What is Average Room Rate (ARR)?
The Average Room Rate (ARR) is a critical key performance indicator (KPI) used in the hospitality industry to measure the average price paid per occupied room over a specific period of time. While often used interchangeably with Average Daily Rate (ADR), ARR typically refers to longer durations (such as weekly or monthly averages), whereas ADR is strictly calculated on a daily basis.
Hotel managers and revenue strategists use this metric to track room pricing trends, forecast future revenue, and measure the effectiveness of their pricing strategies against competitors.
How to Calculate Average Room Rate
The formula for calculating ARR is straightforward but requires accurate data regarding room revenue and occupancy counts.
Where:
- Total Room Revenue: The gross revenue generated strictly from room charges (excluding food, beverage, and other ancillary services).
- Total Rooms Sold: The actual number of rooms occupied by paying guests during the same period.
Example Calculation
Imagine a boutique hotel generates $45,000 in room revenue over a week. During that same week, they successfully rented out 300 room nights.
Using the formula:
- Revenue: $45,000
- Rooms Sold: 300
- Calculation: $45,000 / 300 = $150.00
The Average Room Rate for that week is $150.00.
Why is ARR Important?
Monitoring your ARR helps in several areas of hotel management:
- Competitor Benchmarking: It allows you to see how your pricing stacks up against direct competitors in your local market (the Compset).
- Revenue Management: By analyzing ARR alongside Occupancy Rates, you can calculate RevPAR (Revenue Per Available Room), which provides a more holistic view of financial health.
- Strategic Pricing: If occupancy is high but ARR is low, you may be underpricing your rooms. Conversely, high ARR with low occupancy suggests overpricing.
ARR vs. RevPAR
It is important not to confuse ARR with RevPAR. ARR only considers rooms that were actually sold. RevPAR considers the total inventory of rooms available, regardless of whether they were sold or not. To maximize profitability, a hotel must balance increasing their Average Room Rate without significantly sacrificing their Occupancy Rate.