Average Room Rate – Is it a Myth?

By Venkat Rajagopal Professor, Pacific International Hotel Management School | July 03, 2011

Sales is the only means of earning profit in any business. Hotel managers are also not an exception to this phenomenon. In accommodation sector it is the sale of rooms that brings more revenue. When sale is the only means of earning profits as in other business, hotel managers also think that sale of room, good occupancy is the only means to improve the bottom line, since room sales compared to any other sales of the hotel provides better departmental income. Hence to earn more revenue by selling more rooms’ managers adopt ARR /ADR technique...

Hospitality or Accommodation sectors all over the world like any other business enterprises, attempts to think that a sale is the only means of producing profits. In the hotel sector room sales provides a greater contribution towards fixed expenses and overhead costs compared to the same amount of sale from any other revenue earning areas such as, food and beverage, telecommunications, laundry, shop rentals etc. In order to achieve this desired result of greater contribution there should be a sales mix.

The sales mix of any typical saleable room in a hotel mainly consists of four main elements such as:

  1. Hotel segments such as, free individual travellers (FIT’s), charters,
    groups, packages, honeymooners, transit pax, airlines crew, corporate
    travellers, MICE, again categorised as bed only, bed and breakfast, and
    various other plans.
  2. Variety of available rooms such as, single, double, standard, suites etc,
  3. Various bed configuration such as King, Queen, double, twin sharing, extra
    bed etc.
  4. Yield management whereby maximising revenues by lowering tariffs to increase
    sales during periods of low demand and by raising tariffs during periods of
    high demand.

Conventionally to determine an effective sales mix, room department revenue is calculated and then percentages of the total room revenue are calculated. A performance evaluation of rooms department is determined by average room sale revenue. Hence it is customary for every manager to look at the management report before the operation meeting commences and feel happy about the Average room rate (ARR) or Average daily rate (ADR). Some managers still think that ARR or ADR is the best tool to measure room department ratio. Similarly most commonly, sales and marketing department’s effort is also judged by either percentage of room occupancy or daily average room rate that has been achieved. The concept is simple. Let us imagine a hotel with 75 rooms, which sold 21, 500 rooms in a year and earned room revenue of $850,000.

The ARR or ADR is:

850,000/21,500 = $39.53.This exercise in reality is not 100% correct because of the four sales mix as mentioned above, plus a hotel earns room revenue not only from the bookings that has materialised, historically speaking hotels do charge no shows rates for non-guaranteed reservations, as well as for guarantied reservations. Hence the total revenue earned for the day or for the month or for the year is not only from actual number or rooms sold for various segments but also for different kinds of penalty for not showing up. Sometimes the revenue also includes a small commission earned from other hotels by bouncing the guests to other hotels when it is full and no rooms to sell. Average room rate or ADR could be of some meaning if we could express it as a ratio of maximum potential average rate, though by itself this ratio does not provide a complete and meaningful picture.

Coming up in January 2018...

Mobile Technology: Relentless Innovation

Technology has become a crucial component in attracting and retaining hotel guests, and the need to enhance a guest’s technology experience is driving a relentless pace of innovation. To meet and exceed guest expectations, 54% of hotels will spend more on technology in 2018, and mobile solutions in particular will top the list of capital investments. Many hotels are integrating mobile booking, mobile keys, mobile payments and mobile check-in into their operations. Other hotels are emphasizing the in-room experience, boosting bandwidth and upgrading flat screen TVs to more easily interface with guest mobile devices. And though not yet mainstream, there are many exciting technology developments on the near horizon. The Internet of Things (loT) is taking form in some places, and can be found in guest room control systems, voice activation systems, and in wearable sensors that can be used for access and payment options. Virtual reality headsets are available at some hotels so guests can enjoy virtual trips to exotic locations or if off-property, preview conference facilities and guest rooms. How long will it be before a hotel employs a fleet of robots for room service, or utilizes a hologram as a concierge, or installs gesture-controlled walls that feature interactive digital displays? Some hotels are already using augmented reality for translation services, or interactive wall maps, or even virtual décor. This pace of innovation is challenging property owners and brands to stay on top of the latest technology trends while still addressing current projects. The January Hotel Business Review will explore what some hotels are doing to maximize their opportunities in the mobile technology space.