Mr. Rajagopal

Sales & Marketing

Average Room Rate - Is it a Myth?

By Venkat Rajagopal, Professor, Pacific International Hotel Management School

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.

There are few managers, who prefer to look into paid occupancy percentage, as a quick indicator of performance efficiency. Paid occupancy percentage refers to the percentage of rooms sold in relations to rooms available for sale in the property.

Paid occupancy %

Paid occupancy percentage is paid rooms' occupied/available room The hotel in our case has sold 21, 500 rooms. Rooms available for sale for the year is 75*365=27,375. Paid occupancy % is: 21,500/27,375 =78.53%.

It is worthwhile to note that ARR, ADR or PO% by themselves are not full proof to measure the efficiency. To illustrate this better, a hotel may have room occupancy of 85%, yet it's ARR or ADR may be only $ 45 where as a similar hotel either close by or elsewhere in the same city may have a paid occupancy of 78% and an ARR or ADR of $ 55. It is not difficult to judge which hotel is in an enviable position. Also worthwhile to note is paid occupancy % of 78.53 does not mean that 78.53% of available rooms were sold every day. It simply means there could have been 100% occupancy from Monday to Thursdays and 21.47% on remaining days. Thus it is a wrong notion that paid occupancy % is a key factor of management's success in selling the rooms.

Again, the occupancy percentage does not confirm whether the sales and marketing department has maximised sales revenue because the hotel may be having 100% occupancy but many of the rooms occupied may be paying much less than the rack rate that has been fixed for the room because, it is occupied by different segment of the hotel. In such a situation a manager may want to increase the occupancy at the cost of the room rate at a time when his performance is likely to be assessed.

Should the manager's performance is going to be measured by ARR or ADR, then he may refuse to sell a room below the prescribed rack rate to a guest who is unwilling to pay the rack rate, thereby turning away the potential guest. If we go by the norms that every satisfied guest brings in five (5) new guests to the hotel without any efforts, imagine the potential loss of not only future guests, but also drop in occupancy and room revenue.

If, ARR, ADR, PO% do not indicate the quality of efficiency of the management in selling the product what is it that could reasonably indicate the efficiency? A combination of ARR, ADR plus PO% would reasonably be a better tool to measure the efficiency and success of the management as far as rooms division is concerned. This combination is called Revenue per Available Room or REVPAR. Let us understand this concept by our imaginary hotel which we had discussed earlier.

Revenue per Available Room (REVPAR)

The combination of both paid occupancy % and ARR or ADR is called REVPAR, which in our case is: 78.53% of $35.93 is = $28.21 ARR/ADR is conventional practice of forecasting saleable rooms for the future. This method is very traditional. With the advancement in technology nowadays hotels have eliminated a greater part of guesswork or room rate decision making process for budgeting room occupancy. The process basically involves the number and kind of rooms that should be sold at various room rates.

The managers may try and follow yield management , the objective of which is to maximise hotel rooms revenue by using certain discretion like offering right type of room to the right type of customer who is prepared to pay that price. In practice yield management may present its own problems when being implemented in accommodation sector, unlike airlines because a guest who checks in at a hotel for a couple of nights may want to check out earlier than two nights and similarly a guest who had checked in for the weekend may want to extent the stay by couple of more nights. A good yield management system can be practiced only when the hotel has exhaustive database of its guests, so that the hotel knows the guest's past reservation patterns.

Thus REVPAR is more a reliable tool in measuring the efficiency of the management in selling rooms than ARR or ADR. What one must remember in calculating REVPAR is all the rooms that are out of order, rooms given as complimentary and rooms given to the staff must be deducted from the total inventory of rooms in the property to calculate rooms available for sale, to arrive at reasonably an accurate REVPAR.

Venkatraman Rajagopal known as Venkat is currently a lecturer teaching hospitality and tourism management subjects at Pacific International Hotel Management School in New Plymouth, New Zealand. Mr. Rajagopal holds a degree in Commerce, a Masters in Business Administration and a Masters in International Hospitality Management. With more than 20 years experience in the hospitality industry, Mr. Rajagopal has worked his way up in all departments of the industry, holding senior management positions such as Director of Finance, Director of Food and Beverage and General Manager. Mr. Rajagopal can be contacted at 64 9 8350535 or venkatr@pihms.ac.nz Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.

