There are concepts in the hotel industry that hoteliers should understand if they want to keep a close watch on their business model’s success and profitability. Two of those are ADR and RevPAR.
We will discuss each of them in the following article. They’re not the same, but they’re both critical to know about and to continually monitor.
ADR means the average daily rate of your hotel. In essence, it is one of the more reliable ways of measuring your hotel’s financial performance. You can calculate this number by dividing the total revenue of your room sales by the total number of rooms that you have sold during a given period. It looks like this as a mathematical formula:
If you’re trying to find out how much money each of your rooms is bringing you over a designated period, this is how you do it. If you think about it, it quickly becomes obvious why this number should matter for hotel owners. If your rooms are not bringing in enough money, then that is going to negatively impact your hotel’s overall performance.
As for RevPAR, that stands for revenue per available room. This is the amount of revenue that a single one of your rooms generates, whether someone books it or not.
There are actually two ways to generate this number. You can either multiply your ADR by your occupancy rate, or you can divide the total room revenue by the total number of rooms you have available. Here is the concept expressed as a mathematical formula:
RevPAR consistently remains one of the most popular metrics in the hotel industry. Hoteliers are often preoccupied with increasing their RevPAR. It reflects both the pricing for your rooms and the ability to fill them.
Now, let’s break down the similarities and differences between these two metrics in a little more detail.
It would be correct to say that ADR and RevPAR are connected to each other. You could go so far as to say that they influence each other. However, they have different focus areas and strengths.
Both indicate how much success you’re achieving with your business model. They look at it from different angles, though. ADR takes a look at how well you are doing at keeping your rates high. RevPAR, by contrast, tells you whether you are still able to sell the rooms at those rates.
Also, ADR only includes the revenue from the hotel rooms that you successfully sold. RevPAR goes a step beyond, taking into account the entire inventory and also your rates.
When you look at the two in this way, you can see how RevPAR gives you a more complete picture of the hotel’s performance. This is probably one of the reasons why it remains such a popular metric to figure out when hotel owners look at their sales and marketing strategies.
These two KPIs, ADR and RevPAR, will have a notable interplay. By slightly dropping your ADR through lowering your room rates, both your total revenue and RevPAR can increase slightly, provided you’re able to secure a higher room occupancy rate.
It won’t always work out that way, but this is usually the result you want to see if you lower your room rates during peak times of the year. Watching the interplay of ADR and RevPAR can show you whether your sales and marketing are working.
However, keep in mind that dropping your room prices never guarantees that you will attract more guests. If you do it too much, it can harm your profitability. You need to maneuver carefully in this area instead of blindly chasing after a metric.
As for how ADR and RevPAR are similar, you have probably figured that out already, at least to some extent. You can use both of them to measure your hotel’s room rental performance, as well as its revenue.
Also, they are alike in that neither of them take into account the revenue or expenses from other hotel departments. For that, you would need to use other KPIs.
Probably what’s most important to remember about ADR and RevPAR is that both of them can give you an indication of your hotel’s performance when you look at either one in isolation. However, neither one gives a complete picture. If you want to get a better idea of how your hotel’s room sales are really doing, it’s helpful to look at both of these numbers together.
It makes sense to track both of these metrics over time. This way, you can explore emerging trends. You can see how they play off of each other during different seasons as well.
You will always make revenue management decisions and see market shifts, some of which you may have little control over. Try to notice how these impact both of the KPIs we’ve been discussing.
It’s also helpful if you monitor what the competition is doing to see how their strategies compare with yours. You may notice room for improvement. Ultimately, you can use RevPAR and ADR to generate more revenue, but also to make data-driven pricing decisions and to identify seasonal opportunities.
The main reason why you should use the ADR metric is because it shows you how much money each sold room brings to you. However, it will also reveal the seasons during which your hotel sees the most business. These may seem obvious based on times of the year, but there may be more subtle trends that you won’t be able to notice immediately without calculating ADR.
By examining ADR as time passes, you can see whether it is growing, declining, or plateauing. This information will probably dictate your continued marketing strategies.
