Use 3 KPIs to improve your company's revenue management.
Understanding Adjusted Paid Occupancy, Average Daily Rate, and Adjusted Revenue Per Available Rental Night is the key to maximizing your company’s performance. Paying attention to their trends and the relationship between them will help you maximize the revenue of both your entire portfolio and individual units. Here’s what each means and the basics of using them to create an effective revenue management strategy.
Adjusted Paid Occupancy
The percentage of nights occupied by guests out of the total nights available for guests to book in the period.
Practical Example: If a single property has 11 owner nights in a 31 day month, it has 20 nights available for guests to book (Nights Available). If a guest books a 5-night stay in this unit (Guest Nights) and the remaining 15 nights remain open, the Adjusted Paid Occupancy % for this property will be 25% for this month (5 Guest Nights / 20 Nights Available)
Adjusted Paid Occupancy rate = Guest Nights / Nights Available
High occupancy rates are good but if occupancy rates are too high, this could be a reflection that your rates are too low and you’re leaving money on the table. High occupancy also creates wear and tear on your units and may not leave adequate time for maintenance. Keep in mind that the goal is to maximize revenue, not the occupancy rate. Which is why we also need to pay attention to ADR and Adjusted 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 and ADR is a reflection of how much money 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 start to drop. Again, keep in mind that the goal is to maximize revenue, not ADR. That’s why we also need to pay attention to the Adjusted RevPAR.
Adjusted 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 = Adjusted Paid Occupancy x ADR
- RevPAR = Total unit revenue / total nights in a given period
Compared to ADR or Adjusted Paid Occupancy as stand-alone metrics, the Adjusted RevPAR provides a more complete measure of your company’s performance by giving you an overall picture of both rental revenue and occupancy. If you only pay attention to one KPI, Adjusted RevPAR is the safest bet.
Here’s a quick example to illustrate this:
Scenario 1: A property’s nightly rate is set to $230 a night and the unit is 100% occupied for available nights, making the Adjusted 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 Adjusted RevPAR $240 (80% Available Occupancy x $300 ADR). The revenue for the full year is $87,600.
If you only look at occupancy, scenario one is clearly better and you should set your rate for this unit to $230 a night. However, annual revenue is much lower at that rate. In scenario two, the unit is priced higher so you have fewer guests and occupancy is lower but the annual revenue is much higher. Adjusted RevPAR reflects those differences and is higher in the scenario that maximizes revenue. After all, the goal is to maximize revenue, not occupancy or ADR!