Receive our daily newsletter with the latest breaking news and hotel management best practices.
Hotel Business Review on Facebook
RESOURCE CENTER - SEARCH ARCHIVES
General Search:

SEPTEMBER: Hotel Group Meetings: Demand is Trending Up

Dan Berger

A decade ago futurists and armchair analysts were convinced that the internet would move face-to-face interactions online and therefore kill the meetings & events industry as we know it. Instead of joining together under one roof, wed educate ourselves via webinars, make new connections exclusively over LinkedIn, and swap catered lunches for granola bars and iced-coffee at the office. So, what happened to this dystopia? Today, its evident that technology is having the opposite effect on events. Were actually seeing that modern connectivity and social networking is driving higher demand for face-to-face interactions. In the past, we predicted that broadband would make in-person meetings redundant. READ MORE

Ben Premack

Meetings and events need not be designed around stuffy, windowless rooms involving information overload and ten-minute stretch breaks. These types of gatherings are neither engaging nor fun for anyone. Today, meeting planners want more than just a location; they want a flexible venue in a desirable destination which offers an array of amenities and add-ons for groups looking to make their out-of-office gathering one to remember, and even envied. Well thought-out and customized corporate meetings and events that feel more like a retreat can create new opportunities for employee growth, networking, and creative-thinking all while boosting productivity and morale. READ MORE

Jim Vandevender

As hotels head into the fourth and final quarter of 2016, sales operations and revenue management teams are beginning to look toward next year. Budgets and marketing plans are beginning to be developed that hope to capture the lucrative high demand group market, drive RevPar and meet occupancy and ADR forecasts. But questions loom. Which segments will remain robust and fruitful? Will the high demand within corporate, for example, begin to ebb with the hotel construction pipeline in full swing supplying more and more inventory in most cities? What subsets within corporate group will continue to drive demand and which ones will be the new emerging provider of group room night opportunities? READ MORE

John Hess

Social responsibility enables a culture of caring within organizations in all sectors of business, including the financial services, manufacturing, and retail industries. At organizations of all sizes, from large Fortune 500 companies to small startups, individual team members find satisfaction in helping others and often appreciate the opportunity to do so, because acting with purpose provides a shared experience that is positive and contagious. As the groups business continues to evolve and sales professionals and corporate planners explore the latest bells and whistles, such as 3-D Selfie Stations, to get meetings attendees engaged and excited. READ MORE

Coming Up In The October Online Hotel Business Review


Feature Focus
Revenue Management: Measuring All Hotel Revenue Streams
Revenue Management is a dynamic and ever-evolving profession and its role is becoming increasingly influential within hotel operations. In some ways, the revenue manager's office is now the functional hub in a hotel. Primarily this is due to the fact that everything a revenue manager does affect every other department. Originally revenue managers based their forecasting and pricing strategies on a Revenue per Available Room (RevPAR) model and some traditional hotels still do. But other more innovative companies have recently adopted a Gross Operating Profit per Available Room (GOPPAR) model which measures performance across all hotel revenue streams. This metric considers revenue from all the profit centers in a hotel - restaurants, bars, spas, conference/groups, golf courses, gaming, etc. - in order to determine the real gross operating profit per room. By fully understanding and appreciating the profit margins in all these areas, as well as knowing the demand for each one during peak or slow periods, the revenue manager can forecast and price rooms more accurately, effectively and profitably. In addition, this information can be shared with general managers, sales managers, controllers, and owners so that they are all aware of and involved in forecasting and pricing strategies. One consequence of a revenue manager's increasing value in hotel operations is a current shortage of talent in this field. Some hotels are being forced to co-source or out-source this specialized function and in the meantime, some university administrators are looking more closely at developing a revenue management curriculum as a strategy for helping the hospitality industry close this gap. The October issue of the Hotel Business Review will address these significant developments and document how some leading hotels are executing their revenue management strategies.