You can also use it to check your hotel’s market positioning. You can do this with benchmarking tools. You might utilize them to see how your compset compares to your ADR.
You may determine that your ADR was too high on certain days, which might have cost you some bookings. You may also identify some times when you have solid occupancy and high ADR, such as public holidays or weekends. To boost your profitability, you might avoid taking any low-priced groups on those days.
Forecasting is another aspect of what you can do with ADR. Let’s say you’re trying to plan out your room pricing strategy for the coming year. You can look at the current year’s calculated ADR for each month or quarter and make adjustments based on that.
You can use ADR for the sake of personalization as well. Marketing data based on guest personal preferences is a part of what your hotel’s average daily rate tells you.
That means, if you pay attention to this aspect of the data you’re collecting, you can more easily figure out what guests are being attracted to your hotel and what it is specifically that’s bringing them there. By looking at this wealth of data, you can determine which of your hotel’s features or services you will want to emphasize more in your marketing and which ones don’t seem to be getting as positive of a response.
By combining each of these insights, you can find areas where you might refine your revenue management strategy. Always be mindful, though, of the limitations involved with ADR.
You will want to maximize your revenue per available room as a hotelier. That is why you should always know what is happening with your RevPAR.
If this number goes up, your ADR may be rising as well. It could mean that your occupancy is going up at the same time. In some instances, you will see a rising RevPAR, ADR, and occupancy simultaneously. If so, you can feel pretty good about what it is you’re doing.
When you watch your daily RevPAR and see how it performs over time, you can spot trends, just like you can with ADR. You can then adjust your room prices accordingly.
Maybe you see that your RevPAR is going down. That could be indicative of your overall profitability suffering, so that is a trend you will want to reverse. Typically, you would do so by raising your room rates.
You will also want to frequently benchmark your RevPAR against that of your closest competitors. Are you behind them by a significant margin? If you are, that likely means you need to go after business in a more aggressive fashion.
By contrast, if you’re ahead of your competitors when you look at your RevPAR, that indicates you’re having more success at not just filling up your hotel, but also doing so at rates that are keeping you profitable. If so, you can congratulate yourself on a job well done, but you need to keep up the good work as well. What’s working for you for a while in the hotel industry may not continue in that same vein forever.
Any time you calculate it, you will also notice that RevPAR gives you an accurate representation of at least one part of your hotel’s overall financial health. Having that information can come in handy in a number of ways.
It’s not just that it can tell you whether you’re doing well as compared to your competitors. You can also use it as proof that your property is performing at a high level if you’re trying to court investors. If you have taken out any bank loans, you can use this KPI as a way to let your financial backers know that you’re well on your way to paying them back.
You should also be aware of the limitations that come with both RevPAR and ADR, though. The one thing they have in common that you can’t overlook is that both of them only look at your hotel’s room revenue. They don’t cover certain aspects of your hotel’s operation, such as maintenance and staffing costs. They also don’t factor in the operation of your spa, special events, food and beverage, etc.
This leads us to more comprehensive KPIs, such as TRevPAR (total revenue per available room), and GOPPAR, gross operating profit per available room. They will give you a more realistic and complete idea of what your potential revenue is. They can also help you as you continue fine-tuning your commercial strategies.
ADR and RevPAR also do not take into account your hotel’s cost structure. For instance, two hotels might have the same ADR and RevPAR. However, that does not mean their profit margins will be the same. That is because they might have dramatically different operating costs.
Then, there’s the issue of guest satisfaction. Neither ADR or RevPAR takes that into account at all. That’s something you need to keep a close eye on, though, if you want your hotel to be successful in the long term. Your hotel might have a high RevPAR and ADR, but if your online performance reviews from guests start to decline, don’t expect those numbers to stay high for very long.
Now, you not only know about both the similarities and differences between RevPAR and ADR, but you should also understand why calculating both of them frequently matters for your hotel. You also know about some of the limitations that are inherent with these key performance indicators.
It’s sound advice to calculate both of them often and to know how they play off of each other. By doing so, you’ll have a snapshot of how your hotel is doing, even if it’s not as complete of one as some other KPIs will give you.
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