How to Increase the Average Room Rate (ARR)

In hotel operations, it is not uncommon to find that the actual Average Room Rate (ARR) achieved is lower than the ARR projected in the budget. This raises an important question: what actions should be taken when this occurs, and how can the ARR be improved to reach the budgeted target?

At first glance, the logical solution may seem straightforward—simply increase the room rates for future bookings. However, the next challenge is determining the right magnitude of increase, as well as identifying which segments and periods are most suitable for the adjustment.

If rates are raised reactively and significantly without proper analysis, customers may reject the pricing, leading to a sharp decline in occupancy. Since room rate and occupancy are interdependent, a miscalculated strategy may result in a counterproductive outcome—rather than lifting ARR, it could push it even lower.

Understanding the Concept of “Average”

Before addressing strategies, it is important to revisit the concept of averages. Statistically, an average represents a single value derived from the sum of all data points divided by the total number of values. In a normal distribution, the mean, median, and mode are equal, forming a symmetrical bell-shaped curve.

This implies that some values will always fall above the average and others below it. When higher values are added to the dataset, the average rises; conversely, adding lower values brings the average down. Translating this into ARR, the only way to increase the overall rate is to add transactions priced above the current average.

Identifying the Right Segments for Improvement

The critical question then becomes: which rates, among the many sold, should be increased?

Every hotel develops an annual budget as a benchmark for operational performance. If the actual ARR falls short of the budgeted ARR, the logical step is to compare the actual rates achieved against the budgeted rates. The analysis should focus on identifying which market segments and accounts show actual selling rates below the targeted budget.

Once these underperforming segments are identified, the root causes must be examined. After establishing the underlying issues, the budgeted rates for these segments should be reviewed and adjusted for future periods. A structured analysis will then determine the feasible level of rate increases to apply in upcoming sales strategies.

Continuous Improvement Approach

This is not a one-off exercise but a continuous improvement process. It should be conducted systematically and regularly in line with the Deming Cycle (Plan–Do–Check–Act). By applying this disciplined approach, hotels can manage pricing more strategically, ensuring that ARR moves closer to the targeted levels while maintaining a healthy balance between rate and occupancy.

Written by Ojahan Oppusunggu
Director of Technical & Technology, Artotel Group