Oh, metrics... If you don't like numbers, chances are you steer far away from these, huh? The truth is that the right metrics (or Key Performance Indicators, KPI) are fundamental in understanding whether your business is dying, surviving, or thriving!
It can seem daunting, but it doesn't need to be rocket science.
When thinking about metrics:
- Focus on what matters, and
- Keep it simple. Those are the guiding principles in my line of thinking. Why? Because it's easy to get caught up in the many complicated metrics that every hotel professional recommends. And then find it impossible to make decisions. When there are so many metrics to analyze, it's easy to fall into the trap of Analysis Paralysis.
When we focus on the most important metric, it's easier for our brains to process, to make decisions and for our business to make progress.
Photo by Jon Flobrant on Unsplash.
Remember: this isn't rocket science. Let's keep it simple!
Focus on the most important metric for your hostel and everything else usually falls into place. What to do with all those other metrics your PMS gives you? Just gracefully tune them out (at least most of the time). If you've been practicing mindfulness, then you should be good to go :P.
Before we jump in
Before you even launch, make sure that you've run the numbers in a Financial Model for your hostel, and that you know exactly what success looks like. What occupancy and rates more or less do you need to be profitable? Make sure that it's possible for you to be profitable. Otherwise, no metrics or actions in the world will help you survive.
Launch stage metric
When you've just launched, the most important thing is: to survive. At this stage, you might not have a PMS (a Property Management System, for managing your hostel) to calculate this for you. Don't worry though - it's easy to calculate (even in a homegrown Excel sheet)!
Small aside: Since this is the survival stage, you want to keep your fixed costs to a minimum - and a PMS is not going to bring you more bookings, so it's not a priority. After all, what good is a management system for your hostel when you don't even have bookings to manage? Focus on helping your business survive in this critical stage.
Survival means filling beds. It means getting paid. Getting reviews. Generating word of mouth. Being acknowledged by the world that your hostel exists, and that it's a great destination. That's what progress should sound like at this stage.
So, what's your most important metric at this stage? Your Occupancy Rate. Focus on filling beds and the rest comes together. Fail to fill your hostel's beds and you are doomed. Especially at this early stage. Traction and momentum are KEY in this early stage. Remember, you've got that big pile of fixed costs eating at you every month, so focus on what matters: getting people sleeping in your beds!
So, what actions can I take?
This doesn't mean "just undercut everyone's price", although at times you may need to do that. It does mean making sure the online presence that you have control over, like your photos on OTAs, are beautiful. And also, that your pricing is competitive.
The part you don't have control over, and is critical, like your reviews, will come on its own when you deliver on what your photos online promise. And that will lead to more bookings, and the progress of your business onto the next stage.
What's a good Occupancy Rate?
It depends on your city, the size of your hostel and the season you're in. Shoot to have as many guests as you can, while maintaining the best possible experience for them.
Help me calculate Occupancy Rate!
Sure thing kiddo!
Occupancy Rate = Total units occupied / Total available units.
To clear this up: For dorm beds, each bed is a "unit". For private rooms, each room is a "unit".
So, for example, let's say you have 16 total dorm beds and 4 private rooms in your hostel. And let's say that on a given night, 10 dorm beds and 2 private rooms are booked. That means:
// Expanding the above formula gives us:
Occupancy Rate = (Dorm beds occupied + Private rooms occupied) / (Total dorm beds + Total private rooms)
// In this case:
Occupancy Rate = (10 + 2) / (16 + 4)
Occupancy Rate = 12 / 20
Occupancy Rate = 60%
Growth stage metric
You know you've graduated from the Launch stage when you're filling your hostel consistently. You may have even experienced an overbooking! Nice work. While getting an overbooking sucks, it's a symptom that your hostel is growing and people want to stay there. And that, is a good problem to have.
If you don't have one yet, now is a great time to find a PMS for your hostel. Now, you'll actually be using it since you've got bookings to manage! You'll have money to pay for it(!) and you'll have a much better idea of what you need to run your hostel. And best of all - you'll be avoiding those dreaded overbookings by connecting your front desk to your channels :).
Great. So, now let's talk about the metric I recommend for the Growth stage: RevPAB.
RevPAB stands for Revenue per available bed. You may have heard of it, or other variations like RevPAR (more well known in the hotel space), but it's pretty much the same idea. RevPAB is a great metric for this stage because it helps synthesize two different and important metrics that tend to work in opposing directions. Both are very important: Average Daily Rate (ADR) and Occupancy Rate. But since I wanted to keep things down to one metric, I chose RevPAB.
