Average Daily Rate (ADR)

It is mainly used by the hospitality industry to measure the average revenue an occupied room produces in a given time period.

The hospitality industry mainly uses the average daily rate to measure the average revenue an occupied room produces in a given time.

It is one of many key performance indicators, KPIs, used in the industry. Key performance indicators are metrics that quantify a company's general long-term performance.

Thus, KPIs can be used to determine a company's financial and strategic placement compared to other companies within the same industry.

There are other KPIs, such as the revenue per available room (RevPAR), the average room rate (ARR), and the average published rate (APR). These will be discussed later, compared to the average daily rate.

This metric is the most used out of all the KPIs. This is because it helps hotel managers make swift decisions on room pricing during certain events, such as special events, seasonal changes in weather, or holidays. 

Average Daily Rate vs. Revenue Per Available Room (RevPAR)

The revenue per available room (RevPAR), another KPI, is estimated by multiplying the average daily rate and occupancy rate. The occupancy rate is the ratio of the occupied area to the total available space.

For example, a 300-room hotel with 150 rooms would have a 50% occupancy rate. By multiplying the occupancy rate by the ADR to get the RevPAR, one can understand the average rate at which a property can fill up its spaces or rooms.

It must be noted that an increase in the RevPAR doesn't signify better performance as it doesn't take into account a hotel's size. So, for example, a hotel could have a low RevPAR but more rooms that generate higher revenues.

In the context of a hotel, this metric would showcase a room's profit for a given time, while the RevPAR quantifies the hotel's ability to fill up its spaces at a moderate pace.

If the RevPAR was lower than the avg. Daily rate, meaning the hotel isn't able to fill up most of its rooms on average, and the occupancy rate wasn't 100%, would indicate to the hotel manager that the average room price would need to be lowered to increase the occupancy rate for higher profits.

Average Daily Rate vs. Average Room Rate (ARR)

The average room rate, ARR, is identical to the ADR, considering they are both computed using the same formula. Both are hotel KPIs that measure the average speed by the available rooms. Some hotels even include complimentary rooms in both measures.

The ARR is regarded as another measure of average price but is used less often by the hospitality industry.

However, the ARR is sometimes preferred when dealing with the average rate over extended periods, as the average daily rate is limited to the measure of the average rate for only a single day.

Both indicators can aid hotel owners' decision-making regarding rates and even how many rooms to add to inventory.

The main difference between the two is that the ARR covers the daily rate over a specific time while the average daily rate is limited to one day, as the name suggests.

The average daily rate is better for rapid changes to the rates of rooms. In contrast, the average room rate allows businesses to analyze and assess the bigger picture, which is where the hotel is heading as a business in the long run.

Average Daily Rate vs. Average Published Rate (APR) 

The difference between the avg. The daily rate and the average published rate, APR, is that the ADR represents money paid for rooms over a specific time, while the APR shows the range of prices for different room sizes (single, double, suits, penthouse, etc.). APR also measures how they change over time, as additional seasons in the year change a hotel's room rates.

Seasonality is an influential factor in the APR, as prices of hotel rooms usually increase when a location is "in season."

Weather primarily impacts the number of tourists coming into a country. Also, widely-celebrated events or holidays, such as New Year's Eve, cause an influx of hotel guests. Hotel room prices are, thus, highly volatile, impacting both the average daily rate and average published rate.

In some cases, the APR measures the daily rate in an industry report if the hotel chooses not to report specific indicators. The daily rate is, however, used more often than the APR since it offers data for swift decisions.

Keeping seasonality in mind, ADR can offer a closer look into market trends since it offers data daily.

Importance

It can be used to price rooms at the point that will offer the highest revenue.

By comparing the current ADR to its past measures, different promotions' performance can be evaluated, and trends, such as seasonal customers, can be identified. With this information, a hotel can better price its rooms over the year to increase its revenue.

Furthermore, it is an excellent indicator for hotels to base their prices on and get closer to the maximum amount a consumer is willing to pay for a room. This increases a hotel's overall revenue and, consequently, profit.

Benchmarking is an essential aspect of the process of reaching optimal pricing for a room.

