# Displacement Analysis – Go for Profit!

By. Uwe Gundlach 28th Nov 2013

Should I take the group with 10 rooms at \$200 or the group with 20 rooms at \$100? Most revenue managers ask themselves that particular question every day – at least once. And, it is not that easy to answer, as there are many factors playing a role to make a proper decision.

Any additional revenues attached to each group?

Do I displace any other business?

How many nights they stay?

What is the total revenue of each group?

Just to mention some of the questions you should ask yourself before making a decision. A wrong decision might cost you money, sometimes a lot of money! Those revenue people with the proper tools , understanding and knowledge are those outsmarting the competition. I declined many groups, which my competition later took, because they thought it is ‘good’ business. At the end of the day they lost money and were behind in RevPAR ranking.

You have to do some maths before making a decision. A blank excel sheet gets us started!

That would be a very basic displacement analysis, but it shows you already a tendency which group to take. What we did? We just calculated all expected revenues for each group together and see now that Group 1 brings you \$2,400 in total and Group 2 would make \$ 2,600 total revenues.

How would it look like if you consider the profit margin as well?

Let’s say we have Group 1 joining the dinner buffet at a food cost of 25% and Group 2 has a cost of 50% for their meeting. Both would contribute the same amount of revenues!

If we consider now the fixed room cost per night; What do you think how it will look like?

Example 3: Group 1 takes only standard rooms at a lower rate, but also with a lower fixed room cost of \$15 a night and Group 2 books only suites, which have a fixed room cost of \$40 per night. And suddenly Group 2 is the less interesting and less revenue / profit distributing business of both. As you can see over the last three scenarios Group 2 went from our ‘favorite’ business over equal with Group 1 to less ‘favorite’, because of the costs we have of doing business.

Don’t make the mistake and use only our first example! Let others do this mistake and let you benefit from it, by being smarter and more detailed.

I could extend this table now with multiple nights stay, cost of commission (travel agency request), different room types… It has endless options! BUT it is worth to do your analysis.

### TIP 1: Don’t judge a business on the first sight!

Another scenario doing your displacement analysis would be versus transient business. In many hotels transient business is higher priced as groups. By taking a group you might displace higher priced segments and therefore loose cash or profit!

In the above example we compare 50 group rooms with F&B versus 50 transient rooms. Even though the transient rooms pay a \$40 higher rate, the group including the profit of its F&B components is the more profitable business.

### TIP 2: Don’t judge a business purely on their room rates!

Besides knowing your costs to calculate the profit margin, there is another more important factor for a successful decision making! Forecasting

The more accurate your forecasting in all aspects is, the more accurate and successful are your displacement analyses!

As you can see in the group comparison analysis – one group might be more attractive than the other or transient business might be more attractive than the group business, but if you have your forecasting in place, you might be able to take both businesses without displacing anything!

### TIP 3: Have your forecasting in place!

The key to success is knowledge! The displacement analysis is a tool to proof and judge the profitability!

If all factors are in place you will only take the most profitable business from now onwards and you will outsmart your competition!

And you can see – a very simple excel calculation can make a huge difference!