ADR vs RevPAR: Know Your Industry Terms
Learn Industry Terms To Understand The Market Better
If you’re not an expert in the hospitality industry or have never rented out a vacation home before, the amount of industry terms and acronyms you’ll encounter can be a bit overwhelming in the beginning. But the first step to becoming an expert is gaining the basic knowledge and fundamentals, and that’s why we’re starting a blog series titled “Know Your Industry Terms”--to help owners like you to further understand how the short-term rental industry works.
Today, we’ll be covering ADR and RevPAR, two important performance indicators that are often used to gauge the health of the STR industry as a whole and on an individual basis. We’ll dive into what these two terms mean, why they matter, and which one you should pay attention to.
What is ADR?
ADR stands for Average Daily Rate and it refers to the average price that a vacation rental guest pays for a night’s stay. You can find your ADR by dividing your total unit revenue by the total number of nights sold, and ADRs are typically measured on a daily, monthly, quarterly, and yearly basis.
While this number does not give you much insight into your occupancy rate, your rental’s ADR is a good indicator of the average price that guests can reserve your unit for. And although having a high ADR is generally a good thing because it means you’re making higher-than-average revenue for each night sold, pricing your rental at too high of a rate can ultimately sink your occupancy rate and potentially your revenue.
Why Does ADR Matter?
There are many reasons why the vacation rental industry stresses a huge amount of importance on keeping track of your ADR. Not only does this performance indicator help you to measure the success of your short-term rental business, it’s also helpful when comparing your rental to your closest competitors.
Is their ADR higher or lower than yours? If it’s much lower, it might be time to rethink your pricing strategy, for instance. Another reason why ADR matters is because it can help you to track the high and low seasons of your business. During the slower times of year, your rental’s ADR will be much lower than during the busiest seasons, and taking this into account can aid you in revising your pricing strategy to maximize revenue during all seasons of the year.
What is RevPAR?
Another industry term you might’ve seen pop up is RevPAR (sometimes called RevPAL), which stands for Revenue Per Available Room (Revenue Per Available Listing. This performance indicator is a bit more complex than ADR because it takes into account both your ADR and your occupancy rate. In fact, the formula for calculating RevPAR is just that: your ADR multiplied by your occupancy rate. Another formula for RevPAR is to divide your total unit revenue by the number of nights in the period you are measuring–both formulas will give you the same number.
This term draws its roots from the hotel industry, but it has become useful for short-term rental owners and property management companies to measure how much each property, listing, or “available room” is making per night while keeping in mind how the occupancy rate can affect revenue.
What Makes RevPAR So Important?
RevPAR is often used to gauge the health of a vacation rental business and can be a good indicator of the overall revenue you stand to make each year. Like ADR, RevPAR can also aid you in watching out for the average seasonal highs and lows of your short-term rental property in a number that’s simple to understand and accurately reflects your income.
Since this metric takes into account multiple factors like occupancy rate and average daily rate instead of just referring to one single indicator, it is also an important thing to be considered when crafting a smart pricing strategy. RevPAR is typically a good barometer of whether your pricing strategy is benefiting you as well, because you can measure its changes and fluctuations more closely than with ADR alone. The higher you can get your RevPAR the more revenue your property is making.
ADR vs RevPAR: Which is More Important?
While neither of these terms is objectively more important than the other, RevPAR is typically a more accurate and realistic interpretation of your income than ADR when considered in isolation. For example, increasing your ADR does not always mean more revenue. While increasing RevPAR will always mean more revenue.
However, these two industry terms are often used in tandem, so expect that when you read over short-term rental market reports or industry news, both of these numbers will pop up together and can be contextualized better that way. Because ADR has an effect on RevPAR, it’s a good idea to consider both metrics to get a more realistic picture of the industry as a whole and how that will affect your revenue.
Learn More About Becoming an Expert Vacation Rental Owner
Even if you don’t have a head for numbers and formulas, calculating your RevPAR and ADR is not a difficult task, and it’s important to understand what these metrics mean and refer to before diving into industry data. This foundational knowledge can help you to better understand how well your property is performing and track its progress over time, which in turn can aid you in gauging seasonality, the efficacy of your pricing strategy, and countless other useful bits of information.
Excited to learn more about becoming an expert vacation rental owner? Take a look at our guide to winterizing your short-term rental or check out our overview of allowing longer stays at your rental.