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.

Choose a Social Network!

The social network you are looking for is not available.

Close

Hotel Newswire Headlines Feed  

Coming up in May 2018...

Eco-Friendly Practices: The Greening of Your Bottom Line

There are strong moral and ethical reasons why a hotel should incorporate eco-friendly practices into their business but it is also becoming abundantly clear that “going green” can dramatically improve a hotel's bottom line. When energy-saving measures are introduced - fluorescent bulbs, ceiling fans, linen cards, lights out cards, motion sensors for all public spaces, and energy management systems - energy bills are substantially reduced. When water-saving equipment is introduced - low-flow showerheads, low-flow toilets, waterless urinals, and serving water only on request in restaurants - water bills are also considerably reduced. Waste hauling is another major expense which can be lowered through recycling efforts and by avoiding wastefully-packaged products. Vendors can be asked to deliver products in minimal wrapping, and to deliver products one day, and pick up the packaging materials the next day - generating substantial savings. In addition, renewable sources of energy (solar, geothermal, wind, etc.) have substantially improved the economics of using alternative energies at the property level. There are other compelling reasons to initiate sustainability practices in their operation. Being green means guests and staff are healthier, which can lead to an increase in staff retention, as well as increased business from health conscious guests. Also, sooner or later, all properties will be sold, and green hotels will command a higher price due to its energy efficiencies. Finally, some hotels qualify for tax credits, subsidies and rebates from local, regional and federal governments for the eco-friendly investments they've made in their hotels. The May issue of the Hotel Business Review will document how some hotels are integrating sustainable practices into their operations and how their hotels are benefiting from them.