By Dr. Gabor Forgacs
The previous methods of ADR (Average Daily Rate) calculations are not good enough any longer. In the fast-paced world of the hotel industry the ecosystem of distribution channels and methods is evolving fairly rapidly and we need to reflect that in our ADR calculations. We need to separately calculate an external ADR from guest-paid room rates and an internal ADR from hotel-collected net room rates in order to come to terms with some fundamental measurement challenges.
Hotels compete hard and their performance for cost efficient sales and room rate maximization is under the microscope. Today as a result of successfully digitizing all points of interaction with customers, we can accurately measure relatable costs: there is a data trail everywhere that can be analyzed. The new term “guest acquisition cost” that has to be factored in now, was not even a widely used term a decade ago.
As a conversation starter: is ADR the ultimate measure? Well, maybe there is more in room rate metrics than what meets the eye. Imagine if someone proposed that getting the right footwear is the only key to success for marathoners. This proposal, substantiated with a detailed discussion into the particulars of the different makes and models plus how to select the proper shoe may even get accepted by many as all-important. There is no doubt: getting the right running shoe is pretty important for long distance runners. However, it is obvious that success for marathon runners requires a lot more than just picking the right pair of running shoes. There is so much more a runner needs to do in order to becoming a contender.
How does the above relate to Room Rate Metrics for hotels? Well, one can get baffled with the too narrow approach of some revenue professionals just as well, who tend to think about the exclusive significance of ADR in a similar manner like the running shoe advocates. Can it be seriously proposed that hotel profitability would be maximized if only the room rate, the most important variable could be optimized to perfection? However important room rates can be there is so much more for revenue professionals to work with in addition to ADR.
Consider the concept of Total Hotel Revenue Management to start with. Revenue generated through revenue streams other than rooms could also improve a hotel’s revenue performance. And it’s not just gambling revenue that comes to mind. We may even discount room rates on occasion if function space, catering, spa or food and beverage revenues provide sufficient contribution margins to compensate for the compressed margin on rooms. Some bundles are developed like that since the early years of the business. ADR management matters a lot, but there is good money to be made outside the room division as well.
Another strategic approach to consider is called Distribution Channel Management. As the cost of connecting and transacting with customers is growing faster than sell rates, mastering channel mix and the numbers related to channel production versus channel costs can be critical for margins. This brings me to the discussion of Revenue Metrics. Setting and managing room rates are important and properly calculating a Room Revenue Metric like ADR is just as essential when it comes to accurately measuring hotel performance.
The accuracy plus the method how ADR gets calculated are crucial and they are evolving. There was a time decades ago when posted room rates were the only rates to work with for ADR calculation. However, the way hotels post and distribute their value propositions have fundamentally changed over the years and we can’t ignore the growing spread between external and internal measures: guest-facing room rates and net room rates, which are the room rates a hotel would actually be able to collect after all distribution costs are paid out are very different amounts these days. And the spread between these guest –paid sell rates and hotel-collected net room rates is growing lately according to great market studies championed by Kalibri Labs, authored by Cindy Estis Green and Mark V. Lomanno. They point out the decline in hotels’ revenue capture based on comparing 2015 to 2014 US hotel industry aggregate data.
It is a fair question to ask: if we have two separate ADRs which one is the right one to work with? Is it the guest-paid ADR or the hotel-collected ADR one has to use as a hotel performance metric? The answer is fairly simple: one needs both. In order to avoid confusion and tell them apart we need to see what exactly can we learn from them? In order to understand which one is to be factored in for what calculation and for the sake of consistency our Revenue Metrics analysis needs to clarify: what exactly are we going to measure?
Should we measure external data for market performance we have to work with the ADR that the customer sees on the open market and pays when he/she books a stay. This sell rate is the ADR offered by STR (Smith Travel Research) and other market data reports. This guest-facing ADR offers a chance for a hotel to see how a given property compares to competition room rates within a comp set. The guest-facing ADR is the one factored in for external revenue performance calculation let that be a fair-share metric or a comp set REVPAR penetration index – both meaningful in their own right, where the fair-share calculation compares performance to a subject hotel’s capacity share within a comp set, while a REVPAR index compares a subject hotel’s REVPAR to market average.
The external room rate that guests pay is a higher amount than the actual net room rate a hotel receives after the related guest acquisition costs (agency commissions plus a variety of transaction fees and charges) are subtracted. One can only wish if there was a simple formula to calculate net ADR but there is none. There are too many variables to work with and each hotel might have their own arrangements for CPC (Cost Per Click), CPA (Cost Per Acquisition), key-word bids, search marketing, commission fees, central reservation, call center, brand.com charges, opaque mark-downs and the list can go on. Each hotel has to work out its own set of cost items, knowing that inputs may vary on a weekly or even daily basis.
When the objective is the calculation of the profitability of a given hotel one needs to work with internal metrics. Net ADR is the one that the hotel collects. This number helps owners and their agents called Asset Managers, investors and potential buyers in figuring out the income generating potential of a hotel. This net ADR is a foundation of net revenue and margin calculation, cash flow generation and even appraisal.
In short: when one looks at the open market and works with ADR that a guest would see before a booking decision is made, external or guest-facing ADR is the data to work with. However, this dollar amount is not what a service provider actually gets. When one needs to measure the income generation of a given hotel net ADR or hotel-collected ADR is the right choice.
In closing I just can’t resist the temptation to mention there are exceptions to each rule: there are marathoners without shoes and hotels that don’t ever change their room rate. I remember as a kid, we were stunned watching an Ethiopian marathon runner called Bikila Abebe winning gold at the Olympic Games in Rome in 1960 running barefoot and beating everybody while setting a new world record. Talking about room rates: there is a small young Canadian hotel brand named Alt Hotels that is a sub-brand of the Le Germain Hotels. Each Alt hotel has a flat rate. All year. That means an Alt hotel offers the same room rate on each day of the year and they prefer direct booking. Bikila (1932-1973) the unforgettable champion from Ethiopia never had a chance to stay in one.