Thanks to modern data collection capabilities, hotels can now track performance indicators in-depth and in real-time, giving hoteliers unparalleled insights into their own strengths and weaknesses. The problem is that with so much data available, it can be easy to get lost in the numbers. In order to leverage data intelligently, it’s important to know which numbers to track, when.
Two metrics that are essential to a modern revenue management strategy are ADR and RevPAR. Both speak to the core performance of a hotel making them valuable tools for decision-making. But knowing that these metrics should be analyzed and compared is easier than knowing how to put them to use.
We previously shared an ADR cheat sheet and a comprehensive hotel metrics comparison to clear up some of the confusion. Now, we want to provide easy ways to interpret performance based on ADR and RevPAR.
Quick Definitions
First, it’s important to understand what distinguishes these two metrics, which both involve how much revenue your hotel generates.
- ADR: Calculating Average Daily Rate provides you with the average room rate on any given day. It’s determined by dividing the total revenue made from room fees on that day by the number of rooms sold. This metric indicates how successful a hotel has been at maximizing room rates.
- RevPAR: The Revenue Per Available Room is calculated by dividing your total daily room revenue by the number of rooms available. You could also multiply the ADR by the occupancy rate to arrive at the same figure. This illustrates how successful a hotel has been at achieving a high occupancy rate.
A Tale of Two Metrics
ADR and RevPAR are complementary metrics: ADR tells the topline story and RevPAR fleshes it out. Instead of comparing one against the other, hoteliers need to understand how they work together to illuminate performance.
RevPAR is generally considered the more important metric because it takes into consideration both daily rates and daily occupancy. Obviously, selling more rooms at higher rates is beneficial to any hotel. If occupancy is increasing it means that rooms are being priced to sell, and that’s a great metric of success.
However, occupancy is only half the battle. Pricing rooms for 100% occupancy doesn’t tell you if rates could be higher and occupancy lower to generate the same revenue while decreasing operating costs such as housekeeping. Comparing the two rates can show nuanced changes that inform hotel rate-setting strategies. For example, if ADR is rising but occupancy is falling, hotels may earn a lot from each room but make fewer profits overall. Similarly, rising RevPAR doesn’t necessarily point to rising fortunes because it doesn’t take all costs into account.
Maximizing Revenue, not Metrics
A hotel’s ultimate goal shouldn’t be to maximize either metric, but rather to improve financial performance overall. That means taking into consideration a complex landscape that considers costs alongside revenue. Investing in extravagant amenities to attract more guests may boost your RevPAR, but at a cost.
Every night a guest uses a room, it costs the hotel in the form of utilities, cleaning, complimentary breakfasts and more. The full value of a booking depends on how much guests spend on their room and throughout the hotel, versus how much it costs to keep them happy. The hard part for hotel revenue managers is figuring out how to minimize costs without compromising the guest experience.
In the end, the responsibility falls on everyone in the hotel, not just the revenue manager. Closely tracking and managing financial metrics is essential, but driving them upwards takes input from everyone from marketing to front desk staff to housekeeping. A coordinated approach leads to more bookings, higher room rates and happier guests as well as efficient operations with less waste and redundancy. Revenue managers are the stewards of financial metrics, but everyone on staff is a stakeholder.
Hotels rely on modern property management systems to keep the team engaged and informed. Revenue managers have instant access to accurate financial data, including metrics that are calculated automatically, but knowing how to action those metrics is the true challenge. Armed with a better understanding of what those metrics mean and how to read them, hoteliers can start taking action towards real improvements that will increase revenue, attract customers, and help their hotel grow.
RoomKeyPMS includes a powerful revenue management module that integrates advanced features with intuitive interfaces. When you’re ready to replace confusion with clarity, contact our team.
Photo Credits: Shutterstock / Jacob Lund
