Know Your Industry Terms: What are KPIs and Which to Pay Attention To
The Importance of Key Performance Indicators in the STR Industry
No matter which way you look at it, owning a short-term rental is a numbers game, and tracking those numbers is an essential element of success in this industry. But which numbers should you take into account and which ones aren’t as important?
That’s what we’ll be covering in today’s edition of Know Your Industry Terms–what Key Performance Indicators (KPIs) are and which ones matter to the long-term success of your business. Tracking KPIs is not an easy task, but these important metrics can give you insight into where you need to improve and where you are currently succeeding.
What Are KPIs and Why Do They Matter?
KPI stands for Key Performance Indicator, and it refers to important metrics that are used to track the health and performance of your short-term rental business. KPIs also help you to compare the performance of your business year-over-year as well and can help you and your team see whether you’ve been able to hit your target numbers for the month, quarter, or year.
Keeping track of your KPIs is not just an important means of tracking your business’s financial success–it’s also an essential part of measuring your effectiveness as a short-term rental owner. The ability to make decisions that are informed by data is a necessity in this industry, and measuring KPIs can give you the tools you need to make those well-informed decisions. It can also help you to track how those decisions panned out in the long run, among other things.
All in all, keeping track of your KPIs is a vital part of running a vacation rental business. Even if numbers are not your main area of expertise, you would do well to pay attention to these key metrics for the long-term health of your enterprise.
Key Performance Indicators to Pay Attention To
#1: Occupancy Rate
Perhaps the most important of all the key indicators in the short-term rental industry is occupancy rate. Your occupancy rate measures the percentage of time during which guests are staying at your short-term rental, and for most short-term rental businesses, high occupancy is the goal.
By tracking occupancy monthly, quarterly, and yearly, you have the ability to compare the overall performance of your business with previous time periods, allowing you to measure the health and success of your rental over time. You can also compare your occupancy with your region’s average occupancy rate to determine how well your pricing strategy is working–this will help you to see if you measure up against your local competitors.
How to Calculate Your Occupancy Rate: The formula for calculating occupancy is quite simple: just divide night’s booked in a given time period by the number of available nights during that period. For instance, if your rental was booked for 20 nights of a 31-day month, your occupancy rate would equal 0.7, or a 70% occupancy rate for the month.
#1a: Adjusted Occupancy Rate
Oftentimes, it is important to understand your occupancy rate, but only for the days that were available to book–this is called your adjusted occupancy rate. For instance, you may block your rental off for 5 days for maintenance work. In this case, you want to reduce the number of available days to book by 5 to get a better understanding of your occupancy that month.
How to Calculate Your Adjusted Occupancy Rate: In our example above, let’s imagine a 5 night maintenance block. We want to reduce the number of available nights in our 31 night month by 5. We then divide night’s booked in a given time period by the new number of available nights during that period. So if your rental was booked for 20 nights of a 31-day month and blocked for 5 nights, your occupancy rate would equal 20 divided by (31 nights minus 5 blocked nights) or 20 divided by 26, or 76.9%.
#2: Average Daily Rate or ADR
Another important metric to keep in mind when reviewing your KPIs is your ADR, or your average daily rate. Although this performance indicator seems like the most important when it comes to calculating your total revenue for the year, ADRs are just one number point in a larger context. While gains and losses in this metric will give you a good idea of how your rental is performing, ADRs should only be looked at in the bigger picture, rather than as a one-to-one metric to measure the health of your business. Just because you landed a reservation with a high ADR does not mean you are making more revenue. That is where RevPAR comes in.
How to Calculate ADR: The formula for calculating ADR is not difficult to understand, even if you’re not mathematically inclined: just divide the total amount of revenue you’ve made over a given period by the number of nights booked. If your total amount of revenue for a month was $7,000, for instance, and the number of nights booked was 18, your average daily rate would be $389.
#3: RevPAR / RevPAL
The next KPI we’ll cover is RevPAR (or RevPAL), which stands for revenue per available room or revenue per available listing. This metric, taken from the hospitality industry, can give you a good idea of the health of your business, especially if you track its changes over time. Because it takes into account both occupancy and average daily rates, it’s a more accurate measure of the performance of your vacation rental. Gains and losses in RevPAR help to paint a larger picture of your rental’s success than occupancy rates or average daily rates alone will give you.
How to Calculate RevPAR: Thankfully, finding out what your RevPAR was for a given period of time is easy–all you have to do is multiply that period’s occupancy rate by the average daily rate during that time period. For example, if your occupancy rate is 55% and your average daily rate is $250, RevPAR for that time period would equal $137.50.
#4: Booking Window/Lead Time
Some KPIs don’t have a direct correlation to revenue, such as our next important metric, booking windows or booking lead times. These refer to the length of time in between a guest booking their reservation and when they are coming to stay. Booking windows are vital in helping you measure and forecast demand. If your guests are booking far in advance, for instance, you’ll know that demand is higher for that period of time, and can prepare accordingly for increased stays and guest bookings.
Booking windows can also give you insight into whether your pricing strategy is performing well, as longer lead times can often indicate a well-performing pricing strategy. In addition, too long of lead times may indicate you are pricing too low and leaving money on the table. Understanding your market’s booking window can help find a balance.
How to Calculate Booking Windows/Lead Time: Unlike the other KPIs we’ve mentioned so far, there is no mathematical formula for calculating lead time. Instead, all you have to do is calculate the length of time between when a guest books and when their reservation actually is. For example, if a guest books on April 1st for a stay between May 1st and May 6th, the booking lead time would be 31 days. On a spreadsheet, you can easily subtract the check in date from the confirmation date to find your booking window.
Become a More Informed Vacation Rental Owner with LocalVR
A healthy vacation rental business is no accident–it comes as a result of hard work and diligence, along with making informed decisions that you can stand behind. Keeping track of KPIs is one way to help you see the bigger picture of your short-term rental business and make those well-informed decisions. If you’re hoping to find a short-term rental property management company that understands the importance of these metrics, contact LocalVR today.
Looking for more short-term rental tips and tricks? Check out our breakdown of ADR vs RevPAR or dive into our blog on how the real estate industry affects STRs.