Average Daily Rate Vs Occupancy?
Revenue management in hotels is a field of continuous exploration and challenges. One of the most persistent questions that concern hoteliers and industry professionals is: "Which factor is more important for increasing revenue—occupancy or average daily rate (ADR)?"
Next, we will examine some important definitions, which are necessary and useful for understanding this article.
WHAT IS OCCUPANCY RATE?
The percentage of nights occupied by guests out of the total nights in the period.
Occupancy rate = Nights sold / total nights
The occupancy rate is a quick and easy look at the percentage of units that are full of guests. However, it does not account stays or owner bookings. Therefore, it is recommended to look at the available occupancy rate.
Available occupancy rate = Nights sold / (total nights – owner Stays – holds)
High occupancy rates are good. However, if occupancy rates are too high, it is probably because the prices are too low - which means you are leaving money on the table. Remember, the higher the occupancy rate, the more wear and tear the units will suffer. It can also leave insufficient time for maintenance. The goal is to maximize revenue - not just occupancy.
That's why you need to pay attention to both ADR and RevPAR.
Average Daily Rate (ADR)
The average unit revenue paid by visitors for all Sale Nights during a given period.
Average daily rate = Total Unit Revenue / Nights Sold
Occupancy rate reflects how many nights have been sold, while ADR is the average price for which the hotel sold. A high ADR is generally better because it means it earns more money for each night sold. However, if the ADR is too high, the occupancy rate will inevitably drop. Again, the goal is to maximize revenue, not ADR.
This is why we also need to pay attention to RevPAR.
Revenue per available night (RevPAR):
RevPAR considers both the average reservation price and the number of nights booked for the property.
RevPAR = Occupancy x ADR or
RevPAR = Total unit revenue / total nights during a specified period
ADR and Occupancy are standalone metrics, which give you a very limited view of your property's performance. RevPAR, on the other hand, provides a much more complete picture, as it incorporates both rental revenue and occupancy.
The Revenue Equation
The basic formula for calculating a hotel's revenue is as follows: Occupancy x Available Rooms x Average Daily Rate (ADR) = Room Revenue. This formula determines the revenue each room generates, whether sold or not, and helps hotels compare their performance with the market or similar businesses.
Net Revenue and Operating Profit
Despite the initial focus on gross room revenue, the real question for hotel owners is how to increase net profit. To achieve this, all relevant costs must be considered, such as commissions to online travel agencies, third-party fees, and marketing expenses. The difference between gross and net revenue is calculated using the KPI known as NREVPAR (Net Revenue per Available Room).
For a comprehensive of operating profits, the KPI GOPPAR is used, a metric that calculates the gross operating profit per available room, factoring in operational costs such as cleaning.
The Real Challenge
The dilemma between occupancy and ADR is more complex than it seems. While increasing ADR might appear more profitable, the reality of the market is more dynamic and complex. Changing prices can affect occupancy, especially during low-demand periods, and may lead to revenue losses if the price is too high for the market.
A Practical Approach
The best strategy, is to adopt a practical approach that considers market dynamics and external events affecting room sales. Raising ADR should be done cautiously, avoiding a decrease in occupancy and potential negative impacts on the hotel's performance.
In summary, the key to increasing revenue is not about choosing between occupancy and ADR but about optimizing the use of REVPAR, NREVPAR, and GOPPAR indicators to achieve maximum operating profit.
