Modern hotel management requires a robust set of tools and metrics to evaluate and continuously optimize revenue performance, especially in relation to competitors. Among these, the average rate index (ARI) is one of the lesser-known but extremely useful metrics to keep under check.

NB: This is an article from Cloudbeds, one of our Expert Partners

Subscribe to our weekly newsletter and stay up to date

In this article, we explore what ARI is and how to use it to improve revenue performance.

What is the average rate index (ARI)?

The average rate index (ARI) is a metric that allows hoteliers to evaluate the performance of their room rates relative to a group of competitors during a specific period. This index can vary according to the business strategy, and factors impacting it include the average daily rate (ADR), occupancy rate, quality of services offered, marketing strategies, reputation, and more.

How is ARI calculated?

Calculating ARI requires hotels to collect detailed room performance data. Here’s the ARI formula to use:

ARI =  (Hotel ADR / Compset ADR) * 100

ARI is part of a set of three performance indicators that measure hotel revenue performance by comparing it to a competitive set.

The other two indicators are MPI (market penetration index) and RGI (revenue generated index). In order to make the best decisions, it’s important for hotels to measure and track all three indicators to have a full overview of their performance and market.

Market penetration index (MPI)

Market penetration index (MPI) measures the number of rooms sold by a hotel relative to its competitors. Here’s the MPI formula:

MPI = (Hotel Occupancy / Compset Occupancy) * 100

This formula finds the actual market share obtained by dividing the hotel’s occupancy by the competitors’ occupancy. Another metric to look at is the fair market share, obtained by dividing the hotel’s available rooms by the competitors’ available rooms.

The difference between the two is that actual market share measures the market share that the hotel actually obtains, as it is calculated on the basis of actual rooms sold, while fair market share measures a hypothetical market share that would be obtained if all competitive hotels sold all their rooms (it is calculated on the basis of available rooms).

Revenue generation index (RGI)

The other indicator is the revenue generation index (RGI), which measures the efficiency with which a hotel generates revenue relative to its competitors. Here’s the RGI formula:

Revenue Generation Index = (Hotel RevPAR / Compset RevPAR) * 100

RGI compares a hotel’s RevPAR with that of competitors, providing a measure of how effectively the hotel generates revenue.

Read the full article at Cloudbeds