Key Influencing Factors of ADR, Occupancy Rate and RevPAR

29th Apr 2021
NB: This is an article written By : Manoj Nandkeolyar
Peter Drucker once said, “Profitability is the sovereign criterion of the enterprise” – the gospel truth for any kind of business aiming to get on the inside track. However, the path to success in the hotel biz in particular, is labyrinthine with its myriad departments, countless patrons, and the perpetual need to stay on top of the game. These factors make it challenging for hoteliers to keep track of their performance. That’s where performance metrics come into the picture. These metrics serve as a guideline for setting clear goals, ultimately leading to a performance upturn. But in order to use them correctly, we need to first understand the variables affecting the metrics. While there are quite a few key performance indicators used in the hospitality industry, we’ll be focusing on the three most critical ones in this article – ADR, Occupancy Rate, and RevPAR.

Influencing Factors of ADR:

ADR is the average room tariff on a certain day. Its calculated by dividing the total room income by the total number of occupied rooms. Here are four factors that one must bear in mind to increase this measure:

1- Provide remarkable guest experience: Experience is the new hotel amenity. Millennials are rapidly outstripping baby boomers and this young lot craves for more than just a room. Promise them an unrivalled experience and they’ll willingly pay a higher price for your services. Focus on maintenance, cleanliness, and train hotel staff to treat guests well. Aside from that, try and incorporate a unique element into the package. For example, Carlyle, a hotel in New York, offers the “Super Sophie Experience”, to its pubescent guests. This experience hinges on the popular children’s book series called The Super Adventures of Sophie and the City and includes accommodation, gifts, and a virtual tour of Sophie’s most beloved sites.

2- Understand your audience and personalize: As mentioned earlier, people are ready to pay higher when they get what they want. When you tailor an experience based on your guest’s preferences and interests, you’re basically giving them control over their choices. This can have a strong impact on an individual’s psyche. And who wouldn’t appreciate exclusivity? Sure, a swanky décor makes a statement but nothing beats an excellent customer service. You can go the extra mile by offering a free upgrade, prepare a customized meal, relieve troubled parents by handing a video game to their kids, write hand-written notes upon arrival or slip them in along with the invoice during checkout, it could literally be anything so long as it makes them feel special.

3- Add-Ons: In a recent interview, John Clifford of International Travel Management.com said, “Discounting dilutes the integrity of a hotel’s brand. If you cannibalize your rates, you can’t afford to provide all the amenities.” Fire sales will only bring down your ADR. Offering adjuvant services such as Airport pick-and-drop, spa treatments, internet access, free breakfast, etc. will not only help maintain your ADR but also provide a greater value for money.

4- Build a strong brand: Your brand is what differentiates you from your competitors. Unlike other businesses, hotels don’t provide the element of tangibility to their customers, making it even more important to develop a strong brand. Successful modern hotels utilize social media and internet to build a powerful brand image. You can increase convenience by making booking processes completely online. As per statistics, some hotels sell as much as 90% of the rooms via online booking engines. You could also use all social media platforms to gather feedback and improve your services accordingly while being able to interact with guests directly.

Influencing Factors of Occupancy Rate:

Occupancy rate refers to the ratio of occupied rooms at a given time. The formula used to calculate occupancy rate is – total no. of rooms sold/total no. of rooms vacant times 100.

1- Have a dynamic room rate strategy: While hacking room rates may help achieve a higher occupancy rate on a certain day, it often fails to counterbalance the diminished revenue. Instead, focus on devising better pricing strategies as per your past occupancy trends. You could base these tweaks around psychological factors and competitors as well. For example – set your tariff at an odd price, $49 instead of $50. It’s cliched, but it works!

2- Differentiate: The hospitality sector is highly saturated, brimming with competition. If you want maximum rooms to be sold, you need to analyze your competitors and offer something that they are not. For example – offering better package deals, complimentary services, greater online presence, quick turnaround time, an excellent customer service, etc.

3- Work to turn your guests into your advocates: The power of word-of-mouth is no secret. We all know that its one of the cheapest forms of advertising for any business. With the advent of technology, this method has assumed even more significance. Its quite straightforward – improving your services or products will mean brand advocacy on the WWW. Irrespective of who your target audience is, loyalty programs or online advocacy will drive more guests to your hotel, eventually increasing occupancy rates.

4- Implement length of stay restrictions: Controlling your guest’s stay duration can have a huge impact on occupancy rates, especially during the lean season. You can impose a minimum or maximum length of stay. For example – a stay requirement of minimum two nights during the weekend. This would also help in predicting occupancy rates in the near future.

Influencing Factors of RevPAR:

Revenue per available room is calculated by using this formula – ADR multiplied by occupancy rate. It refers to the income generated from room sales at a given time, indicating the profitability of a hotel.

1- Average Daily Rate (ADR): Contrary to what many hoteliers think, a higher ADR and not a higher occupancy rate, translates to a higher RevPAR. A decade-long study revealed that 4,000 European hotels claimed ADR to be a stronger determinant of a better RevPAR compared to occupancy. For example – let’s assume that your hotel has 100 rooms in total. To achieve a cent percent occupancy rate, you decide to slash your prices down to $80 instead of your regular rate of $100. This will fetch you a higher occupancy rate with a revenue of $8000. On the other hand, if you focus on achieving a higher ADR, with rooms priced at $100, you might achieve a 90% occupancy rate but still earn a higher revenue of $9000.

2- Consider every aspect of your operations: Your housekeeping staff, electricity, F and B, maintenance, etc. all add up to the value your hotel offers. Attention to details and regular inspection can aid in keeping these aspects of operation in check. The better your hotel operations management, the more guests you attract. And more guests means more revenue!

3- Get a firm understanding of the demand of your hotel i.e. the time of the year when occupancy rate would be high, which segment of customers suit best to your hotel, etc.