What Is Market Penetration Index (MPI)?
Market Penetration Index (MPI) is a competitive metric developed by the Smith Travel Accommodations Report also known as the “STAR Report”. Market penetration index compares your hotel's occupancy to the average occupancy of your competitors. This metric is useful in assessing how attractive of an offering your hotel is bringing to the market.
How to measure Market Penetration Index
To get your market penetration index, you need to first calculate your occupancy rate. This rate is the amount of occupied rooms divided by the total rooms available. Occupancy rate shows how busy a property is, and the MPI calculation compares this to your competition. This means you also need to know your competitors occupancy rate. This is best achieved through third party data providers such as STR.
MPI = Your occupancy rate / your competitors occupancy rate * 100
How to interpret your Market Penetration Index (MPI)
If your MPI is above 100, it implies that you have a greater market share than your competitors. This is great news and indicates that you have a strong positioning through the eyes of potential guests. If your MPI is above 100, you should then conduct an Average Rate Index (ARI) to see how your rate is compared to your competitors. If your rate is lower than your competitors, this may be what is driving your MPI. If your rate is higher, you may want to consider why guests are willing to pay more for your services. Possibly, there is room for the rate to increase without affecting occupancy.
If your MPI is below 100, it implies that your competitors are stronger in your market than you are. The next question should be, why? Here are a few places to look for that answer:
- Are our rates higher than our competitors?
- Is our offering worse than our competitors?
- Are our reviews worse than our competitors?
- Is our marketing strategy worse than our competitors?
If none of these questions are helping to create actionable steps, consider if the competitive set is an accurate reflection of your real life competition.
Developing your competitive set for your MPI
A major question that comes along with calculating and using a Market Penetration Index, is who are your competitors? Since the demand for specific hotel types varies between regions, it is important to know how your property is positioned in the market.
For example, there may be 100 hotels in a local area that could be used as the competitive set for your MPI. Of those 100 hotels, 10 are luxury or boutique properties, 20 are roadside motels, 40 are mid-range chain hotels, 10 are luxury chain hotels and 20 are mid-range independent hotels.
If your property is a luxury boutique hotel, you may choose to compare it to only the 10 other boutiques. You may also find it useful to calculate the MPI for all the luxury hotels in the area (a comp set of 20) or possibly even a set of boutiques and independent hotels (a comp set of 30).
This type of decision will vary depending on your properties competitive landscape and positioning within the market. This informs how customers view you when searching for a hotel, and thus are a good definitional boundary for a MPI competitor set.
Market Penetration Index Best Practices
Managers should track their MPI over time and compare how changes to the property service offering and price affect the competitive position within the landscape. To make this easy, consider digitizing the data tracking and working the metric into your monthly or quarterly meetings. Finally, ensure that you do not look at MPI in a silo. This is an indicator of competitive strength, but not the only answer to a complex question. Use MPI in conjunction with other business metrics to make decisions that improve your property.