The basic elements for measuring a hotel's performance are the occupancy rate and the average rate. But what's behind them? The number of rooms a hotel manages to rent in a period generates an economic benefit, but the focus shouldn't be on the percentage, but on the profitability that percentage produces.
High occupancy = good business? Not necessarily
There are cases where occupancy is "high" —above 60% annual cumulative— something that depends heavily on the destination: a property in a traditional tourism spot can reach 40% just from vacation seasons, but struggle the rest of the year.
If a hotel exceeds 60% but we review its relationship with the average rate, the economic result may not be ideal. In highly competitive destinations, and especially with "unfair operating styles," rate wars break out: capture anything, at any price. So we see branded hotels whose minimum rate is around 1,200 pesos + taxes in a good destination, and that same brand, in a poorly chosen destination, competing with 2-star hotels at 500 pesos —and for groups, even breakfast is complimentary. The question is: is that a business?
Information before investing changes everything
Starting any business requires valuable information about the environment, the location and the future projects that can ignite or kill a destination. One example is the "Arco Norte" highway: Pachuca, once a stopover for long-haul travelers, stopped being one when many continued along the highway without detouring.
Other risks: hotels with many years of operation that need heavy remodeling investments and, meanwhile, lower their expectations to survive; or selling franchises to the highest bidder, where the interest in placing the brand —without validating market size or seasonality— can make the project fail.
Is my competitors' occupancy a good benchmark?
Comparing the competitive set's performance is useful, but we keep finding properties that don't share their information, or that give it in a misleading way: encouraging numbers where there are none, or dressed-up indicators so as not to alert the competition.
Also, occupancy measures rooms sold over rooms available, and an 80% in a 100-key hotel is not the same as a 40% in a 300-key one. Who sells more? And above all, who charges what's consistent with their product? If you want to understand these metrics well, read our guide What is RevPAR and ADR.
Average rate, revenue and the risk of underpricing
The average rate results from analyzing the different prices assigned by customer, stay and season, and reflects the minimum expected in a property. When a market study detects potential demand, it must be compared against the product you want to build: by standard, a brand has defined price ranges to optimize profitability. If, when operating, you lack enough experience, in order to win business you can underprice the product.
From here come two keys to success: analyzing the market before investing and having a good operator who positions the product to raise the average rate, not the opposite.
A real case: Expo Guadalajara (2011)
As an example of the firm's work, an analysis of 15 three- and four-star hotels in the Expo Guadalajara hotel district showed in 2011:
- Average rate (Expo area): 1,030.25 pesos + taxes.
- Annual revenue (Expo area): ~655 million pesos, up 14.70% from the previous year.
- Average rooms sold per day: 1,742… but ~1,260 rooms per day went unsold.
That "what wasn't sold" is money left on the table. An empty room is lost revenue, and that's why every well-priced occupancy point matters.
Why invest in the sector?
Hotel investment is, traditionally, a real estate and asset investment that generates certainty on its own. It's a growing industry, but at a critical moment: there are destinations —or zones within them— that are saturated and have little available, very expensive land. A market analysis makes it possible to find the optimal location to capture underserved niches and operate profitably.
Does your hotel fill up but earn little? We measure what really matters —profitability, not just occupancy— and tell you where the leak is. With data, not hunches.
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