By far, the most widely used average in the hotel industry is the Average Daily Rate(ADR). The ADR, and its more talented but less famous sister – RevPAR, are elevated to currency status in the monthly comp set ADR index. Unfortunately, while ADR and RevPAR are great measures for investors to look at how one property compares to another, they are almost irrelevant for hotel managers trying to make the great decisions that create long-term value for those same investors. In fact, for most managerial functions, ADR indices do more to obscure problems and opportunities than to reveal them, often allowing unprofitable trends to go completely undetected. Too many hotel companies rely heavily on ADR indices to evaluate the performance of their Revenue Managers, and I have always advocated that this practice is a mistake. In this respect, I often feel like “a voice crying out from the wilderness.” Let me explain, with examples, why relying mostly on ADR indices to reward or penalize an RM’s results is a classic mistake when using averages.
The following grid shows 5 different Revenue Management strategies for one day in a 100 room property that will deliver the same exact ADR and RevPAR, even though they clearly have very different long-term effects on revenue growth. For simplicity, I have assumed that all rooms are available so that ADR and RevPAR are the same. The property market mix is Transients, split into Direct and OTA bookings, FITs and Groups. Let’s take a quick look at the nuances of each strategy that are hidden to those looking only at the ADR/RevPAR.
Strategy A. Sacrificing Group inventory for Transient may lead to better visibility in OTA’s, but is it destroying the Sales department’s ability to offer competitive rates and build relationships with meeting planners?
Strategy B. Having an even mix across channels helps diversify the risk, but is it stifling the growth of Transient channels?
Strategy C. Satisfying group demand is critical for long term growth, but is it limiting Transient foot traffic that will use the outlets and other ancillary?
Strategy D. Eliminating OTAs and FITs cuts out the middle men, but will it destroy your OTA positioning and your relationships with Tour Operators, which you may need when the market softens?
Strategy E. Going strictly Transient may be efficient for the RM, but what does it do for rate positioning and F&B revenue?
We can all agree that each of these strategies is different. Which is the best? That depends on where you want to take your property. Yet the ADR/RevPAR index suggests that each of these strategies is the same. What if each of these strategies were being implemented in five competing hotels? Would it make any sense to use the ADR index to compare how one RM performed versus another? Now add the fact that within one comp set you have properties with different number of rooms, outlets, services, and location and you have no choice but to downgrade the ADR index to what it really is – a one-dimensional indicator of an RM’s achievements.
Averages hide the truth and the monthly ADR index is no exception. Revenue Management is a complicated function and using the ADR index as a barometer of the effectiveness of an RM is a very superficial and dangerous approach to performance evaluation. I understand that this is the easiest(aka “simple”) way to compare one RM against another, but dependence on this average is doing more to destroy profits than to grow it.
Read the first post in this series here.
Author Info: Robert Hernandez is an expert in the field of mathematical Hotel Optimization and Analytics. He has spent the last 17 years building data-driven forecasting and optimization models for companies in over 20 different industries, from tech to tourism. Robert possesses a very unique skill set including cross-disciplinary experience, advanced mathematical and analytics skills, data transformation, industry-specific knowledge and business-process improvement expertise. Robert began his career at the Walt Disney Company in Revenue Planning. Read More+