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Hotels, Knowledge

The 3 Most Important Hotel Metrics – How to Calculate and Improve Them

Onshore Paik August 31, 2022

Hotel metrics are numbers used to determine a hotel’s overall performance. They can help a hotel monitor its own growth and compare itself to competitors. There are many different metrics a hotel may want to track, but the three most fundamental metrics are the average daily rate (ADR), the occupancy rate (OR), and the revenue per available room (RevPAR).

All metrics have their limitations and should be considered holistically alongside other metrics. For example, the limitations of RevPAR (e.g., it does not measure a hotel’s ability to generate revenue) have led to the establishment of other metrics such as total revenue per available room (TrevPAR) and adjusted revenue per available room (ARPAR). However, ADR, OR, and RevPAR still hold the greatest weight, with many hospitality companies exclusively reporting them in quarterly earnings reports.

 

Average Daily Rate (ADR)

ADR is the average revenue made per room. The ADR is used to assess the profitability of a hotel and the effectiveness of its current pricing strategy. As a hotelier, you want to maximize the profit you are making from renting out rooms, and the ADR shows you how well you are doing that.

How to calculate ADR:

ADR formula

A real-world example of calculating ADR:

Hotel A’s total revenue from rooms for the 2nd quarter of 2022 was 16,554,529 EUR. During this time, they sold 165,711 rooms. Therefore, their ADR for the Q2 2022 is 16,554,529 EUR / 165,711 = 99.9 EUR.

 

3 ways to improve ADR:
  1. Run pricing experiments
    Hotels, as well as their individual rooms, can vary widely in price. Luxury rooms can go for 500+ EUR per night while cheaper ones go for prices well below 100 EUR. The key is to understand your target demographic and what they would be willing to pay for your rooms. Rolling out new price points and promotions can help you understand which pricing strategies lead to the highest revenue. In addition, you should plan to frequently adjust your pricing based on changing market and customer demands, among other criteria.
    This may sound overwhelming, but here’s the good news: there is no need to attempt these calculations manually. There are many tools available that will take all these factors into account and automatically update your prices on all distribution platforms. Check out the Apaleo Store and explore 60+ solutions to optimize your pricing strategy.

  2. Actively encourage referrals
    According to a 2019 study published in the Journal of Marketing Research, customers acquired through referrals are both more profitable and loyal. In addition, an effective referral program motivates guests to spread the word about your hotel, and you can reach potential guests who are outside the scope of your marketing budget. You can offer incentives, such as a promotion code or complimentary services, to encourage guests to refer you to their family and friends.
    If you are serious about taking advantage of referrals, you should also invest in strong guest loyalty programs. Such programs increase the loyalty and potential value of your guests. This is important for referrals because loyal guests are more likely to recommend your hotel to others.

  3. Invest in upselling
    According to Altfeld Research, the probability of selling a product to an existing customer is 60-70 %, as opposed to the 5-20 % probability of selling a product to a new customer. This means that it is much easier to sell upgrades and additional services to current guests than it is to acquire new bookings.
    Upselling platforms allow you to strategically upsell ancillary products to your guests. These tools have been proven to notably improve incremental revenue generation. Take for example Oaky, a popular upselling app on the Apaleo Store. Since adopting Oaky, the Radisson Hotel Group has doubled their upselling revenue in northern Europe and increased its transportation revenue by 40-50 % in some hotels. Of course, no solution is one-size-fits-all: explore a range of upselling apps on the Apaleo Store and find the system best suited to you.

Occupancy Rate (OR)

OR is an indication of how full your hotel is. Most generally, OR can be used to assess how well a facility is being managed. A high OR, which is between 70 % and 95 % for most hotels, indicates high spatial efficiency. Maintaining a hotel is expensive, but the maintenance cost per room decreases with increasing OR. A consistently low OR can indicate that a hotel is poorly managed or that it is in an undesirable location. However, a high OR is not a goal to optimize for on its own. Many hotels could reach a higher OR by decreasing room prices, but they do not because they earn more from higher room prices and lower OR.

How to calculate OR:

Occupancy Rate formula

 
A real-world example of calculating OR:

In June 2022, Hotel H’s average number of available rooms per day was 1361. The average number of occupied rooms per day was 817. This means that Hotel H’s OR for June 2022 was (817 / 1361) x 100 = 60 %.


3 ways to improve OR:
  1. Choose to add value rather than lowering prices
    While it is normal for hotels to offer their rooms at a slightly lower rate during the week, dramatically reducing room prices during periods of low demand is probably a bad idea. You don’t want to damage your price integrity or establish incorrect guest expectations. Instead, you should opt for adding value. What this looks like would depend on the atmosphere of the hotel and your target demographic: Hotels with a romantic setting could offer special promotions for weddings during the week or on off-seasons, which is generally when OR becomes an issue. More artsy, quirky hotels could host cultural events, such as art shows or book readings. These are often popular with older guests and retirees, who are often looking for entertainment and have plenty of disposable income.

