The average day rate (ADR) is commonly used as a key performance indicator (KPI) in the hospitality sector. It refers to the average revenue earned per hotel room per day. The ADR is often combined with the occupancy rate to calculate the revenue per available room (RevPAR). This is a strong indicator of the operating performance of an accommodation provider.
Understanding the ADR
In the accommodation sector, prices are often subject to major fluctuations depending on the season. They may also be influenced by other factors. For example, group bookings may be eligible for a discounted rate.
This means that the price of a room on any given day may not be an accurate reflection of how much revenue it generates over an extended period. The use of average day rates gets around this problem by focusing on the average over a given period.
Calculating the ADR
The ADR can be determined by a very straightforward calculation. It’s simply the total revenue from rooms on any given day divided by the number of rooms occupied by paying guests on that day. Generally, you will exclude rooms occupied without charge. These would typically be rooms for complimentary guests and staff rooms.
If more detail is required then ADR can be calculated according to different categories of room. For example, you might want to see if premium room classes really do generate more revenue than budget room classes. You might also want to see if rooms in a certain part of a building generate more revenue than rooms in another part of the building.
The ADR and the occupancy rate
On its own, the ADR is of very little practical use. Rooms with exactly the same ADR could generate very different levels of revenue depending on how many nights they are in use. This is why the ADR needs to be combined with the occupancy rate.
The occupancy rate is simply a measure of how many nights a room is occupied during a given period. Multiplying the ADR by the occupancy rate gives the average revenue per available room (RevPAR).
Like ADR, RevPar on its own is of very little practical use. It shows the amount of revenue earned by an accommodation provider. It does not, however, show whether this is achieved through high prices or high occupancy rates, or a combination of both. This is why RevPar needs to be shown with both the ADR and the occupancy rate (or calculated from them).
Pros and cons of ADR
The ADR provides a convenient way to make like-for-like comparisons. These could include:
Seeing how one accommodation provider stacks up against another
Measuring performance over time
Looking at the effectiveness of marketing strategies
It is, however, vital to think carefully about whether or not the comparison is truly fair. For example, a seasonal promotion might coincide with a period of extremely good (or bad) weather. How would you separate the effect of the promotion from the effect of the weather?
Another weakness of ADR is that it only calculates the revenue from the sale of the room itself. It excludes revenue generated as the result of the sale of the room. Similarly, it also excludes any monies paid to guests, for example as compensation for problems. This second point should, generally, be fairly minor. The first, however, could have a major impact.
Some businesses, including some accommodation providers, earn a significant percentage of their revenue from value-added services. In the case of accommodation providers, this could be anything from mini-bars and restaurants to spa facilities and entertainment. In fact, in some cases, these value-added services effectively operate as profit centers in their own right.
How we can help
If you’re interested in finding out more about the average day rate (ADR), then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.