Understanding Average Daily Rate (ADR): A Key Hospitality Metric

The average daily rate (ADR) is a performance indicator used in the hospitality sector to measure the strength of revenues generated. It is measured as the total revenues generated by all the occupied rooms in a hotel or lodge divided by the total number of occupied rooms over a given time period. It is a simple average that shows the revenues generated per occupied room.

Summary

• The average daily rate (ADR) is a useful tool to maximize revenues in the hospitality sector.
• The ADR is measured as the total revenues generated by all the occupied rooms in the hotel or lodge divided by the total number of occupied rooms over a given time period.
• The average daily rate includes only the occupied rooms and not the total available stock.

Formula for the Average Daily Rate

Importance of Average Daily Rate

The average daily rate allows comparison across time periods and also to a cross-section of peers to help the hotel operator ascertain the key trends, emerging challenges, and, consequently, determine a change of strategy if needed.

ADR can be used for initiating strategic choices, such as using promotions5 P's of MarketingThe 5 P's of Marketing – Product, Price, Promotion, Place, and People – are key marketing elements used to position a business strategically. The 5 P's of to boost occupancy or increase prices to maximize revenues.

The average daily rate also serves as a metric to check how well each geographic stratum does in relation to revenue generation. For prudent comparison, we must select peers closely matched in terms of size, location, and clientele.

If a property generates a lower average daily rate than its peers, the company can look deeper into the root cause of the problem. Based on the ratio, the problem can be that a promotional discount increased the number of rooms occupied, but also means the revenue generated per room became smaller.

However, it can also be the case that the prices charged per room is very high, which is leading to lower occupancy with an optically higher ADR.

Examples of ADR

Local Competition

Consider a hotel named A with 100 rooms near a warm tropical beach. On a particular day, 80 rooms are occupied and, for simplicity, assume that all the rooms are of the same configuration. The total revenue per day is $10,000.

Total revenue per day = $10,000

Number of rooms occupied = 80

Average Daily Rate (ADR) = $10,000 / 80 = $125

Calculating an ADR of $125 per day on its own is of no use. However, if we know that the ADR for the previous day was $100, then we can compare how efficiently each of the occupied rooms is generating revenues.

Also, suppose the nearby Hotel B reports an ADR of $200, then Hotel A now needs to understand why it is lower than its competitor. There are two possible reasons: (1) Hotel B may reporting a fewer number of rooms occupied, or (2) Hotel B’s room rates are higher.

1. Higher ADR is certainly not desirable in the first case because the hotel industry faces a lot of fixed costs, such as leasesOperating LeaseAn operating lease is an agreement to use and operate an asset without ownership. Common assets that are leased include real estate,, employee expenses, and establishment charges. Lower occupancy denotes that the lumpy fixed expense gets spread over a large universe of rooms and is sustainable.
2. In the first case, a higher ADR is certainly not desirable because the hotel industry faces a lot of fixed costs, such as leasesOperating LeaseAn operating lease is an agreement to use and operate an asset without ownership. Common assets that are leased include real estate,, employee expenses, and establishment charges. Lower occupancy denotes that the lumpy fixed expense gets spread over a large universe of rooms and hence is sustainable.
3. The second case may indicate that Hotel B enjoys some competitive advantageCompetitive AdvantageA competitive advantage is an attribute that enables a company to outperform its competitors. It allows a company to achieve superior margins, which is allowing it to charge higher rates. The advantage can be pleasant views, better ambiance, or an international brand offering world-class service.

Seasonal Business

Consider a ski resort located in the North American Rockies. Skiing is a seasonal recreational activity, and hence a ski resort would report highly seasonal revenues. A typical skiing season lasts for five to six months per year. The average daily rate over the prime skiing season would be a key metric to track the resort’s performance.

Suppose there are 100 rooms. Over a six-month period during the high season, the occupancy rate was 75%. The average daily revenue was $18,750.

Total revenue per day = $18,750

Number of rooms occupied = 100 x 75% = 75

Average Daily Rate (ADR) = $18,750 / 75 = $250 (during the skiing season)

Additional Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™Program Page - CBCAGet CFI's CBCA™ certification and become a Commercial Banking & Credit Analyst. Enroll and advance your career with our certification programs and courses. certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

• Average Revenue Per User (ARPU)Average Revenue Per User (ARPU)Average revenue per user (ARPU), also known as average revenue per unit, is a non-GAAP metric commonly used by digital media companies,
• Current Income (Real Estate Investments)Current Income (Real Estate Investments)Current income is an investment strategy that gives investors exposure to consistent above-average payouts. The most common current income-focused
• Hospitality REITHospitality REITA hospitality REIT is a real estate investment trust that owns, acquires, and manages hotels, motels, luxury resorts, and business-class hotels, and leases
• Market ShareMarket ShareMarket share refers to the portion or percentage of a market earned by a company or an organization. In other words, a company’s market share