Like any business, the hospitality sector needs to use certain key performance indicators and metrics to measure a vacation rental's profitability. Average daily rate (ADR) is one of those crucial metrics that everyone in the vacation rental or hotel industry should know like the back of their hand.
To that end, below is an explanation of what an average daily rate is and how to calculate it. Additionally, read on below to learn why this calculation is so crucial to a hotel's success and how to achieve the best results in your establishment.
What is the average daily rate (ADR) in the hotel industry?
Average daily rate (ADR) is a metric used in the hotel industry to measure the average revenue that a room is bringing in per night during a specific period of time. Another way to express this calculation is the average price that a hotel guest is paying per room per night during a set period of time.
Hotel owners use this metric in conjunction with others to measure hotel performance. As a rule of thumb, it's important to strike a balance where the ADR is concerned. Generally, a higher ADR indicates that the property is bringing in more revenue. However, at a certain point, a room's ADR can also become too high, which might lead to lower occupancy.
Why is the average daily rate important in real estate?
Ultimately, the average daily rate is a key performance indicator (KPI) for the hotel industry and is used in different calculations to determine a particular hotel's level of profitability and growth and to help real estate investors compare the hotel performance against its competitors.
In particular, the ADR is often multiplied with a hotel's occupancy rate in order to find the revenue per available room (RevPAR), which is a measure of the hotel's ability to fill its available rooms at an average rate. Additionally, it's also used in adjusted RevPAR (ARPAR) calculations, which are similar but take into account operating expenses in order to create a truer picture of the hotel's profit.
However, real estate investors can also use this equation, even if they aren't in the market for a hotel. For example, a bed and breakfast or even a vacation rental with multiple units would also be able to use this equation as a measure for profitability for each occupied room.
How to calculate the average daily rate (ADR)
Now that you know what ADR is and what it's used for in both the hotel industry and real estate, it's time to take a closer look at how to calculate it. The equation is formulated by taking the average revenue earned per room and dividing it by the number of rooms that have been sold.
Average daily rate (ADR) = Average revenue earned / Number of rooms sold
Notably, rooms that are used for giveaway on a complimentary basis or that are currently being used by hotel staff are typically left out of this equation. Only those units that actively generate room revenue are considered.
Calculating ADR: A simplified example
If a particular hotel property has $30,000 in room revenue and has sold 300 rooms for the night, the equation to find its average daily rate would look like this:
ADR = $30,000 / 300
ADR = $100
Understanding ADR: A real-world example
Marriott International publishes its ADR in the company's yearly annual report. The most recent report from 2019 found that across all of its North American properties, Marriott's ADR grew about 1.1% since 2018 to an average rate of $202.75 per night. Meanwhile, on a worldwide scale, the ADR only rose 0.2% in the same timeframe to an average rate of $182.60 per night.
What's the difference between the average daily rate (ADR) and the revenue per available room (RevPAR)?
In the hotel business, the average daily rate (ADR) and revenue per available room (RevPAR) are closely related. In fact, a property's ADR is needed to find the revenue per available room. However, at their core, these two metrics measure different aspects of profitability.
On the one hand, the average daily rate tells the company how much money they make per room, on average. On the other hand, the revenue per available room measures the company's ability to fill their rooms at that average rate.
Tips for increasing a property's ADR
After knowing how to calculate ADR, the next challenge is to learn how to increase it. In light of that, below are three tips to help you succeed at raising the nightly rate for a room while keeping your occupancy rate intact.
1. Offer packages and promotions
While guests are still in the process of arranging their booking, they're often focused on finding the best deal. Offering packages that include extras or promotions that advertise a discounted rate effectively gives you a leg up on the competition because potential guests will feel like they're doing the smart thing by booking a stay at your hotel.
2. Give discounts for upgrades
Essentially, you'll want to encourage and reward guests for choosing higher-cost upgrades. For example, keeping guests in-house for longer will provide a solid boost to your ADR, so you could consider offering guests an extra night's stay or discounting extended stays. Alternatively, you could offer a discounted rate on your suites, which will encourage guests to choose to fill those rooms over standard options.
3. Keep an eye on competitor pricing
Keeping a close eye on competitor pricing and mirroring their fluctuations gives you the chance to price your inventory competitively. By making sure to set optimum pricing and to edge out your competitors, you'll ensure guests choose your lodging over other options.
The bottom line
While no one calculation will ever tell the full story of a hotel or rental unit's performance, each metric has its own specific purpose. In particular, the average daily rate (ADR) is a measure of the vacation rental's ability to fill available rooms at a specific rate. It can also be used in conjunction with other metrics to give hotel owners a truer picture of their total revenue. Those in the hospitality sector should be sure to keep this equation at the forefront of their minds.