Average daily rate (or ADR) is one of the most important metrics hoteliers use to evaluate their hotel’s performance. Everyone in the hospitality industry should be familiar with ADR, as it is the gateway to calculating other useful key performance indicators (KPI’s) and measuring the success of your hotel.
What is Average Daily Rate (ADR) for Hotels?
Hotel average daily rate (or ADR) is a calculation for how much money your hotel brings in per day in room rentals. This is not a comprehensive calculation; ADR only accounts for the amount your hotel is making per day in room bookings. It does not consider earnings from ancillary revenue such as extra amenities and services your hotel offers — add-ons such as spa treatments, pool access, room service, vending machines, etc.
ADR is the basis for understanding the average rate of a stay at your hotel. It’s important to consistently and periodically calculate ADR, as it will change with the seasons. ADR is affected by factors such as time of year, location, and local events guests stay to attend.
7 Strategies to Increase Your Hotel's Average Daily Rate
- Offer Room Service & Additional Guest Services
- Build Guest Packages & Offer Promotions
- Use Local Tourism & Events
- Improve Your Hotel’s Online Reputation with Guest Reviews
- Monitor Competitors
- Optimize Your Hotel Rooms’ Pricing
- Upsell Guests
How Do You Calculate Hotel ADR?
Hotel ADR quantifies how much you’re making on rooms per day. To calculate your hotel’s ADR, you will need two numbers: room revenue and rooms sold over a specified period of time.
To calculate ADR, divide the room revenue by the number of rooms sold. The ADR formula is as follows:
Hotel Average Daily Rate (ADR) = Room Revenue / Rooms Occupied
Remember that you are only factoring in the revenue generated for an overnight stay. Do not worry about revenue from extras such as your restaurant bar or restaurant, spa, or valet service.
Example ADR Calculation
Let’s say you’re looking at the numbers for a busy week in March. That week, your hotel brings in $10,000 in room revenue, and you have sold 100 rooms.
From here, we can divide room revenue ($10,000) by the number of rooms occupied (100) to calculate the hotel’s average daily rate (ADR) as follows:
In this scenario, your hotel ADR for that week is $100, meaning that a room, on average, goes for $100 per night at your hotel.
Additional Hotel Metrics That Use ADR
Now that you’ve calculated your ADR, you can use this figure to calculate other metrics such as RevPAR and ARR. These are among the most important metrics for hoteliers to track. Other metrics to be aware of are occupancy rate, average length of stay (ALOS), and market penetration index (MPI).
Below, we’ll compare two of the most important hotel metrics that use ADR: RevPAR and ARR.
Average Daily Rate (ADR) vs. Revenue Per Available Room (RevPAR)
RevPAR is, historically, the most commonly used metric for understanding performance in the hospitality industry. RevPAR stands for Revenue Per Available Room. It measures your hotel’s ability to fill vacancies at an average rate. An increase in RevPAR can indicate that either the average room cost or your building’s occupancy rate is on the rise.
RevPAR can be found in one of two ways. The first calculates RevPAR; the second calculates TRevPAR:
- RevPAR = Multiply hotel ADR by the occupancy rate.
- TRevPAR = Divide total revenue by the number of vacant rooms.
Building off the example ADR given above, let’s calculate the same property’s RevPAR.
Revenue Per Available Room (RevPAR) = ADR * Occupancy Rate
This hotel property has a total occupancy of 150 rooms, and the average occupancy rate is 90%. The average cost for a room per night is $100. The hotel’s total revenue in the calculated period is $12,000. You can calculate the RevPAR as follows:
This means that your hotel’s revenue per available room is, on average, $90.
If you think this calculation is a bit simplified, you’d be correct. RevPAR doesn’t take into account every source of revenue and is thus not entirely accurate. That’s why hoteliers should weigh true revenue per available room, or TRevPAR, over a simplified RevPAR. TRevPar considers all revenue produced by the hotel, including food, beverage, and amenity add-ons.
