Occupancy vs. ADR: Which is the biggest influence on a hotel's bottom line?
Other hotels in your local market could have a RevPAR of $80, but they could be larger hotels with more rooms or smaller hotels with fewer rooms. Hotels can have the same RevPAR, but they are performing very differently depending on their actual number of available rooms. Thus, use RevPAR along with other revenue management metrics such as your occupancy rate and average daily room rate to get a fuller picture of your performance against the competition.
The beauty of RevPAR is that it is purely based on your room revenue. By excluding value-added features like your bar or restaurant revenue, you can focus on your core business. That essentially enables you to decide if you need to adjust your nightly rate or increase your occupancy to get the right amount of revenue for your hotel. If you get your core business right, the success of your other value-added features will follow.
The occupancy rate is the percentage of occupied rooms in your hotel at a given time. The higher the occupancy rate, the better for you. You would want to fill as many rooms as possible and as often as possible. To know your occupancy rate, divide the total number of rooms occupied by the total number of rooms available, times 100. If you have 75 occupied rooms out of 100, you have 75% occupancy for the night.
The ADR or average daily rate, on the other hand, is how much a room is selling for on average. To increase the ADR, hotels must look for ways to boost room rates. To know your ADR, divide your average room revenue by the number of rooms sold. If you have $20,000 in room revenue and 250 rooms sold, the ADR would be $80.
What is the best indicator of the financial performance of your hotel? What has more impact on the bottom line of your hotel? Neither one is an exclusive reflection of the financial health of your hotel. The key is to find the perfect balance for your hotel and to compare your hotel to your competition.
For example, if you are operating a value hotel such as a travel lodge or quick motel, you need to look at the rest of the hotels in the market. You might find that your pricing strategy is to have a lower ADR to attract customers who are looking for a good value option. Therefore, you need to drive up your occupancy rates to make sure that you are making money.
On the other hand, if you are operating a premium hotel, you will run your hotel the exact opposite way. You might not be too concerned about occupancy, but you will have a higher ADR because there is a lot of added-value features that come with premium hotel listings.
The worst thing you can do is totally ignore your occupancy rate and ADR, so it's a bit of a balancing act. To maximize profits at your hotel, always consider both in the equation.
If we can help you find that right balance, or if we can customize a winning revenue management strategy for you, call at 888-999-8086 or email email@example.com.
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