ‘quick weekend getaway’ and longer stays, or larger groups in higher occupant properties will be planning further ahead for a big once-a-year vacation, and have a longer booking window. Additionally, understanding the market trends for all vacation rentals in your area will help you with dynamic pricing, so that you anticipate booking windows and adjust the pricing accordingly.
Cancellation rates are calculated as the percentage of reservations that are canceled by the guest prior to arrival. You might track cancellation rates by those that are a full refund or that incur a penalty fee. Tracking the cancellation rate is important to track trends that may be an indicator of the policy and the need to adjust. Cancellation rates are also included in the revenue trends for forecasting.
Similar to the cancellation rate, canceled nights are the flat number of nights for check-ins during a given period that is canceled prior to arrival. Canceled nights can be tracked to determine if specific properties or time frames are more problematic.
Similar to the cancellation rate, canceled stays are the flat number of stays for check-ins during a given period that is canceled prior to arrival. Stays can be tracked to determine if specific properties or time frames are more problematic.
Dynamic pricing is a customer or user billing mode in which the price for a product frequently rotates based on market demand, growth, and other trends. Dynamic Pricing is a mathematical algorithm that takes real-time inventory data to raise and lower the rental rates of your vacation rental. Dynamic pricing aims to solve issues like under/overbooking, by adjusting prices based on supply and demand in order to transfer you get more bookings for when there are low numbers available. It also helps protect against spikes in demand during peak seasons, so if people want it bad enough they will pay what’s needed (supply and demand!).
This data point is tracking the total nights reserved by guests for a given period. Also referred to as Properties Sold or Nights Sold. The is a cumulative figure that can be calculated annually, quarterly, monthly, or by seasons or peak event times. Sharing guest nights with owners is a great data point for monthly reporting.
Incremental revenue is that which is recognized outside of the standard booking revenues. Property managers should track incremental revenues to determine the value and ROI. Examples of this revenue stream could be concierge services, mid-stay cleans, early check-in, or late checkout. Many property managers partner with local activities, venues, or restaurants for referral shares that are included as incremental revenue.
Key Performance Indicators (KPI)
KPIs are used throughout all industries and are a set of business metrics used to evaluate factors crucial to the success of an organization. For vacation rental property managers some of the primary KPIs could include ADR, Occupancy Rate, Conversion Rate, and RevPAN. KPIs are important to business objectives because they keep objectives at the forefront of decision-making. It’s essential that business objectives are well communicated across an organization, so when people know and are responsible for their own KPIs, it ensures that the business’s overarching goals are top of mind.
Available nights are the total nights in a given period that a vacation rental manager can take a booking. In hotels and vacation rentals, this is also referred to as Room Supply. There will be nights that are not available due to holds, such as owner stays or maintenance activity, the hold nights are not included in the nights’ available calculation as they will not be bookable. Nights available are used in other important KPIs to determine
Total Nights in a Time Period – Hold nights = Nights Available
Occupancy rate is the percentage of Guest Nights out of the total nights in the period. This is one of the most important KPIs for revenue management. While generally, you are aiming for high occupancy, property managers should evaluate this in context with other KPIs such as ADR and RevPAR, as the goal is to maximize revenue.
Also note that for vacation rentals, unlike hotel occupancy, Owner Nights + Holds can have a big impact. If owners have booked 10% of the nights, and 5% of the nights were holds, the maximum Occupancy would be 85%. Use the Available Occupancy KPI to illustrate the percentage of guest nights booked out of only those nights available to book for guests.
Occupancy = Guest Nights / Total Nights
Originating in the hotel industry, RevPAR is Revenue Per Available “Room” with hotels and is a key vacation rental revenue management metric. For vacation rentals, RevPAR is calculated by multiplying the Occupancy by the ADR. Compared to ADR or Occupancy as stand-alone metrics, RevPAR provides a more complete measure of your company’s success by giving you an overall picture of both rental revenue and occupancy. In a single figure, RevPAR helps you understand how well your company has filed its properties both in the off-season when demand is low even though rates are also low, and in the high-season when demand is high and rates are also high. When evaluating the performance of your company, RevPAR is a more complete measure that captures both rental revenue and occupancy. With an overall picture in one figure, this metric helps you see how well your properties did over time including when demand was low even though rates were also low as well as high-season periods where demand is higher than other times during the year but so are prices.
RevPAR = Occupancy x ADR (or) Total Unit Revenue / Total Nights in a given period
RevPAR broken down by bedroom calculates the amount of Unit Revenue earned per bedroom per night. Because RevPAR as an overall inventory evaluation tool may not offer clarity into the performance of different property sizes, vacation rental managers look at the data by bedroom occupancy to determine the returns on the high level of inventory. This allows you to directly compare the rental revenue per bedroom over the number of total available paid nights for two or more occupancy type properties, for example, compare large 6 bedroom properties to one bedroom or smaller. This is a way to determine a meaningful KPI to benchmark against competitive property managers, individually managed properties, and against your own portfolio.
= Unit Revenue / (Total Nights x Sum of Bedroom Count)
Scraped data is the term used to refer to the data coming from a third party using technology to extract data from human-readable output coming from another system. The most common in the vacation rental industry are companies that scrape data from Airbnb, Booking, and Expedia family sites and resell that data to managers and other interested parties. Scraped data is used to build databases that offer insights to the market, competitors, your own portfolio, and more. Scraped data is critical to a dynamic pricing strategy to determine supply and demand, booking windows, booking curves, and more.
Unit Revenue (Recognized) or Gross Rent
This is calculated for the unit based on total revenue and not including incremental revenue. This calculation can be used for revenue forecasting, setting rates, and other KPIs.