Hotel Average Daily Rate - Your Ticket to Higher Profitability!

Did you know that the Hotel Average Daily Rate [ADR] is your ticket to higher profit?

A poor ADR means poor profitability!

In other words, your hotel will not have any meaningful profit.

Am I exaggerating?

Not really.

Let’s find out why not!

25 Fin Terms Beginner Hotel Mgrs Must Know Series

Welcome to the 25 Financial Terms Beginner Hotel Managers Must Know Series.

My name is Lakshmi Narasimhan Soundararajan.

I will be guiding you through this series of posts.

You will be learning concepts using a real life hotel - Paradise Hotel.

Let us jump right in.

This Blog Post will cover

What is Hotel Average Daily Rate?

Hotel Average Daily Rate gives you the: 

• average of room prices 
• charged for an occupied room 

in a hotel for a period.

To say it differently, Hotel Average Daily Rate is the Revenue per Occupied Room.

In the hotel industry, two KPIs contribute to room revenue:

• Occupancy Rate (which you saw in the previous post, click here) and
• Average Daily Rate

When you say that:

• average daily rate is $241 (see February month in Statistics below), you mean that
• the average of all prices charged for hotel rooms occupied or sold for that period was $241.

Average Daily Rates are linked directly to market segments.

What is a market segment?

It is a particular customer profile which is part of your target audience.

Where Do You Find Average Daily Rate in a Financial Statement?

Average Daily Rate is found in the Statistics section of the Paradise Hotel Profit and Loss Statement (see below).

Statistics are found at the bottom of a Hotel Profit and Loss Statement.

The above screenshot is the Statistics section of the Paradise Hotel Profit and Loss Statement.

As you can see Paradise hotel has Average Daily Rate as follows:

• $241 in February
• $246 in March
• $250 in April

Notice that average daily rate can be different in different months.

This is the seasonality factor in the hospitality industry.

It makes the hotel business model a challenging one.

COVID-19 & Average Daily Rate

During the covid-19 pandemic, hotels suffered in their average daily rates.

Even big players like Marriott, Hilton, Hyatt were having low average rates at times.

You will see shortly why having a consistently good average daily rate is key for revenue generation.

And this suffered greatly during the pandemic.

We will be providing covid-19 references throughout this series.

Market Segments - Average Daily Rate Connection

Market Segments play a huge part in Average Daily Rate performance.

This is because different market segments produce lower or higher average daily rates.

See Paradise Hotel's Market Segments and their ADRs in the 3 Lean, Standard and Peak months.

Why Should You Know About Average Daily Rate?

Why is Average Daily Rate critical?

It is key because it determines partly the profit potential of the hotel.

How is that, you ask?

Owners and stakeholders have:

• poured millions of dollars as investment in the hotel project 
• with an objective of earning a reasonable return on investment.

The reasonable return on investment will depend primarily on the profitability potential of the hotel.

That profitability potential is partly:

• dependent on the average daily rate of 
• guest rooms occupied in a hotel for a period.

Average Daily Rate is one of factors in the market share that a hotel will command in the market.

The higher the average daily rate, the better the possibility of a greater market share.

In the hospitality industry, market share is a KPI that determines positioning of hotel among other things.

Based on the average daily rate, a month could be categorized as:

• peak,
• lean or
• standard.

Average Daily Rate is a KPI (Key Performance Indicator) used for measuring other KPIs like:

• customer patronage,
• spending,
• room rates sold etc.

Average Daily Rate is the KPI which is used to calculate powerful performance indicators like:

• room revenue,
• revenue per available room etc.

which we will look at in later posts.

You could say that profitability (apart from hotel revenue) is dependent on Average Daily Rate.

Owners and stakeholders often want to know how well the guest room asset is being utilized.

In other words:

• how much revenue is being generated and
• what profit is being retained from the average daily rate achieved in a hotel.

Average Daily Rate is one of the most important KPIs which we will revisit later on.

In a later post, you will learn the powerful link between: 

• market segments (which represents customers) and
• the room rates which are part of the Average Daily Rate in a hotel.

Formula for Hotel Average Daily Rate

How do you calculate Average Daily Rate?

Average Daily Rate for a Day = Daily Room Revenue / Daily Rooms Occupied

NOTE: The three months are an extract to highlight Lean, Standard and Peak Months.

Related Financial Terms

The following financial terms are closely related to the Hotel Occupancy Rate.

I will discuss these in later posts in this series.

• Rooms Available
• Occupancy Rate
• RevPAR

FAQs

What are KPIs used for in hotels?

KPI is a generic acronym which represents the financial term “Key Performance Indicator.”

KPIs can measure:

• financial performance,
• marketing effectiveness,
• customer satisfaction,
• employee retention,
• payroll costs and

various other performance indicators of a business.

What is the best indicator of hotel success?

1. Occupancy Rate
2. Average Daily Rate (ADR)
3. Revenue per Available Room (RevPAR)
4. Customer Acquisition Cost (CAC)
5. Employee Satisfaction.

How do hotels measure performance?

Occupancy Rate measures the business volume of the hotel.

• This means how many hotel rooms are occupied or sold in that period.

Average daily rate measures average revenue earned from prices charged on occupied rooms

• It measures average revenue earned from each occupied room per day.
• This sheds light on pricing strategies.
• Average Daily Rate is commonly known by the acronym ADR.

Revenue per available room is how hotel utilizes available rooms for revenue generation.

• It combines occupancy rate and ADR to give a comprehensive view of both room sales and revenue.
• Revenue per Available Room is commonly known by the acronym RevPAR.

25 Financial Terms for Beginners Series

Here is the list of 25 Hotel Financial Terms that Beginner Managers Must Know in this Series.

We will be discussing each of these in blog posts in this series.

1. Occupancy Rate [Published]
2. Average Daily Rate [This Post]
3. RevPAR [Next Post]
4. Market Segments
5. Market Share
6. Average Length of Stay
7. Guest Repeat Ratio
8. Restaurant Seats Available
9. Food & Beverage Covers Served
10. Average Food & Beverage Check
11. Meal Period Analysis
12. Year on Year Growth
13. Fixed & Variable Expenses
14. Undistributed Operating Expenses
15. Management Fees
16. Gross Operating Profit
17. Depreciation
18. Net Income
19. Balance Sheet
20. Assets - Fixed & Current
21. Liabilities - Long Term & Current
22. Owner Equity
23. Cash Flow Vs Cash Balances
24. Financial Ratios
25. Analysis

Want to Learn from a Video on Hotel Average Daily Rate?

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Hotel Average Daily Rate - 25 Financial Terms

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Your Guide to Professional Success

So, there you go.

25 Hotel Financial Terms which will make you a business savvy hotelier.

Click below for other hotel financial terms as chapters of this Ultimate Guide.

Coming Soon - Hotel RevPAR [Revenue per Available Room]

RevPAR is one of the most powerful KPIs in the hotel industry.

Understand what this financial term means and how it enhances revenue and profitability.

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Ultimate Guide on Hotel Financial Terms (Other Chapters)