The average daily rate (ADR) is a performance indicator used in the hospitality sector to measure the strength of revenues generated. It is measured as the total revenues generated by all the occupied rooms in a hotel or lodge divided by the total number of occupied rooms over a given time period. It is a simple average that shows the revenues generated per occupied room.
The average daily rate (ADR) is a useful tool to maximize revenues in the hospitality sector.
The ADR is measured as the total revenues generated by all the occupied rooms in the hotel or lodge divided by the total number of occupied rooms over a given time period.
The average daily rate includes only the occupied rooms and not the total available stock.
Formula for the Average Daily Rate
Importance of Average Daily Rate
The average daily rate allows comparison across time periods and also to a cross-section of peers to help the hotel operator ascertain the key trends, emerging challenges, and, consequently, determine a change of strategy if needed.
ADR can be used for initiating strategic choices, such as using promotions to boost occupancy or increase prices to maximize revenues.
The average daily rate also serves as a metric to check how well each geographic stratum does in relation to revenue generation. For prudent comparison, we must select peers closely matched in terms of size, location, and clientele.
If a property generates a lower average daily rate than its peers, the company can look deeper into the root cause of the problem. Based on the ratio, the problem can be that a promotional discount increased the number of rooms occupied, but also means the revenue generated per room became smaller.
However, it can also be the case that the prices charged per room is very high, which is leading to lower occupancy with an optically higher ADR.
Examples of ADR
Consider a hotel named A with 100 rooms near a warm tropical beach. On a particular day, 80 rooms are occupied and, for simplicity, assume that all the rooms are of the same configuration. The total revenue per day is $10,000.
Total revenue per day = $10,000
Number of rooms occupied = 80
Average Daily Rate (ADR) = $10,000 / 80 = $125
Calculating an ADR of $125 per day on its own is of no use. However, if we know that the ADR for the previous day was $100, then we can compare how efficiently each of the occupied rooms is generating revenues.
Also, suppose the nearby Hotel B reports an ADR of $200, then Hotel A now needs to understand why it is lower than its competitor. There are two possible reasons: (1) Hotel B may reporting a fewer number of rooms occupied, or (2) Hotel B’s room rates are higher.
Higher ADR is certainly not desirable in the first case because the hotel industry faces a lot of fixed costs, such as leases, employee expenses, and establishment charges. Lower occupancy denotes that the lumpy fixed expense gets spread over a large universe of rooms and is sustainable.
In the first case, a higher ADR is certainly not desirable because the hotel industry faces a lot of fixed costs, such as leases, employee expenses, and establishment charges. Lower occupancy denotes that the lumpy fixed expense gets spread over a large universe of rooms and hence is sustainable.
The second case may indicate that Hotel B enjoys some competitive advantage, which is allowing it to charge higher rates. The advantage can be pleasant views, better ambiance, or an international brand offering world-class service.
Consider a ski resort located in the North American Rockies. Skiing is a seasonal recreational activity, and hence a ski resort would report highly seasonal revenues. A typical skiing season lasts for five to six months per year. The average daily rate over the prime skiing season would be a key metric to track the resort’s performance.
Suppose there are 100 rooms. Over a six-month period during the high season, the occupancy rate was 75%. The average daily revenue was $18,750.
Total revenue per day = $18,750
Number of rooms occupied = 100 x 75% = 75
Average Daily Rate (ADR) = $18,750 / 75 = $250 (during the skiing season)
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