What Is Average Room Rate (ARR)?
Average Room Rate (ARR) is the measured value of how much revenue a given hotel can make for a paid rented room in any given time period. ARR is one of the most important metrics in hotel management. It helps managers make decisions about rates, occupancy levels, and even how many rooms to add to their inventory. It is calculated by dividing the total revenue made in the time period by the number of rooms that were occupied during that same time period.
ARR = Total revenue earned by occupied rooms ÷ Total number of rooms occupied
This formula might look very familiar; it is identical to that of Average Daily Rate (ADR). There are key differences between the two, though, that should be addressed before deciding which to use in any given situation.
ARR Versus Average Daily Rate (ADR)
Sometimes, the difference between a hotel’s ARR and ADR can be confusing. It is important to compare the two prior to using them.
Average Room Rate (ARR) is the average rate that a hotel charges to stay in a room over a certain period of time. It is calculated by dividing the total amount of revenue during that time period by the total number of rooms rented out.
Average Daily Rate (ADR) is similar to ARR, but instead of looking at how much was charged in any period of time, ADR divides earnings by rented rooms over only a single day. Applying this formula to any period other than that of a day and night (such as over several days, a week, a month, or more) would make your value the ARR of your hotel rooms, not the ADR.
These two values are essential to the hospitality industry; while knowing your facility’s ADR is useful for micromanaging your rates versus those of your competitors and making fast changes to your hotel’s pricing, ARR allows you to look at the bigger picture. You can track changes across longer periods of time, which is beneficial when analyzing larger trends in hospitality, such as seasonal peaks and troughs.
What Is The Ideal ARR?
The ideal ARR is one that maximizes a hotel chain's revenue and profit, while still maintaining a healthy occupancy rate. If your property’s ARR is too high, you can decrease it by:
- Increasing the number of affordable rooms that you are renting out by adding more rooms with fewer amenities to your hotel
- Reducing rates for specific days (for example, by offering a free breakfast on weekends)
On the other hand, you could increase your property’s ARR by:
- Raising the price of your rooms and/or amenities gradually until you find the right pricing for your hotel that will still retain guests
- Increase the number of deluxe rooms that you are renting out by adding suites offering greater amenities to your property