money burning reflecting importance of displacement analysis to ensure revenue is not lost

The dilemma in question has a formal name: displacement analysis.
This is a calculation to determine the value of a group booking versus how much revenue would be generated by transient bookings and walk-ins.

NB: This is an article from Lighthouse

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The key metric in such an analysis is displacement: the revenue potential lost – or displaced – by a hotel, incurred by accepting one booking over a competing opportunity.

Based on the relative numbers in your analysis, you can then decide whether to accept the group business.

But it’s not as simple as that because, crucially, how many individuals might book and how much they’ll pay are unknowns requiring further analysis. And you also have to consider the total value by adding extra items like food, drink and hiring meeting space to your basic room rates – remembering to deduct costs.

It should now be clear from this introduction how this could affect your bottom line but we’ll emphasize the point: it’s a lot.

We’ll come on to how you can determine informed estimates of these unknowns but before we do, let’s reflect on some common displacement-related scenarios:

  • Group bookings – this is the ‘bird in the hand’
  • Transient business – not guaranteed but can be more profitable
  • Shoulder night displacement – this prevents later-booking travelers from booking roll-on nights
  • Last room availability contracts
  • Local negotiated rate (LNR) corporate account bookings

Why displacement analysis is essential for hoteliers

Quite simply, there’s one primary responsibility of a revenue manager and his or her team: optimizing bookings and maximizing revenue.

The examples we give above illustrate how often potential displacement might occur, and when it does, this calls for displacement analysis. Without it, you can’t make reliable decisions on whether to take group bookings.

Sometimes you will take them, of course. But you need to be sure that you’re not more likely than not to miss out on more lucrative business.

Consider these benefits of conducting displacement analysis:

  • Decisions are grounded in logic and data
  • You can explain your decisions to your colleagues
  • You’re more likely to keep rooms free for transient bookings, which keeps more travelers happy
  • Familiarity with historical data, which you’ll gain from these analyses, is a good thing in its own right
  • Done right, you will, on average increase your revenue

How to conduct a hotel displacement analysis

In an increasingly fluid hotel industry, determining the best room rates has become more complex than ever.

Your pricing strategy can be influenced by a myriad of factors – from monitoring multiple channel partners, keeping tabs on competition, adapting to evolving traveler trends, to scrutinizing demand forecasts. Below are three pivotal factors to consider.

At the end of this section, we reproduce the displacement analysis formula, showing that each term on the right-hand side of the equation is quite simple to understand, at least in theory; there’s no complicated mathematics involved.

What is complicated, though, is that unlike one side – group value, where you’ll have most of the numbers at your fingertips – with displacement cost, the other side, you’re reliant on speculation.

Improving the accuracy and reliability of your speculation is where the first two sets of considerations in this section come in. Let’s consider these before we look at the formula itself or weigh up group versus individual bookings.

Read the full article at Lighthouse