What is Average Daily Rate (ADR)?
ADR is a vital gauge of both the average rate paid for rooms sold and the operating performance of a hotel. It’s used to assess how well a hotel is filling its rooms, at what price, and how that compares to other periods or competitors.
In essence, your average daily rate is the average rental income per paid occupied room in a given time period. It is used alongside RevPAR (revenue per available room) and occupancy rate as a key success metric.
Why is it important to calculate ADR?
Your hotel’s ADR helps you understand the effectiveness of your room pricing strategy and can be used to compare performance across different time periods or against competitors, even if those competitors have vastly different rates or far more (or fewer) rooms than your own hotel. It’s a common (if not mandatory) inclusion for investor reports, and generally acts as a broad measure of how successful the hotel has been in a given period.
Lastly, ADR can be used as a warning sign. If it dips too low, it may be an indication that your pricing, promotions, and/or inventory management must be reviewed to ensure that you are maximising revenue and profitability.
In short, the higher your average daily rate, the more efficient your hotel is at revenue generation.
Key considerations for ADR calculation
While it’s a valuable metric, calculating ADR requires careful consideration of various factors to ensure accuracy. Understanding these elements and how they impact ADR ensures a more insightful analysis, helping you make informed decisions.
ADR specifically focuses on room revenue and excludes other sources of income such as food and beverage, spa services, or conference facilities. While these additional revenues contribute to the overall profitability, they are not factored into the ADR calculation. This exclusion can sometimes lead to a skewed perception of the total revenue picture, especially in hotels with significant non-room revenue streams.
Seasonal trends can have a substantial impact on ADR. During peak seasons, demand may drive room rates higher, while off-peak periods may require promotional pricing to attract guests. These fluctuations can lead to misleading comparisons if not properly accounted for. A year-over-year comparison or a moving average can provide a more balanced view of ADR performance across different seasons.
Your hotel likely has different types of rooms, each with different pricing. Luxury suites, standard rooms, and budget accommodations all contribute to the overall ADR but at different rates. Understanding the mix of room types sold and their individual contribution to the ADR is essential for a nuanced analysis.
External factors like market busts or booms, local events, competition, and market trends can influence ADR. A sudden influx of tourists for a major event or increased competition from new hotels, for example, can alter room pricing dynamics. Being aware of these external influences and adjusting comparisons based on ADR accordingly ensures a more accurate reflection of the market conditions.
Lack of guest experience context
A high ADR may indicate successful pricing but doesn’t necessarily reflect guest satisfaction or loyalty. Integrating guest feedback and other qualitative measures alongside ADR analysis can provide a more comprehensive view of performance, encompassing both financial success and guest satisfaction. Pure revenue isn’t everything.
How to calculate ADR in hotels
Here’s how you can calculate the ADR for your hotel:
ADR = Total Room Revenue / Number of Rooms Sold
For example, if your hotel earned $10,000 in room revenue and sold 100 rooms, the ADR would be:
ADR = $10,000 / 100 = $100
How to improve ADR
As you can imagine, increasing ADR is a common goal for many hoteliers. You can increase both your average daily rate and revenue per available room (RevPAR) by using some of the below yield management strategies.
1. Forecasting demand by customer segment
Hoteliers must strive to match their guests’ timings and service characteristics to their willingness to pay, to ensure they receive the best guest experience.
The key is to use your data to understand your different customer segments and their sensitivity to pricing, and combine that information with seasonal demand. For example, business travellers tend to be less price-sensitive than leisure travellers.
Using your demand forecasts, you will have information on how to set your booking limits – that is, the number of rooms you wish to sell at a discounted price to leisure customers, and the number of rooms you wish to reserve for full-price business customers.
Understanding your property business mix is critical to better forecasts and more strategic pricing strategies.
2. Increasing your revenue based on demand
Seasonality, special events and high demand can allow hotel properties to alter their rates in order to increase revenue.
Again, the idea isn’t to simply increase rates or occupancy but, rather, to analyse your different segments so you can attract the right customer at the right time.
For example, a business traveller who normally books during the week will likely be indifferent about weekend or holiday discounts.
However, conversely, price-sensitive leisure travellers may be lured by multi-night discounts and seasonal promotions.
As such, consider review pricing and marketing tactics for products such as:
- Special rates on multi-night stays
- More valuable rooms or upgrades for long-stay guests
- Bundling, package and excursion deals (e.g. Valentine’s Day)
- Special room rates for members of tour groups, conferences, and recurring airline or business customers.
Based on an analysis of your customer segmentation and booking trends, you can create different revenue options for rooms by incentivising your preferred target market with personalised promotions and discounts.
Finding the right mix of room rates and incentives as part of an ongoing yield management strategy will, of course, involve doing your market research and testing your hypothesis against your desired metrics.
Many marketers believe in A/B testing to constantly improve offers for target prospects and channels.
3. Pricing based on length of stay
Comparing your live minimum/maximum rates against your competitors’, based on length of stay (LOS). With a pricing intelligence tool like Insights, hotels have the ability to analyse their local competition and respond to demand – up to one year in advance.
Know how competitive your pricing and reputation is, or when there’s low stock available in the market, so you can make changes that count and increase your chances of being booked online.