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RevPar, ADR Formula & its Significance in the Hotel Industry

RevPar, ADR Formula & its Significance in the Hotel Industry

RevPAR is arguably the most important of all ratios used in the hotel industry. Because the measure incorporates both room rates and occupancy, it provides a convenient snapshot of a how well a company is filling its rooms, as well as how much it is able to charge.

Most hotel-industry observers are familiar with the commonly used valuation rule of thumb that hotels should generate $1 in ADR per $1,000 in value per room. That technique is also referred to as the $1-per- $1,000 method, 1 the building-cost-rate formula,2 the general rule-of-thumb method for determining room rates, 3 and the ADR rule-of-thumb approach. A more recent corollary to the ADR rule of thumb has been a room-rate multiplier technique for valuing hotels.11 In this reverse calculation, a hotel may be valued at 1,000 times its average daily rate on a per-room basis. For example, a 100-room hotel with a $120 average daily rate would be valued as follows:

1,000 × 100 × $120 = $12,000,000

What is RevPAR?

Revenue per available room (RevPAR) is a strong performance index/metric used in the hotel industry. Multiply a hotel's average daily room rate by its occupancy rate and you’ll get the RevPAR. Another alternative is to calculate it by dividing a hotel's total room revenue by the total number of available rooms in the period where its being measured.

Now, let us clear it with an example! Let's say that a boutique hotel has a total of 100 rooms, of which the average occupancy rate is 90%. The average cost for a room is $100 a night. Using the data provided, a hotel wants to know its RevPAR so it can accurately assess its performance. The hotel manager can calculate the RevPAR as follows:

($100 per night x 90% occupancy rate) = $90.00

Therefore, the hotel's RevPAR is $90.00 per day. To get the monthly/quarterly RevPAR, a hotel manager can multiply the daily RevPAR by the number of days in the desired period. This calculation assumes all rooms are at the same price!

The hotel manager can use this daily RevPAR to make key assessments and decisions regarding the hotel property. They can see how well the hotel is filling its rooms and how wisely the average hotel room is priced within the given range. With a $90 RevPAR but a $100 average room, the hotel manager may be able to reduce the average rate to $90 to help realize full capacity.

RevPAR, although helpful, doesn't take into account the scale of a hotel. Therefore, if a person is trying to assess two hotel or hospitality properties, RevPAR alone is not a good measure. This is due to the fact that a hotel may have a lower RevPAR despite having many more rooms that give it higher revenues.

Furthermore, the growth in RevPAR does not mean a hotel's profits are increasing day-by-day. The reason being RevPAR doesn't use any profitability measures or information on profit insights. Focusing solely on RevPAR can lead to declines in both profitability and revenue. Lieu, many hoteliers are turning solely to the average daily rate as a performance measure! Why? Because it has been found to be one of the main impetus that drives the hotel occupancy! Therefore, if a property is able to accurately price its rooms, the occupancy rate should increase, and ideally, its RevPAR should also naturally increase.

What is ADR?

An average daily rate (ADR) is an index/ metric widely used in the hospitality industry to indicate the average realized room rentals per day. Average daily rate is one of the key performance indicators (KPI) for all the hotels in the world (irrespective of its chain or independent nature). Other KPIs are metrics such as occupancy rate are combined with ADR which comprise revenue per available room (RevPAR), all of which are used to measure the operating performance of a lodging unit such as a hotel.

RevPAR and ADR helps a hotelier to analyze their growth rate and sales properly.

 

All the hotel operators seek to increase ADR by focusing on pricing strategies. This includes upselling, cross-sale promotions, and complementary offers such as free spa and dining service in the hotel. The overall economy is a big factor in setting prices, with hotels seeking to adjust room rates to match the current demand. But it is also true that the ADR does not tell a complete story about a hotel’s revenue! For instance, it does not include the charges a lodging may charge their guests if they does not show up. The figure also does not subtract items such as commissions and rebates offered to customers if there is a problem or real-time issue.

A property’s ADR may increase as a result of price increase. However, this provides limited information in isolation. Occupancy could have fallen, leaving overall revenue lower. Marriott International Inc. reports ADR along with occupancy rate and RevPAR. In 2016, Marriott's ADR increased 4.1% to $152.30. This is on a constant currency basis, which eliminates the effects of currency translations. Occupancy was up 0.8% to 73.7%. Taking $152.30 times 73.7% equates to a RevPAR of $112.25, which is up 5.2% from 2014.

Marriott's management credited overall economic growth, including moderate gross domestic product (GDP) growth in North America, which improved pricing. In particular, the company noted strong demand for rooms with higher rates, reducing the needs for discounting. However, market conditions are monitored, and rooms are priced daily to try to reflect the current demand.

