The Revenue-Occupancy myth

One of the biggest misconceptions in hotel revenue management is that achieving high occupancy is the ultimate goal. This approach, often referred to as the "heads in beds" strategy, aims to fill as many rooms as possible, sometimes at the cost of lowering rates significantly. While this strategy might keep rooms occupied, it can have a detrimental impact on the overall revenue performance of a property.

Focusing solely on occupancy overlooks the importance of maximising revenue per available room (RevPAR), a critical metric in the hospitality industry. RevPAR is the product of occupancy and ADR, meaning that even if occupancy is lower, higher rates can still generate significant revenue. As experts note, "A high ADR isn't worth much if a hotel is empty. Conversely, high occupancy and a low average rate rarely maximise an asset's potential".

ADR and profitability

There’s a clear relationship between raising ADR and improving profitability. Research shows that even small increases in ADR can lead to substantial revenue growth, especially if occupancy levels remain above a minimum threshold. A 5% increase in ADR, even with a 5% drop in occupancy, can still lead to higher overall profitability .? This is because higher-paying guests are typically less price-sensitive and more likely to spend on ancillary services such as dining, spa treatments, and events during their stay .

In fact, focusing on high occupancy at low rates can harm a hotel’s bottom line. Lower room rates attract more cost-conscious guests, who are less likely to spend on these ancillary services. Moreover, a full hotel with low-paying guests increases variable costs such as cleaning and staff without significantly improving profit margins .?

The role of technology and data in pricing

Modern revenue management systems (RMS) have transformed how hotels approach pricing. These tools allow revenue managers to make data-driven decisions by analysing historical performance, competitor rates, market conditions, and demand forecasts in real-time. With these insights, hotels can confidently raise rates, knowing when and how to adjust pricing without sacrificing too much occupancy.

By embracing dynamic pricing models, revenue managers can tailor rates to specific segments and booking windows, adjusting them in real time based on demand. For example, during high-demand periods, they can raise prices without fear of losing significant occupancy. Conversely, during low-demand periods, managers can target more price-sensitive customers with special offers that add value without simply slashing room rates.

Overcoming the fear of higher prices

Despite the clear advantages of increasing ADR, many revenue managers remain hesitant to do so due to a fear of reduced occupancy. However, this reluctance is often unfounded. Historical data shows that many guests prioritise value and experience over price. If a hotel can deliver a superior guest experience—through personalised service, exceptional amenities, or unique offerings—guests will be willing to pay more for their stay.

Moreover, low occupancy isn’t always detrimental if revenue remains high. High-value guests, who are less sensitive to price increases, often stay longer and spend more on services. As one industry expert put it, “A 90% occupancy rate at a discounted price often generates less revenue than a 70% occupancy rate at a higher price”.

The big picture: Profitability over occupancy

Ultimately, revenue managers need to shift their mindset from focusing purely on occupancy to focusing on overall profitability. RevPAR, and even gross operating profit per available room (GOPPAR), should become the central metrics for evaluating a hotel’s success. By balancing room rates with occupancy and ancillary revenue opportunities, hotels can find the sweet spot that maximises profit without sacrificing too much on either front.

Hotels that focus on strategic pricing, rather than filling rooms at any cost, are better positioned for long-term success. Revenue managers must learn to let go of the fear of higher rates and instead trust in the data-driven insights and modern tools at their disposal. As the hospitality industry becomes increasingly complex and competitive, those who can navigate this balance will ultimately thrive.

Final thought:? embrace strategic rate increases

In today’s competitive hospitality landscape, revenue managers should not be afraid to raise room rates, even if it leads to a temporary dip in occupancy. By focusing on maximising RevPAR and profitability through strategic rate management, hotels can improve their overall financial performance. Leveraging advanced RMS technology and data-driven insights, hotels can confidently adjust their pricing to capture the most valuable guests and increase revenue, even in low-occupancy scenarios.

By letting go of the old belief that occupancy is king and embracing the power of strategic rate increases, revenue managers can lead their hotels to greater profitability and long-term success.