True Revenue Per Available Room (TRevPAR) = Total Revenue / Number of Available Rooms
This means that the true revenue per available room is, on average, $80.
Average Daily Rate (ADR) vs. Average Room Rate (ARR)
Another popular metric used by hoteliers is average room rate or ARR. ADR and ARR are similar but not the same. Whereas ADR measures the average cost of a room per day, ARR measures a room’s average cost per x amount of time. ARR essentially measures the same thing as ADR but on a larger scale. Using ARR, you can find the true average cost of a guest’s stay over the course of a week, month, or year.
Like TRevPAR, ARR measures the total room revenue, including valet service, room and bottle service, etc. To calculate ARR, divide the total room revenue by total rooms occupied. Below is the equation for computing ARR:
Average Room Rate (ARR) = Total Room Revenue / Total Rooms Occupied
If we continue with the example used in the above calculations, our hypothetical hotel’s total room revenue is $12,000. The hotel has 150 rooms and is at 90% occupancy.
Using this information, we can find that the ARR equals approximately $88.80.
7 Strategies to Improve Your Hotel's ADR
1. Offer Room Service & Additional Guest Services
This is a two-fold advantage. The more hotel amenities you provide – such as an onsite bar, room service, spa – the more money you stand to make from a guest’s stay. Offering a mix of paid and complimentary services also attracts guests. After all, what guest doesn’t want to stay in a place with luxury spa facilities and around-the-clock bottle service?
2. Build Guest Packages & Offer Promotions
Consumers are always looking for a good deal, and there’s nothing like a special promotion to make a customer feel like they’re getting the most of their dollar. The promotional opportunities are endless. Consider strategically offering promotions in the off-season when your occupancy tends to dip to maintain a healthy occupancy rate year-round.
Examples of promotions you can offer include direct booking discounts, bonus points for loyalty programs, or airline miles. Share information about ways of finding cheap flights to your region with potential customers.
3. Use Local Tourism & Events
What special events and tourism do your city have to offer? Perhaps there’s a stunning national wonder or an impressive monument nearby. Use your location’s tourist magnets to your advantage by catering to tourists traveling for your area’s specialties.
4. Improve Your Hotel's Online Reputation with Guest Reviews
Anyone in the hospitality industry knows reputation is everything. Many travelers are eager to review their experiences. Management should encourage reviews as this will increase your online presence.
While bad reviews are usually inevitable, what matters is how you respond to them. Responding to bad reviews gives you a chance to remedy the situation and shows customers that the management cares about their experience. An occasional bad review won’t sink your business as long as there are a handful of positive reviews for every negative.
5. Monitor Competitors
As the saying goes, “keep your friends close and enemies closer.” Your competitors are a good benchmark for measuring your successes and shortcomings. You’re both offering the same service. Therefore you need to understand what it is that makes you — and your competitors — stand out. Then, you can adjust your business strategy according to what draws customers in (or keeps them out.)
6. Optimize Your Hotel Rooms' Pricing
ADR is essential when it comes to deciding how much to charge for a room. Location, square footage, renovations, and fixtures all play a key role in the price you can charge.
7. Upsell Guests
Hotel ADR is by no means the only metric that matters when it comes to success in the hospitality industry. There are many other things to take into consideration. Furthermore, the ADR you see on paper is not necessarily indicative of your business’s financial health.
It’s important to stay up to date on a variety of KPIs consistently. Any given KPI on its own is only one slice of the revenue pie. A single good KPI may be deceptive about your business’s true performance and, on its own, should be taken with a grain of salt. Likewise, a single concerning API may have an explanation that cannot be accounted for in a simple equation. Before getting too excited (or worried), consider all your KPIs together. When viewed holistically, KPI’s can provide you with a full picture of your property’s performance.
Jim Hughes is a content marketer who has significant experience covering technology, finance, economics, and business topics. At the moment he works as content manager in OpenCashAdvance.com.