Hilton Worldwide Holdings Inc. reported ADR rose 3.6% in 2016 to $141.19. The company's occupancy rate rose 130 basis points to 75.4% Both metrics combined lead to a RevPAR increase of 5.4% to $106.51.

Significance of Revpar in the hotel industry

1. RevPAR tells you if your room-rates are perfect: Believe it or not, you could be charging too little for your rooms. Let’s say you’ve been charging $100 per night for your 200 guest rooms, and each night you’re booking 180 of them. Pretty good, right? Maybe, maybe not. Let’s take a look at the numbers. That’s an occupancy rate of 90%, which comes out to a RevPAR of $90 when multiplied by your average room rate of $100.

But could you be making even more money? Let’s say you raise the average rate to $150, and the next night you only get 150 bookings. That’s a big drop off in bookings, but relax: let’s take a look at the RevPAR before we panic. With a 75 %occupancy rate and a $150 average booking price, your RevPAR is now $112.50. Profits have gone up, and you were able to spot a much better price point for your hotel thanks to RevPAR. That’s an extra $4,500 you’re pocketing each night in a 200-room hotel, and your hotel staff has to clean 30 fewer rooms.

Now not only are you making a lot more money per night than you were before, you may even be able to find creative ways to use those unbooked rooms for a little extra cash — say, by putting them on third-party websites for big discounts.

2. RevPAR reminds you not to cut prices (to attract customers): Many hotel managers think they have to undercut their competitors to attract guests, but that’s not really the case in this industry most of the time! Demand for hotels is pretty inelastic — a family of four isn’t going to be interested in a $39 room, which is a rate that suggests dubious quality even if it’s a perfectly good room. They’re willing to open their wallets for a good room, and a higher price can signal that.

By paying attention to your RevPAR, there’s a strong chance you’ll notice that you’re much more profitable at a price point that is higher than your competitors. RevPAR keeps your from missing the forest for the trees. Instead of dropping your prices in the name of boosting your occupancy rate slightly, that RevPAR stat will keep you laser-focused on what you should really care about: profits.

3. It helps you realize when you’re being a spendthrift: Hotel managers who don’t track RevPAR and just focus on filling their rooms may be taking a steep loss and not even know it. But by using the data at your fingertips, you will avoid this.

RevPAR establishes a baseline for your revenue that your costs cannot exceed. Add up the amount of money you’re spending each day on your hotel, and divide it by the number of hotel rooms you have. Is that number higher than your RevPAR? Then you are actually losing money when you fill up your hotel. By comparing your costs with RevPAR, you can spot when you’re booking at a loss, and change the obvious course before it’s too late!

Significance of ADR in the hotel industry:-

1. Effectively manage your online reputation: By improving guest satisfaction and managing your online reputation you can increase overall revenue and ADR. The Global Review Index is used to benchmark the online reputation of individual hotels or groups, compare results between properties or against competitors and track the evolution of a hotel’s performance over time. Hoteliers can use it to set quality objectives as well as optimize online pricing and distribution strategies.

2. Personalize your Service, Build Relationships: You can improve a hotel’s room occupancy rate with the help of technology. As we all know, enhancing guest experience should be your prime focus and personalization gets you there faster. Use AI-enabled guest engagement platform like Trilyo to engage your guests in amazing ways, like- via rendering hyper-personalized recommendations thus providing them an out-of-the-world in-room experience by understanding their preferences and behaviour. Focus on building relationships not only with your guests, but also with your partners and operators.

Ensuring a guests’ requests are carried out even before his/her arrival ensures you will score more points for guest satisfaction. Use data to know your guest, target your message according to the requirements, regions or purpose of journey. In an industry as competitive as this one, personalization is becoming more important than ever. Getting to know your guests allows you to market to them directly, based on their needs and interest, at different points of the travel journey.

3. Offer something extra to your guests: Many hotels offer extras to guests when booking online such as an airport shuttle or champagne in the room on arrival for special occasions. By being creative when encouraging guests to spend a little extra you can increase your ADR.

4. Utilize big data: From historical booking information to newer consumer-centric data sets like web shopping behaviors and guest reviews, data sets can affect pricing. For example, take external factors into account such as local holidays or annual events when forecasting as high demand periods can allow you to increase rates.

To help you calculate your hotel’s RevPar & ADR, we are offering you a FREE consultation with our sales manager. You just need to sign up for Trilyo Demo and we will take care of the rest.

 

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About Author

Abhishek Moharana
Abhishek Moharana

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