Occupancy and ADR: Which is the biggest influence on a hotel’s bottom line?
Is there any answer more irritating than “there’s no right answer”? Sadly, that’s the case for the hotel industry’s age old question of whether occupancy or average daily rate (ADR) has a greater influence on profitability. There are far too many variables in how a hotel performs, such as control of general costs and additional revenue streams, which are too vast for us to make the bold claim that either is the principle profit driver.
But posing the question certainly brings up some fascinating discussion points. We’ve decided to delve into two case study scenarios that explains the correlation between occupancy, ADR and gross operating profit (GOP) percentage margins. The two example markets below are similar in terms of sample and focus on luxury, upper-upscale and upscale properties.
Let’s take a look at all Market A properties that achieved a GOP percentage margin of 45% and above. How do these compare to the market average?
While occupancy for hotels in the above 45% bracket rose 7.0%, there was a far greater increase in ADR (+42.0%) for those properties, and this can be interpreted as rate having greater influence on profits.
The opposite is true in Market B, where occupancy is more important to hotel profitability than ADR. Hotels in the 45% and above bracket produced a 50% increase on the market average occupancy, while rates increased just 14.3%.
While these are just two basic examples, both highlight the importance for hotels to analyze their own key performance indicators and measure against their market or competitors. By understanding the context, hotels in these scenario markets would better understand where to focus their efforts in order to achieve profitability success.
The end result is that when it comes your hotel’s bottom line, you need to take all revenue streams and expenses into consideration to identify opportunities for growth.