To clarify: Average Daily Rate (ADR) is just that - the average price paid by guests in a given period. It's calculated like this:
ADR = Total lodging revenues / Total units booked
RevPAB might sound a bit confusing at first, so bear with me here! To understand how RevPAB works and why it's useful, let's take a look at things from another point of view...
Let's say we kept on working with the Occupancy Rate, like we did in the Launch stage. The problem with this is that it's easy to fool ourselves into thinking we're growing, when the reality is that it depends.
Your hostel might be full, but you may not be doing better. So, how do you know you're growing? Well, it depends on your occupancy (how full your hostel is) and your rates (how much you are charging). You may have filled up your hostel, but what rates are those guests paying?
What good is it, for the Growth stage, if you fill up your hostel (Occupancy Rate of 100%) if your ADR is $1? Not much good at all...
You might say: "Ok ok, makes sense. So, why not use the ADR as our most important metric in this stage??"
Good idea! But we'll fall into the same trap. We can sell one room for $1,000 a night and have a superb ADR, but a crappy Occupancy Rate... Not great either.
So, to summarize: both metrics are important, and RevPAB is the perfect synthesis.
Help me calculate RevPAB!
There are a few ways to calculate RevPAB:
// Option 1: ADR and Occupancy
// Occupancy rate is calculated above in the Launch stage section, and ADR in the Growth stage section.
RevPAB = Average Daily Rate * Occupancy Rate
// Option 2: From Scratch
RevPAB = Total lodging revenues / Total units available
So, for example, let's say you have the same setup as before: 16 total dorm beds and 4 private rooms in your hostel. And let's say that on a given night, 10 dorm beds and 2 private rooms are booked (just like in our Occupancy example). And let's say that the private rooms paid $50 / night and that the dorm guests paid $15 / night each. That means:
// Option 1: ADR and Occupancy
// First, let's calculate ADR:
ADR = (Private room revenues + Dorm bed revenues) / (Number of private rooms booked + Dorm beds booked)
ADR = ($50 * 2 + $15 * 10) / (2 + 10)
ADR = $20.83 / night
// Now let's calculate RevPAB using the ADR and Occupancy (from the Occupancy example above)
RevPAB = $20.83 * 60%
RevPAB = $12.50
// Option 2: From Scratch
RevPAB = (Private rooms revenues + Dorm bed revenues) / (Total private rooms + Dorm beds available)
RevPAB = ($50 * 2 + $15 * 10) / (4 + 16)
RevPAB = $12.50
Words about RevPAB
By keeping an eye on RevPAB, you'll always know when you are growing. You'll never be able to cheat your RevPAB. As demand for your business grows, you'll be able to charge higher rates and keep your hostel full. And that will give you a higher RevPAB.
The one thing about RevPAB that I don't like is that it's hard to grasp at first.
Occupancy is easy to visualize in your head. ADR is too.
But there's something weird about RevPAB that makes it a bit harder to understand. But, the more you use it, the easier it will be. Judge RevPAB based on your hostel's history and you should be golden.
This isn't to say you won't need other metrics at all. Eventually, you'll dive into other metrics when you need to explain "why's" in your RevPAB's movements.
Here's an example:
If your RevPAB is lower than it was at the same time last year, you'll want to understand why. The first obvious place to look is your ADR and Occupancy. Did you charge too high a rate and your Occupancy ended up lower than last year? Maybe more hostels have opened in your area and there is a price war going on? Have your reviews suffered since the same time last year?
These are all questions that you should be asking yourself to get to the bottom of the question "Why is my RevPAB lower this week, than it was at the same time last year?".
Remember: RevPAB is your high level growth metric. Eventually you'll need to dig into others to understand the "why" in RevPAB movements. But always keep things as simple as possible. That will help you avoid Analysis Paralysis.
Are you looking to launch your hostel soon? Or just launched and figuring things out? Occupancy Rate should be your most important metric. Get guests sleeping in your beds!
Before you launch, make sure that you've run the numbers, and have a solid understanding of what your future might look like if Occupancy is lower or higher than expected. If you aren't profitable with 100% Occupancy, then nothing is going to help you survive... Before you launch, make sure that it's possible to be profitable! It's not always the case.
To start, you need to:
- Make sure you have a solid online presence for backpackers to find you. You MUST have good, high-quality photos of your hostel and rooms, a nice website, and be listed on the right OTAs with those great photos.
- Make sure your guests have an amazing time, and that
- you make every possible effort to get 5-stars.
Past survival mode and trying to figure out how to grow? RevPAB is your most important metric! Make sure you understand what RevPAB is (more in depth discussion above) and what kinds of questions you should be asking yourself to understand why things are better or worse than expected.
Questions? Let me know in the comments!
Photo by NOAA on Unsplash.