Average daily rate (ADR) is an important metric in the hospitality industry. It is a key performance indicator, along with several others. Accordingly, we’ll devote this article to average daily rate and the ADR formula. In fact, we will illustrate how to calculate ADR. Then, we’ll discuss ways to improve ADR and boost hotel occupancy. Finally, we will end with a section on ADR frequently asked questions.
What Is the ADR Formula?
ADR is the average realized room rental per day for hotels, resorts, and other properties within the lodging industry. It is a measure of how well a lodging property is generating revenue. Naturally, the higher the ADR, the better. However, if you set the ADR too high, you risk vacancy as customers will most probably seek alternative properties. Therefore, there is a delicate balance that you must observe between average day rate and total revenue. The key to revenue performance is to boost price per room without creating vacancies, well, at least not too many vacancies.
Significance of Average Daily Rate
You can use average daily rate to measure current versus historical performance. Additionally, you can compare ADRs among comparable hotels in the area. Specifically, you should compare ADRs for properties with similar location, size, and clientele. Your ADR relative to your competitors’ ADR indicates how your service and amenities rank. Clearly, nearby hotels with similar ADRs should offer similar value. Ultimately, your goal should be to have the best occupancy rate amongst all competitors with similar average daily rates.
Naturally, if you find the average daily rate of your property lacking, you will need to research the issue. It could be that you have operational or structural difficulties that you must address, such as:
- Unclean, infested, and/or uncomfortable rooms
- Old rooms with poor layout and shabby decoration
- Problems with HVAC and/or plumbing
- Lack of amenities
- Staffing problems
- Reservation system problems
- Access problems
- Poor marketing
Below, we discuss ways to improve average daily rate and occupancy.
How to Calculate ADR
The formula for how to calculate ADR is:
Average Daily Rate = Rooms Revenue Earned / Number of Rooms Sold
The two factors are:
- Rooms Revenue Earned: This is the total room revenue you earn in a given day.
- Total Rooms Sold: This is the number of occupied rooms in a given day. Specifically, it excludes complimentary and vacant rooms, as well as rooms you set aside for employees.
Note that the ADR formula doesn’t account for vacant rooms. In other words, only rooms that you actually sell will figure into the ADR formula. Obviously, a high ADR might not be positive if a high vacancy rate accompanies it. However, if you run an exclusive boutique property, you might be willing to accept a low occupancy rate. Therefore, hoteliers look to revenue per available room (RevPAR) to place average day rate within context.
ADR vs RevPAR
RevPAR is the average rate a hotel gets for its available rooms — sold and unsold. Note that RevPAR doesn’t account for hotel size. Also, total revenues might rise even if RevPAR is flat or falling. This can happen if the ADR for sold rooms is sufficiently high.
The formula for RevPAR is:
RevPAR = Average Daily Rate x Occupancy Rate
In this formula, Occupancy Rate is the percentage of available rooms actually sold.
Let’s look at four possibilities.
- Rising ADR, Rising or Steady RevPAR: If both metrics are rising, it shows you are successfully raising ADR without hurting revenue performance. Conceivably, it might be that you previously underpriced rooms. Or, you may have increased the competitiveness of your property, enabling a higher average daily rate. Moreover, you might receive double revenue on a booked, forfeited room in which the original customer doesn’t show. Then, if you re-book the room, you collect your rate twice for a single night.
- Falling ADR, Rising or Steady RevPAR: This might indicate that you’ve made your rooms more price-competitive and thereby reduced vacancies. Perhaps you overpriced your rooms relative to the current market environment. For example, the economy might be tanking, or new competitors might have recently appeared.
- Rising ADR, Falling RevPAR: You may have overpriced your rooms such that you’ve driven away potential customers., Therefore, you could suffer a lower occupancy rate. Additionally, you might face higher commissions to online travel agencies (OTAs), or increased customer rebates for problems encountered.
- Falling ADR, Falling RevPAR: You have a serious problem on your hands. Even with lower room rates, you can’t attract enough new customers to raise your revenues. You may need to look into structural or operational changes to your property.
ADR Formula Example Calculation
To illustrate the ADR formula, imagine this: You own a hotel that sold 500 rooms yesterday and thereby earned $50,000 in revenues. Furthermore, the occupancy rate of your property is 95%.
ADR = $50,000 / 500 rooms = $100 per room.
RevPAR = $100 x 0.95 = $95.
Although your ADR is $100, you collect on average only $95/room because 5% of your available rooms were vacant.
How to Improve ADR and Occupancy
There are several ways to increase ADR and your occupancy rate.
Previously, we identified a list of problems that might be sapping your rates and occupancy. Accordingly, here are some ways to correct those problems:
- Ensure rooms are clean by allocating enough resources to the housekeeping operation. Replace uncomfortable beds, pillows, and seating.
- You may benefit from renovating and redecorating older rooms.
- Assess and fix problems with HVAC and/or plumbing.
- Add valuable amenities that customers want.
- Increase staff training and review.
- Consider raising pay standards to attract better personnel.
- Review, update and/or replace your reservation system.
- You might offer free transport to overcome access problems.
- Consider changing your marketing consultants, if possible.
It makes sense to review and possibly revamp your social media strategy. Ultimately, you will want to bombard your media sites with a constant stream of news about the wonderful virtues of your hotel. For example, you can highlight your standout employees. Furthermore, talk up your hotel’s amenities and special promotions. Also, publicize local events that might attract travelers.
Your online reputation can do much to help or hurt your ADR. By cultivating a good reputation, you can spark traveler interest in your property. Many travelers turn to OTAs for reviews. You need to monitor for mentions of your hotel on these sites and immediately respond to comments. Even if you can’t resolve a problem, you can at least show that you tried. You can gain insights into your hotel by evaluating customer reviews.
Sometimes, your hotel makes a mistake, it happens, we’re all human. You might resolve problems with staff, facilities and other items by offering a partial or full refund. Alternatively, you might offer your customer a special deal on their next stay. However, don’t be too quick to offer a full refund — first make sure that a customer isn’t simply taking advantage of your courteous and respectful professionalism.
Video: How to Do Revenue Management for Hotels: Improve ADR and Occupancy
Hotel Management FAQs
What does ADR stand for?
ADR stands for average daily rate. It is the average day rate you charge for a sold room. Note that ADR excludes vacant and complimentary rooms, as well as rooms used by staff.
What other metrics are important for hotels?
Two other important metrics are occupancy rate and revenue per available room (RevPAR). Note that ADR x occupancy rate = RevPAR. Both occupancy rate and RevPAR tell you something about how well you are selling your rooms.
Where can I find a good hotel management company?
Our best advice is to read our well-written article, “Top Hotel Management Companies – Rankings + How to Choose.” In it, you’ll find clearly articulated and valuable insights on what to look for in a hotel management company. Additionally, we identify the top five management companies available to you.
If you are looking to buy, build or renovate a hotel or similar property, contact Assets America®. We offer financing starting at a bare minimum of $5 million without the hassle, delay and enormous frustration which you are very likely to encounter on your own.