What is an Occupancy Rate?

Occupancy rate is one of the global hotel industry’s foundational performance metrics, showing the percentage of rooms occupied in a property, segment or geographic area for any given time. The objective of successful revenue management is to achieve the optimal occupancy level for driving growth in revenue per available room (RevPAR) and profitability.  

Factors that influence occupancy rate

There are a wide range of factors that can impact occupancy levels in a property, market, submarket, etc. For example, the presence of events can lead to surges in demand, which in turn increase occupancy levels. Major concert tours in Dublin during the summer of 2022 provided a nice case study on the influences of major events on occupancy rate. On the negative side, substantial supply growth in an area can bring occupancy levels down even while market demand continues to grow.   

Another factor to be considered at the property-level is the size and type of a hotel. Generally, it is more difficult to fill a large hotel every day than a smaller one. Thus, occupancy rates tend to be higher in smaller properties, due to the significant difference in rooms that need to be sold. The same principle applies to luxury properties that typically have higher rates and target a narrower market; therefore, this can result in lower occupancy rates compared to other types of properties.

In this educational piece, STR will break down this metric to highlight how it can be used, important considerations when reviewing your rates, how occupancy differs from other metrics, and ways to improve the performance of this KPI.

What is the formula for occupancy rate?

Occupancy rate is calculated by dividing the total number of occupied rooms by the total number of rooms available. In other words, divide demand by supply. 

• Example: Property A had 100 rooms available last night and managed to sell 80. Property A’s occupancy rate was 80%. 
• Example: Property B had 20 rooms available last night and sold 19. Property B’s occupancy rate was 95%. 

Occupancy vs. average daily rate

Occupancy rate is a significant performance indicator for hoteliers to track and balance alongside other key metrics. Monitoring ADR provides insights into the average price in which a room was sold on any given night. The objective is to obtain the highest room revenues by balancing occupancy and ADR with operating costs to increase profit margins. A common mistake is pricing rooms too low in order to attract more demand (occupancy). Although this scenario could lead to a strong occupancy percentage for a hotel, the financial implications would be negative overall due to higher operating (variable) costs. Discover more about average daily rate in a previous blog post. 

Occupancy rate vs. revenue per available room

Occupancy and average daily rate combine to produce the third top-line KPI: RevPAR. Revenue Per Available Room allows you to have a strong understanding of the contributing impacts of both occupancy and average daily rate. As neither occupancy nor ADR independently provide insight into the performance of a hotel, RevPAR does provide that understanding. Understanding the factors and decisions that led to a certain time period's RevPAR can only be achieved by digging into the component parts of occupancy and ADR.

Why is occupancy rate important?

Having an awareness of your occupancy rate is essential when it comes to managing the success of your property. With the primary objective of any hotel being to sell room nights, occupancy remains in its purest form a great way to understand if that goal has been met. However, it is important to be mindful of the fact that occupancy alone does not provide the full picture as to the overall profitability of the hotel.

To gain this insight, attention must also be given to the revenue-related metrics like ADR and RevPAR and then profitability metrics such as total revenue per available room (TrevPAR) and gross operating profit per available room (GOPPAR). These additional KPIs will provide the necessary financial breakdown needed to see the overall picture. By having an understanding of all performance indicators, you are most effectively positioned to enhance the performance of your property or portfolio.

What is a good occupancy rate?

While market averages can be used as benchmarks, there isn’t one answer to that question. A “good occupancy rate” is usually determined at a property-level with factors such as location, hotel service level, local competition, customer segmentation and market demand trends all contributing to the conversation. Desired occupancy levels come through day-by-day forecasting to first gauge a hotel's demand patterns. Resulting levels are then compared against comp set and market performance for previous periods. From there, a hotel can re-strategize (via product offerings, customer segmentation, and price) to obtain a higher, or in some cases, lower occupancy. 

Ways to improve occupancy rates

There are a variety of methods that can be used to improve occupancy rates:

• Benchmark historical and forward-looking occupancy data. How do you know if your recent occupancy or occupancy on the books is good if you don’t know your competition’s levels?
• Be aware of market trends and the events calendar. Are you trading ahead or behind the competition? Which days of week, months or seasons provide opportunity for further growth?
• Understand your guest segments and generate the demand mix that works for you. What are the underlying factors behind changes in demand and rate? Is there a shift in transient or group demand sources occurring?
• Provide special offerings or packages.
• Remain mindful of your hotel’s location when targeting guests.