Comparing the ADR and occupancy rate to other competitors can offer a more comprehensive image of a hotel's success.

Since it varies by room type, seasonal trends, etc., and is, hence, interrelated with consumer demand, the avg. The daily rate is essential to benchmarking and understanding what price point should be assigned.

Calculation

It can be calculated using a simple equation that divides the average revenue earned from all rooms by the number of rooms sold, excluding complimentary and staff rooms.

For example, if a hotel gained $60,000 in room revenue from a total of 400 rooms sold, the ADR would be $150.

There are two essential steps in using the metric as a benchmark to increase profit.

First, a company must establish its own demand trends throughout the year, specifically during seasonal changes, vacation periods, or special events/holidays. It also must specify its target guests during each of these periods.

For example, if a company usually sells out during a specific time of the year, it shouldn't take on lower-paying guests early. Instead, it should aim for high-paying guests for the avg. Daily rate to be maximized.

Secondly, a company should compare its daily rate to other competitors and the market standard for specific periods in the year.

Benchmarking allows a company to figure out if the ADR is affecting occupancy levels, if the rate strategy for low demand periods is effective, if the balance between the average daily rate and the occupancy rate is optimal for an increasing RevPAR, and if the company is getting the most out of high-demand periods compared to other competitors.

Limitations

It has some limitations, such as it isn't able to show the charges a hotel might levy if a guest doesn't show up or the refunds a guest might be offered when a problem arises.

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More importantly, inflation could increase it while occupancy rates fall, ultimately decreasing a hotel's revenue, despite the increase. As demonstrated, an addition doesn't always signify an increase in revenue.

For example, there could be guests who don't pay high rates for a room but choose to spend a lot on services, increasing revenues but not the ADR.

Although ADR is a great indicator of a company's performance and crucial to creating a pricing strategy, it must be used with other indicators that measure revenue-generating streams besides room rentals.

This allows for a clearer and more accurate image of a company's revenue and profit, enabling holistic strategies to be created that can maximize revenue more thoroughly.

Advantages

  • Allows a firm to determine which pricing strategies to use and when to increase profits
  • It can be used as a benchmark for comparing performance to other competitors and acquiring a larger market share
  • As a valuable measure of a company's financial status, it can be used to orchestrate an efficient revenue strategy. 

Disadvantages

  • It doesn't consider total revenue and profits, as it doesn't weigh in commissions, refunds, or charges from guests that don't show up. 
  • Must be used alongside the occupancy rate and RevPAR as, if it were to be used alone, it wouldn't fully represent how successful the company is 

How can you increase it?

There are several ways to increase one's average daily rate, all of which will require some investment. Firstly, upgrading facilities and services would mean being able to charge higher rates. Social media presence is another great way to attract high-paying customers.

Connection

Part of the media strategy could be getting impressive reviews that would paint the hotel worthy of such high charges.

To increase it, companies must develop methods to boost prices per room and for guests to spend more. These methods include upselling, cross-sale promotions, and complimentary offers.

Upselling is a sales technique involving upgrading a customer for a more refined and high-end product than what was originally purchased. It is an excellent method as it will increase a company's earnings and offer a more luxurious experience for guests.

Cross-sale promotions sell complementary products to customers, which can be one of the most effective marketing methods.

These are all methods that a company can use to increase its metric.

ADR and economic crises

During an economic crisis, the metric will most likely decrease as customers are less likely to rent out rooms for higher prices than before a recession.

An economic crisis can create huge disparities between supply and demand due to the sharp drop in need and the excess capacity in hotels. This causes the metric to decrease.

Historically, it does recover from economic downturns, although the recovery time is much longer than the initial decline. Thus, it is necessary to focus on increasing profits rather than reaching for a higher metric when the market is unready for it.

Additionally, research shows that, during a recession, hotels should resist lowering prices for rooms available as it ensures a higher probability for the metric to attain its prior levels.

If hotels panic and lower prices immediately, they could risk the average daily rate never reaching its pre-recession speed, even years after the economic crisis.

In studying past recessions that have impacted hotels, the daily rate mediates and then goes through an upturn. Hotels must stay close to the original price before the recession to be part of that upturn process. 

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Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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