This paper presents experimental operation of a heat pump water heater (HPWH) at various draw rates to investigate the effect of tank stratification on system performance. Measurements are made both on refrigerant and water sides. Exergy analysis and mixing coefficient were introduced to characterize tank stratification. Performance is evaluated based on COPsys and recovery efficiency as measures. Results show that with increase of draw rate, stratification worsens causing higher condensing temperature, which results to lower system performance. Three-Dimensional Computational Fluid Dynamics (CFD) method was introduced to describe and explore the thermal tank numerically. The results from experiments for effect of draw rate on stratification agrees with CFD results. Performance of HPWHs is strongly influenced by the thermal stratification in the water tank. Destratification and mixing is more pronounced as draw rate increases. Improvement options are discussed that can improve performance with asymptotic approach to a perfectly stratified tank.