Understanding the difference between RevPAR vs ADR is key to better analyzing your Key Performance Metrics, better known as KPIs. These two KPIs are important performance indicators, which can help hoteliers make data-driven decisions to optimize revenue management strategies.
While RevPAR and ADR are similar, they are used differently. RevPAR, which stands for “revenue per available room,” indicates how successful your hotel was at filling the rooms, whereas ADR indicates how successful your hotel was at maximizing room rates.
In this article we will go into more detail about what these two metrics are and how they are used.
Definition of ADR and RevPAR
Before we get started, let’s define RevPAR vs ADR.
ADR, or average daily rate, is a key metric used to calculate a hotel’s profitability. It demonstrates the average rate hoteliers can charge for a room during a certain period on any given day. It can be used to help predict seasonal trends.
Hoteliers can then adjust the price to meet the demand and thereby maximize revenue per room. It can be determined by dividing the total revenue on any given day by the number of rooms sold.
ADR = room revenue / rooms sold
RevPAR in the hospitality industry, on the other hand, is a metric used to measure a property’s performance. It shows the property's ability to fill its available rooms at an average rate. It also helps determine the success of a property at a high occupancy rate. It can be used to plan for the different seasons and measure profitability at a given time of year.
RevPAR can be calculated in one of two ways:
RevPAR = ADR x occupancy rate Or RevPAR = rooms revenue / rooms available
Comparing RevPAR vs ADR
Now that we understand these two metrics, let's compare the two, as well as the information you can gather and how they work together to get a better understanding of how your property is performing.
RevPAR is considered a more useful metric because of the fact it doesn’t only look at the daily rate, but also takes into consideration daily occupancy. That is because the more rooms you sell at a higher daily rate, the more revenue you generate, which is what any hotel should strive for.
Could you potentially charge a higher daily rate and generate the same revenue? This is why you can’t just look at RevPAR because it doesn’t take into consideration all the costs associated with having 100% occupancy.
While both metrics are important KPIs for the hotel industry, the end goal of any hotel operations should be to optimize financial performance by looking at both costs and revenue.
These metrics should not be used in isolation; instead, they should be coupled with a coordinated approach across the whole staff from revenue managers, to marketing, sales, housekeeping and front desk staff. Only in treating revenue management holistically will a hotel be able to reach their goals.
How can RevPAR be used practically?
RevPAR is important to measure a property’s profitability. It can be used to help hoteliers price their hotel rooms accurately as it essentially looks at the hotel’s ability to fill its available rooms at an average rate. If the RevPAR improves, it means that either the average room rate or the occupancy rate is improving.
Revenue managers can use this metric to make decisions because they can analyze how well the property is able to fill its rooms and if the average property room is fairing well against competitors. For example, if the average room rate is higher than the RevPAR, revenue managers can lower the average rate to help the hotel reach full capacity.
Where RevPAR falls short
This metric is not an end-all solution to revenue management. It is important to consider when calculating RevPAR that there can be fluctuations due to seasonality, the overall market trends as well as consumer trends, all of which can make RevPAR difficult to monitor.
Furthermore, using this metric as a stand-alone metric to measure performance might lead to inaccurate results because it doesn’t always indicate better performance. This is because if the RevPAR goes up, it doesn’t necessarily mean that the hotel’s profits are increasing.
In addition, it doesn’t take into consideration all the costs of running a property. Of course, properties should strive to have 100% occupancy but it’s also important to analyze the costs of having a full house. Think: housekeeping, utilities, personnel, wear and tear on the rooms.
A booking’s value can be analyzed based on how much guests are spending on a whole (both in extra services and for the room in it of itself).
How ADR is useful
ADR can be used as a comparison across time periods to understand trends and see if the current revenue strategy is working. It can also be used to make strategic decisions, like using promotions or increasing prices to optimize revenue.
This metric can also be used to determine how well your property is doing in comparison to your competitors of the same size, location, and price range. For example, if your property is generating a lower average daily rate than your competitors, you know that something in your pricing strategy has gone wrong.
Keeping an eye on these fluctuations will ensure that you are getting the best daily rate across time.
ADR doesn’t always provide a full picture
While ADR can be useful to determine pricing strength, it doesn’t necessarily give the whole picture of how well your property is performing. You need to consider occupancy together against historical results in order to fully understand how your property is doing.
While it is generally the case that the lower the rates, the higher the occupancy, this vision is a bit short-sighted. You must also look at how your ADR compares to the competition as you will need to have competitive rates so that people will want to book your hotel over the competition.
You must also consider how increasing rates impact overall revenue. Just trying to boost ADR without a plan can reduce occupancy and therefore revenue as a result. This is where hotel data analytics comes into play.
Mews Analytics helps you track performance and make more informed decisions with real time data displayed in five interactive dashboards.
While both RevPAR and ADR are useful metrics to determine profitability and the overall performance of a property, it is important to fully understand how they play into each other in order to make wise, data-based decisions to grow the property, boost revenue and attract more customers.
They should not be looked at on their own but rather in conjunction to get a full picture. Understanding and applying decisions based on not RevPAR vs ADR, but instead RevPAR AND ADR, is the first step in making improvements to overall performance.
Furthermore, the job of increasing revenue should not just lie in the hands of the revenue manager. Instead, it should be treated holistically as a team across all departments. That is to say it must be coordinated with marketing so that they can wisely choose and create promotions and run targeted campaigns depending on what the property is trying to achieve.
The front desk staff and housekeeping are also responsible for creating a stellar experience with impeccable rooms so that you have happy guests who want to keep coming back and will also be an advocate to other customers.
9 July 2021
Check in with the latest in hospitality
Sign up to our monthly newsletter for industry insights, product news, partner offers and more.