The key to optimizing your company’s performance? It’s all about understanding the Big Three: Occupancy, Average Daily Rate, and Revenue Per Available Rental Night.
Identifying trends in these three key performance indicators – and their relationship to each other – will help you maximize the revenue of individual units and your entire portfolio.
The percentage of nights occupied by guests out of the total nights in the period.
Occupancy rate = Nights sold / total nights
The occupancy rate is a quick and easy look at the percentage of units that are filled by guests. However, it doesn’t account for owner stays or holds. This is why we recommend looking at the available occupancy rate.
Available occupancy rate = Nights sold / (total nights – owner Stays – holds)
High occupancy rates are good. However, if occupancy rates are too high, it’s probably because your rates are too low – which means you’re leaving money on the table. Remember, the higher the occupancy, the more wear and tear your units will endure. It also may not leave adequate time for maintenance. Keep in mind that the goal is to maximize revenue – not merely the occupancy rate. Which is why we also need to pay attention to ADR and RevPAR.
Average Daily Rate (ADR):
The average Unit Revenue paid by guests for all the Nights Sold in a given period.
Average daily rate = Total Unit Revenue / Nights Sold
The occupancy rate is a reflection of how many nights you’ve sold, while ADR is the average of how much you sold them for. High ADR is generally better because it means you’re making more money for every night sold. However, if ADR is too high, your occupancy rate will inevitably drop. Again, the goal is to maximize revenue, not ADR. That’s why we also need to pay attention to RevPAR.
Revenue Per Available Rental Night (RevPAR)
RevPAR takes into account both the average rate at which you booked the property and the number of nights it was booked.
RevPAR = Occupancy x ADR
RevPAR = Total unit revenue / total nights in a given period
ADR and Occupancy are stand-alone metrics, giving you a very limited view of your company’s performance. RevPAR, on the other hand, provides a far more comprehensive view, as it incorporates both rental revenue and occupancy. If you only pay attention to one KPI, pay attention to RevPAR.
Here’s a quick illustration:
Scenario 1: A property’s nightly rate is set to $230 a night and the unit is 100% occupied for available nights, making the RevPAR $230. The revenue for the full year is $83,950.
Scenario 2: The nightly rate for the same property is set to $300 and the unit is 80% occupied for available nights, making the RevPAR $240 (80% Available Occupancy x $300 ADR). The revenue for the full year is $87,600.
If you only look at occupancy, scenario 1 appears preferable and you should set your rate for this unit at $230 a night. However, annual revenue is much lower at that rate. In scenario 2, the unit is priced higher, so you have fewer guests and occupancy is lower – but the annual revenue is much higher.
RevPAR accounts for these critical differences. Moreover, it identifies the scenario that maximizes revenue. And maximizing revenue is the goal.