  2. Focus on local businesses.
    You could promote your space to local companies for meetings and other corporate events, reaching out with special offers or a partnership proposal. These companies may also want a place for visiting colleagues to stay—that’s additional rooms occupied during the work week.
    Other local businesses to reach out to are real estate agencies. People today are more mobile than ever. This means that real estate agents are frequently showing houses to clients visiting from other cities or even other countries. You can offer real estate agencies exclusive rates for their clients.

  3. Capitalize on external events
    If your hotel is in a big city, there are likely countless events—festivals, concerts, conventions, etc.—taking place year-round. These events are attractive not only to people who live in your city but also to people from other locales. For example, Munich has a population of just above one million. However, Oktoberfest attracts six million visitors, many of them not from Germany. All these visitors will need a place to stay for the duration of the festivities.
    Depending on the event you are targeting, you can offer discounted tickets, and special rates, or even adjust the hotel experience according to the event. An event-based promotion can increase your hotel’s online visibility through social media and reach a wider range of potential guests. This is because people actively research events, whereas they might only do a quick OTA search for a hotel.

Revenue Per Available Room (RevPAR)

RevPAR measures a hotel’s ability to fill its available rooms at an average rate. More concretely, it is the revenue generated by a single room in a hotel’s inventory—regardless of whether it is occupied. For example, say that your ADR is 100 EUR. This means that this is the amount of revenue you can expect from one occupied room. However, if your OR is 60%, then the revenue you are getting from each individual room in your hotel is 60 EUR.
RevPAR can be used to help optimize pricing. A RevPAR that is significantly lower than the ADR throughout the year may be an indication that you are overcharging for your rooms. On the other hand, if the RevPAR is consistently equal to the ADR, that could mean that you are undercharging for your rooms.

How to calculate RevPAR:

RevPAR formula

 

A real-world example of calculating RevPAR:

In the 2nd quarter of 2022, the European ADR and OR for Hotel M were 232.39 EUR and 69.6 %, respectively. Therefore, their RevPAR was 232.39 EUR x 0.696 = 161.74 EUR.

 

3 ways to increase RevPAR:
  1. Find the optimal balance of ADR and OR
    Since RevPAR is the ADR multiplied by the OR, it is important to optimize the two such that you end up with the highest RevPAR possible. According to Investopedia, an increase in a property’s RevPAR often indicates an improvement in OR. But striving for a 100 % OR is not necessarily the best way to increase revenue. In fact, a high OR can lead to lower profits if the increased number of occupied rooms doesn’t offset the decreased ADR.
    You can collect your hotel’s and your competitors’ data from previous seasons, then note the values of ADR and OR when the RevPAR was the highest. You should supplement this process by experimenting with room rates and other factors that influence ADR and OR. However, a better way to tackle this challenge would be to use a revenue management system that will track relevant metrics for you. These tools take into account many different factors that can influence RevPAR and help you find the right balance of ADR and OR for your hotel.

  2. Reduce cancellation rate
    You could just make all reservations non-refundable and forget about it, but that may just result in a decreased OR. Many guests have anxieties about booking a trip that can’t be refunded—even if they fully intend on making the trip. From a guest’s perspective, a non-refundable reservation is a high risk. Therefore, it is necessary to make this higher risk worth it to the guest. You can do this by offering special benefits for non-refundable reservations. This could be something as simple as a reduced rate or a complimentary service.
    Another option would be to combine non-refundable reservations with ‘minimum length of stay’ packages during the high season. For example, say that the price of a room is 100 EUR per night. That means a guest staying three nights would pay 300 EUR. However, you could have a minimum stay package that offers a three-night stay for 240 EUR with a non-refundable reservation. This encourages guests to book longer stays and prevents the revenue projection problems caused by canceled long-term reservations.

  3. Implement feature-based pricing
    Feature-based pricing is adjusting the pricing of each room based on its specific features: size, view, furniture, theme—the possibilities are endless. With this pricing model, you can lock services and functionalities that are more expensive to maintain by including them in premium rooms and packages. This prevents the revenue loss that would occur from operating these expensive features at lower price points.
    Feature-based pricing is also more conducive to upselling. Your guests are already in the mode of selecting features, so it is more natural for you to suggest the purchase of add-ons, such as late check-out or swimming pool access. If you make this process obvious and intuitive, you may even see guests purchasing add-ons without any encouragement. You can learn more about feature-based pricing in this article written by an industry expert of 25+ years.

Metrics such as ADR, OR, and RevPAR are essential to making data-driven business decisions and optimizing hotel operations. While it’s possible to calculate and manage these metrics manually, it’s best to have the process automated and your metrics displayed on dashboards. You can do this via a business intelligence system designed for hotels. Check out the Apaleo Store for a collection of business intelligence apps that you can integrate into your existing system and find the best solution to analyze your hotel’s performance.

 

Onshore Paik

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Onshore Paik
Onshore Paik is a copywriter and editor with a background in tech publishing. When she’s not in front of her keyboard, she can be found reading novels, playing board games, and climbing boulders.
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