Average Daily Rate (ADR): Definition, Formula & Calculation

KEY TAKEAWAYS

• ADR (average daily rate) is an effective tool for maximizing revenues within the hospitality industry.
• ADR takes consideration of the total revenue generated by all occupied rooms at a hotel or other lodging business. To calculate the ADR, the total revenue gets divided by the total occupied rooms over a time period.
• ADR includes only occupied rooms, not all empty and occupied combined.

What Is the Average Daily Rate?

ADR (Average Daily Rate) is a key performance indicator used in the hotel industry to gauge the strength of revenue generated. It is the sum of all revenues from a hotel or lodge divided by the number of rooms occupied over a period. It’s a simple average that shows how much revenue you generate for each occupied room.

Why Is Average Daily Rate Important?

The average daily rate can be compared across various time periods, as well as to a group of peers. This allows the hotel operators or managers to identify key trends and emerging challenges. Moreover, this key performance metric helps determine the need for a change in business strategy.

ADR is ideal for initiating strategic decisions. This can include promotions that boost hotel occupancy or raise rates to maximize revenue.

Also, the daily rate formula measures how each geographical stratum performs with revenue generation. We must choose peers that are closely related in size, location, clientele, and clientele to make a prudent comparison.

Compared to competitors, a lower average daily rate can help the company to understand what needs to change. Perhaps occupancy increased due to a promotion, but the revenue per room was smaller.

It could also be that prices per room are very high. This leads to reduced occupancy and optically high ADR.

Calculating ADR

First, let’s imagine that there are two 100-room hotels. One is the Sleepy Retreat; the other is the Rise & Shine Inn. 

To help keep things simple, we’ll assume both hotels in this example achieve 80 rooms occupied on a given day. And each hotel’s rooms are the exact same design and layout. For the Sleepy Retreat, the daily revenue is $10,000.

So if the total daily revenue equals $10,000, and the number of occupied rooms equals 80, then the average daily rate equals $125. We achieve this number by taking $10,000 and dividing it by 80. Therefore:

Or

10,000 ÷ 80 = 125

Of course, this figure doesn’t do a whole lot for us by itself. We need to compare it with the ADR from the day before. So if yesterday’s ADR came out to 100, we can tell how efficiently each day provided services to customers.

But what if the Rise & Shine Inn reports a $200 ADR for the previous day? Obviously, your competitor offers something you don’t. Now you need to know why and make the necessary adjustments.

Summary

Think of ADR calculation as a hotel room rate calculator. Without this invaluable calculation, hotel owners have to work harder to determine their success or failure. Moreover, ADR is key in providing important data for other areas of the business. This popular metric gives a clearer picture of current market trends in the hotel business.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.