Do you want to break the code on ADR Breakage?
To an outsider, the revenue manager’s lexicon may often seem like a confusing amalgamation of newspeak, decipherable only with a Ouija glass or enigma machine. Examples that spring to mind are “perfect sell”, “fenced”, “OTB”, “BAR”, and “OTA” just to name a few.
A term that fits firmly in that category is the ever inscrutable “ADR breakage”. Luckily I am here to help you understand this term once and for all.
“So, what is ADR breakage?”
In regards to the hotel revenue manager’s trade, ADR breakage is simply the actualized rate of business that has booked or is booking vs. the established rate for the arrival date in question at the time of observation.
“So, why use ‘ADR breakage’?”
ADR breakage has the advantage of being a powerful concept that is quick to learn, and doesn’t take a large amount of calculation to begin wielding when reviewing whether your strategy is working.
Let’s look at a few quick examples and see if you can see the significance of what the ADR breakage signals. In the examples below, keep a close eye on a few key columns: first look at the volume of room nights picked up in the past 7 days in the ‘Rooms’ column of the 7 Day Pickup section. Next, look at the ADR column under the 7-day pickup section. After noting those two data points, see how it compares to that the hotel’s BAR or RACK structure for that corresponding night in the right-most column.
In the first example, note the extremes between the ADR of rooms picked up in the past 7 days, in comparison with the higher BAR structure. “HOW IS THIS POSSIBLE!?” you frantically shriek as beads of sweat form on your brow, the concept of breakage completely blowing your mind.
Typically, extremely high breakage signals such high resistance to BAR rates, that guests are forced to book outside of traditional unfenced discounts, and full retail rate plans, and are now booking using a rewards rates, employee rates, friends and family benefits, and opaque channels. This is most common in hotels that are grossly over-priced and not cognizant of the market mix of the rooms picking up.
In this second (and less common) example, there seems to be little-to-no resistance to the BAR rate to the point that there are a few nights where the ADR of the rooms picked up is above the hotel’s BAR rate. “What could possibly be booking at these rates?” you meekly say, your voice now raspy and thin, as you lie exhausted on the ground in utter awe and obeisance of how mighty and powerful this new concept of ADR breakage truly is.
This usually happens under two circumstances: the first and most common being hotels with corporate accounts that are priced high, and a limited leisure market that forces hotels to dip their BAR rates below their negotiated rates to fight for leisure and group business. This is more common than one may think, and can be a headache when corporate guests and negotiated groups shop the hotel online and learn they aren’t getting the best value. The second reason why this may happen is when the hotel is simply under-priced in a market with a normal market mix. Since there is very little resistance to the BAR rate, this signals that guests are comfortable paying for premium room-types and rate plans such as points packages and other value adds.
In this final example, one can see that there is a much healthier balance between the ADR of rooms picked up and the BAR structure in place. “This looks right! This looks like business I want booking at my hotel!”, you shout at a near deafening volume, your voice quivering and breaking, finally turning into a sickening and maniacal cackle as your mind finally and completely explodes, now realizing the limitless power you now yield as a revenue manager who understands breakage.
This level of healthy breakage signals that there is a desirable mix of full retail, qualified discount, and corporate business, and that the volume of pickup is such that the negative effect of low rated rewards nights and opaque rates are minimized (if they are being accepted at all).
After having a complete existential meltdown, you will now want to know how to calculate breakage. Luckily this is simple:
Rate or ADR of business booked ÷ Unrestricted BAR rate
…if 10 rooms pick up for tonight at an ADR of $89 and your BAR is $109…
Breakage = $89 ÷ $109 or 81.7%
…if 1 room picks a premium suite at $169 and your BAR is $129…
Breakage = $169 ÷ $129 or 131%
I think that I should include one word of caution before you bring breakage to the table at your next revenue call. ADR breakage is something of a soft metric. Just as your BAR strategy is constantly changing; your breakage will always change. Use it to gauge whether your strategy is working, but always try new strategies and take a note of what it does to your breakage. Aiming for 100% ADR breakage is a goal, but something that will be virtually impossible to achieve.
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