Last week, we introduced some of today’s most challenging issues surrounding yield management in the spa industry. Furthermore, we stressed the importance of bringing an integrated approach into revenue management capable of providing spas with the opportunity to measure time as a crucial variable to understand revenue-production performance.
In our previous post, we briefly introduced RevPATH as the key performance indicator (KPI) that will allow us to measure time effectively. In the following lines, we would like to further explain the benefits that this KPI provides to spas and wellness centres in terms of revenue management. We would like to continue to use the reference document Spa Revenue Management from Sheryl Kimes and Sonnee Singh. Let’s take a look.
Why time matters
As we stated last week, the spa industry uses two main KPIs, amongst others, to implement revenue management: The Average Therapist Occupancy and the Average Treatment Room Occupancy. While looking at the spa’s capacity is an essential element of yield management, we strongly believe such an approach is incomplete if it does not bring into consideration the ‘time’ variable.
Time is an essential component of the way our industry works. In fact, customer demand changes by time of the year, week, day and time of the day. According to the Spa Revenue Management report “each spa’s managers must be able to forecast their operations time-related demand so they can make effective pricing and capacity-allocation decisions to manage the shoulder periods”.
How to calculate RevPATH
Today, spas can bring ‘time’ into revenue management using the so-called revenue per available treatment-hour (RevPATH). This KPI, “can be calculated by multiplying the treatment room occupancy by the average treatment-related expenditure per person or by dividing the revenue for the time period in question by the number of treatment-hours available during that interval.”
In practical terms, this means that a spa with a treatment room occupancy of 70% and an average-related expenditure of $200, has a RevPATH of $240 (70% x 200). Similarly, a twenty-room spa that makes $1600 on Fridays between 6:00 and 7:00 AM, has a RevPATH of $80 (1600 / [20 x 1]).
Different spas calculate their RevPATH according to their goals. While high-end spas may favor higher expenditure per guests, regular spas may prefer high volumes of business. The bottom line is that “the trade-off between occupancy and average expenditure is a strategic one, and one that must be carefully considered when positioning one’s spa”.
Building a strategy
Once spas and wellness centres have been able to understand their RevPATH patterns, it is time to use that information to build a solid strategy towards the future. Such a strategy, which needs to be designed around the spa’s structure and its core services, may include different kinds of actions aimed at increasing RevPATH.
For instance, “during the busy periods, the manager may want to consider requiring a credit card guarantee for reservations, reducing the amount of time between treatments, or offering premium services. During [their] slow periods, [they] may consider offering specially priced treatments for customers who are available on weekdays”.
In all this process, the manager also needs to keep an eye on the ‘fair’ reasons that are given to customers when different prices are applied to the same kinds of services. If the customer perceives an ‘unfair’ treatment, he/she will walk away from your business. Because of this, it is essential for the spa manager to develop logical conditions (rate fences) capable of explaining the price differential.
A solid implementation of those rate fences, which can be both physical (e.g. room size or location, treatment type, amenities) and intangible (e.g. affiliation, time of day or week, treatment duration), will have a significant impact on revenue management. This is why using discounting as the only option to deal with revenue management could be a dangerous strategy if it does not have the support of coherent and logical rate fences.
Considering all of the above, we agree with the Spa Revenue Management report on the importance of developing and implementing strategic differential pricing instead of making of it a tactical, sporadic approach. Likewise, we believe the long run success of revenue management depends on the spa’s ability to “market and manage every available moment of the spa as a distinctive product”. If we know how to take full advantage of RevPATH, we will certainly enhance our revenue management and overall performance.