Hospitality has an abundance of acronyms for business metrics that measure your property’s results.
They help you track almost everything from occupancy and revenue to staff productivity and food cost. Keep an eye on your KPIs to spot areas you can optimize to further improve your business success.
The two most well-known metrics that give you a solid idea of your overall performance are ADR and RevPAR.
Let’s take a closer look at why they’re so important, the difference between ADR vs. RevPAR and why it’s best to look at them together.
What is the Average Daily Rate for Hotels (ADR)?
The Definition of ADR
ADR is short for average daily rate, i.e. the average price guests pay per occupied room.
It looks at the rooms you sold and tells you how successful you are at charging a high rate. Occupancy is not a factor for ADR.
How to Calculate Your Hotel’s ADR
ADR formula: total room revenue/number of occupied rooms = ADR
Here’s how this would look in practice:
The Ocean View Hotel has 150 rooms. On June 1st it generated $14,625 in revenue from selling 117 rooms.
Plug these figures into the formula and you get: $14,625 / 117 rooms sold = ADR of $125.
Keep in mind that your ADR says nothing about your occupancy or overall room revenue. The following example illustrates this point. May 15th was a slower day, and the Ocean View Hotel generated $10,375 from selling 83 rooms.
Use the formula from above and you’ll see that the ADR was also $125 even though the hotel made less revenue overall.
What influences ADR
Several factors impact how much you can sell your rooms for.
- Seasonality: high season brings strong demand and lets you go for a higher ADR while low season will usually see fewer bookings at lower rates. Your high and low seasons depend on your target market and location. Your peak periods could be winter ski season, spring and summer break, or MICE season in your city.
- Market demand: higher demand during special events such as sports tournaments, concerts, etc. can be great occasions to boost your ADR.
- Location: A better location means you can charge a premium, especially during high-demand periods; so make the most of it if your hotel is right next to a convention center, the beach or major tourist sites.
- Amenities: The fancier and more elaborate your services and facilities, the more you can charge. Ensure they add value to your guest’s stay though, otherwise people won’t be willing to pay more for your rooms.
Importance and interpretation of ADR
Your hotel’s ADR shows how much money each sold room brings. Track it over time to see how it develops in the long term. This helps you identify seasons and see if your ADR is consistent, growing or declining.
It’s also a great metric to check your market positioning. For this, use benchmarking tools to see how your ADR compares to your compset.
You might realize that on some dates your ADR was too high and that cost you bookings. Or maybe you can identify times which regularly have both high ADR and solid occupancy, e.g. weekends or public holidays. Avoid taking low-priced groups for those days in the future to boost your profitability.
Combine all these insights to find areas where you can refine your revenue management strategy and improve your results. Keep in mind though that ADR only gives you part of the picture because it doesn’t take into account any operating costs or your unsold rooms.
That’s why we also need RevPAR…
What is Revenue per Available Room (RevPAR)?
The Definition of RevPAR
RevPAR stands for revenue per available room, i.e. the total revenue generated averaged out over all your rooms, no matter if they were sold or not. This means RevPAR looks at your complete inventory’s potential to generate revenue. As such, every additional room sold will increase your RevPAR.
How to Calculate Your Hotel’s RevPAR
There are two RevPAR formulas you can choose from.
- ADR X occupancy = RevPAR
- Total revenue/number of available rooms = RevPAR
As an example, let’s calculate the Ocean View Hotel’s RevPAR for June 1st. We know that on this day it generated $14,625 in revenue from selling 117 of its 150 rooms. That gives us an occupancy rate of 78%.
Formula #1: $125 ADR X 78% = RevPAR of $97.50
Formula #2: $14,625 total revenue / 150 available rooms = RevPAR of $97.50
What Influences RevPAR
These three factors have the biggest impact on your hotel’s RevPAR.
- Occupancy rate: The more rooms you sell, the higher your RevPAR because there’s more total revenue to average out over your available rooms.
- ADR: Pricing too high can turn away potential bookers which reduces your RevPAR. On the other side, lower rates may attract more guests and lead to a lift in RevPAR.
- Revenue management strategies: If your goal is to be your market’s price leader, you may see lower RevPAR than if you set more competitive rates. However, if your prices go too low, your RevPAR will suffer in the long run as well.
Importance and interpretation of RevPAR
Your RevPAR shows how well you’re doing at maximizing revenue per available room. An increase in RevPAR means that your ADR, occupancy or both are growing.
Compare your daily RevPAR over time to spot trends and adjust your pricing strategies accordingly. For example, if you see RevPAR going down, it’s a sign that your overall profitability is probably suffering. That means it’s time to look for ways to boost your rates.
Benchmark your RevPAR against your competition as well. If you’re behind, it’s a sign that you need to go after business more aggressively. If you’re ahead, you’re doing better than the others at filling your hotel at good rates.
ADR vs. RevPAR: Understand the Relationship
As you saw from looking at the RevPAR formula, ADR and RevPAR are connected and influence each other. Still, they have different strengths and focus areas.
Key Differences Between ADR and RevPAR
Both are indicators of your business success, but they look at it from different angles. ADR looks at how well you’re doing at keeping your rates high while RevPAR tells you if you’re still able to sell those rates. ADR only includes your revenue from the rooms you sold. RevPAR takes your entire inventory as well as your rates into consideration, giving you a more complete picture of your performance.
Interplay: How RevPAR and ADR impact each other
If your ADR is higher than your RevPAR and you still have rooms left to sell, consider lowering your rates to drive more business.
Let’s go back to the Ocean View Hotel. On June 1st, its RevPAR was $97.50, and its ADR was $125 at an occupancy of 78%. Total revenue came to $14,625.
For the following week, they want to increase occupancy and revenue, so they decide to lower their rates. In this case, the new rate brought a boost in bookings. The forecast now predicts an ADR of $120, 90% occupancy and total revenue of $16,200. That leaves RevPAR at $108.
See how both RevPAR and total revenue increased by slightly dropping ADR? Of course, this is a simplified example, and it won’t always work out this way in day-to-day business. But it illustrates how the two KPIs work together.
Remember, dropping prices isn’t a guarantee for attracting guests and overdoing it can harm your brand and profitability. So use your best judgment instead of blindly chasing a metric.
Using ADR and RevPAR Together
Both are important to understand your hotel’s performance but in isolation, they don’t give a complete picture. Always look at them together to see how your hotel’s room sales are really doing.
Track both metrics’ development over time, explore trends and how they impact each other during different seasons. Keep an eye on how market shifts and your revenue management decisions impact both KPIs, too. Finally, monitor your competition to see how you compare and if there’s room for improvement.
Use this knowledge of your hotel and your market to identify opportunities, make data-driven pricing decisions and generate more revenue.
ADR and RevPAR give you a basic idea of your hotel’s performance. They’re both easy to calculate, understand and measure over time. That makes them a great source of information for your data-powered revenue strategy.
But both only look at room revenue. They don’t cover important aspects such as staffing costs, maintenance or distribution. And they don’t factor in other revenue streams like events, F&B, or the spa either.
That’s why there’s a new trend to look at more comprehensive KPIs such as GOPPAR (gross operating profit per available room) and TRevPAR (total revenue per available room) as well.
Use them for a more complete and realistic idea of your revenue potential and further fine-tune your commercial strategies.