Revenue Management between Displacement Calculation and Analysis

By.  Ahmed Mahmoud 11th Dec 2014

It’s usually a safe bet to assume that any hotel would like to increase its revenue and acquire more profits. High-performing hotels foster a culture of constant improvement and regularly ask, “How can we grow and sustain increasing levels of income?” Revenue growth and exploring new revenue resources is the aim for everyone and it is everyone’s business, so why can’t we make it part of everyone’s daily work routine. Every employee wants to be part of a company’s growth agenda, but most don’t know how. Hotel management needs to provide them with both information and tools, starting with making revenue growth an inherent part of daily conversations, meetings, and presentations.

We have all heard the old motto/pivot of Revenue Management: “Selling the right product, to the right customer, at the right time, at the right price, through the right channel, with the right tools” results in the application of disciplined analytics that predict consumer behavior at the micro-market level and optimize product availability and price to maximize revenue growth.

One of the revenue management tools to make sure you increase your profit is the displacement calculation and analysis, so let us exam what is it and how to use it. What is displacement: in general it could be one of the below:

  1. The action of moving something from its place or position.
  2. The occupation by a submerged body or part of a body of a volume which would otherwise be occupied by a fluid.
  3. The unconscious transfer of an intense emotion from one object to another.
  4. The component of an electric field due to free separated charges, regardless of any polarizing effects.

Based on the above, the displacement in hotel revenue management mean you move or not accept some business and replace it with other business i.e. accept group booking and denial some other group , or accept one group and denial some corporate or retail booking, the accepting or denials will be based on some factors , calculation or analysis .

In a scenario happening everyday with the revenue management team the raised questions are there all the time “Should we take the group with 10 rooms at $200 or the group with 20 rooms at $100? , in other scenario ” Should we take the group of 30 rooms at $250 or we accept our regular corporate and retail business” And yes it is not that easy question to answer, as there are many factors playing a role to make a proper decision i.e. .

  • A- How many nights the groups stay?
  • B- What days of the week they will stay?
  • C- What room types then will choose?
  • D- Is the group linked with F&B activities?
  • E- Is there are any additional revenues attached to the group?
  • F- What is the total group revenue will generate

And here it is the most important question “Do I displace any other business?

Displacement Calculation

Groups displacement: Those revenue people with the proper tools, understanding with knowledge those outsmarting the competition. They might decline many groups, which competition later accepted, because they thought it is ‘good’ business. At the end of the day completion lost money and were behind in RevPAR ranking For revenue management a wrong decision might cost you money, sometimes a lot of money! You have to do some maths before making a decision. A blank excel sheet gets us started as shown below: As it show, we just calculated all expected revenues for each group together and show the difference, so it is very clear the tendency to which group to accept .

Transients Segments Displacement Calculation: The same calculation can be made for the transients segment, with a raise question “are the revenue/sales team contracted non-yieldable segments adding to your bottom line? Or are they displacing revenues that can be generated by selling public transient rates? See the below example:

In a daily scenario if one of your LRA (Last Room Availability) account send a request to books 2 nights arriving 09 March, the hotel will have to accept the reservation. In mean time the hotel receive another request from individual guest for the same period for 2 nights as well, who would the hotel to accept. Let’s say that the account contracted rate is $100. The hotel will lose with that stay $200 (corporate room value minus the BAR rates)

Some revenue managers will say , I would accept the individual request since it is the same stay patterns and generate more revenue , others will say no I should keep my regular LRA account as it is provide the hotel with regular business all the year round ………………., Will leave the answer to your best judgment, but it would be better if a displacement calculation regularly performed on the hotel main accounts to evaluate the revenue gain: revenue displaced on identified dates minus the positive revenue on non constrained dates.

In hotel revenue management it is highly recommended extracting the day by day production of top accounts (Retails, Tour Operators & Wholesalers, Corporate, Consortia, and Groups …….etc) and evaluating day by day the possible displacements.

Transients and Groups Displacement Calculation: Group business is the segment of hotel business that is transacted in a negotiated fashion. Types of group or negotiated business include: Associations (national, regional, governmental, educational, etc.) By their negotiated nature, group bookings are different from transient bookings. For example, groups negotiate blocks of rooms at specified, discounted rates. Group rates are established well in advance of the stay date-often a year in advance or more. Group packages are for blocks of rooms (typically ten or more). Group contracts often stipulate a cut-off date, the last date at which the group can book rooms at their discounted rate. Beyond that date, rooms are booked at the standard transient rate.

It’s critical to create the right mix of negotiated group rate customers and transient customers. Generally, the posted prices offered to transient guests are higher than those offered to groups. Transient guest revenue, however, is not guaranteed.

In the above example we compare 100 group rooms with F&B versus 100 transient rooms. Even though the transient rooms pay an $80 higher rate, but the group including the profit of its F&B components is the more profitable business.

Basic 10 Recommendations for Displacement Calculation

Don’t judge a business on the first sight! Don’t judge a business purely on their room rates! Know your costs to calculate the profit margin. Analyze historic pick up/pace trends from previous year and the lead time vs conversion of your hotel’s group business. Review business on the books to determine top line availability. Review Room Type availability including commitments to wholesale allotments (including materialization levels) and corporate contracted rates. Calculate potential displacement due to the group* (Not only the room revenue generated by the transient business but also their additional spend). Refer to budget/forecast to assess budget/forecast requirements and expectations Consider restrictions over Special Events and periods of high demand Review clients’ past behaviour including previous wash factors and future potential.

Next week we will go in details for the groups and Transients displacement analysis

About  Ahmed Mahmoud

Ahmed Mahmoud has more than a decade of experience in the hospitality industry and business administration, Ahmed began his career early by holding a variety of management positions with such top hotel chains as Accor Hotels, Hyatt International and Starwood hotels. With decades of revenue management experience Ahmed founded the very dedicated site for revenue management news, articles,

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