A longstanding debate in the hospitality industry deals with the question of whether it’s better to have a higher hotel occupancy or higher average daily rate.  Since typically your largest income component and department profitability come from your rooms revenue, this question is of key importance to the hotel operator/owner.  Arguably, it is possible to offset a change/decrease in either rate or occupancy with a corresponding increase in the other.  However, the issue does go a little deeper.

As you drive occupancy up, you increase variable expenses to maintain and supply a room and you increase wear and tear on your property.  However, subject to the property type and availability of various amenities, higher occupancy means increased revenue opportunities throughout the hotel.  With a solid understanding of the typical revenue generated per occupied room, one is in a better position to predict the financial impact of increased occupancy in the hotel. 

Yet, one needs to dig deeper to fully understand the impact.  If lowering rate to drive occupancy is the strategy, one needs to consider potential changes in the both the classification of guest and the type of guest.  Spending patterns may vary significantly between a guest attending a conference, one on a per diem account and a leisure guest.  Rate versus occupancy strategies should always include a close look at the historical revenue patterns by guest segment if available.  Other indirect considerations should include the potential benefit in attracting new guests to a property. Provided that the experience is an overall positive one, attracting new guests can have residual benefits to future bookings.  The trade off here is a potential negative impact on the guest experience if higher occupancy changes the ambiance of the property or quality of experience.  Higher density means potentially less availability of services, more noise and more challenges to your staff.  In short, there is no easy answer to which is better.  The safest bet is knowing one’s property, its guests and their spending habits and the reasons your property attracts guests in the first place.  My personal recommendation is to always focus on profitability, acknowledging that rate and occupancy are merely part of the equation.

-Paul Reitz

Paul Reitz, CCIM is Senior Vice President of Investment Services at NAI Global and is a hospitality specialist in NAI Global’s Special Asset Solutions and Investment Services groups.