In revenue management, the optimal utilization of available room capacity is crucial. One of the key methods for making the most profitable business decision is displacement analysis. But what exactly does it entail, and why is it so important for the hospitality industry?
What is Displacement Analysis?
Displacement analysis helps hotels determine the most economically viable allocation of their rooms. It examines whether a group booking or a mix of individual business and leisure travelers over a certain period generates higher total revenue. The goal is to weigh whether accepting a large group booking might displace more lucrative individual reservations – and vice versa.
The Key Question: Group Booking or Individual Guests?
Let’s consider the following scenario: A hotel receives a request for a group of 30 people who want to stay for three nights. The decision to accept this booking depends on several factors:
- Group Rate: What is the achievable price per night and room for the group?
- Additional Revenue: What additional income is generated through F&B, meeting rooms, or other services?
- Displacement Effect: Will the group booking displace higher-paying individual guests? If so, how many?
- Margin and Costs: What costs arise from accommodating the group compared to individual guests? This includes profit margins for F&B, room rental, commissions, etc.
Calculation of Displacement Analysis
A hotel calculates the potential revenue loss from displaced individual guests and compares it to the total revenue generated by the group booking. A detailed calculation can be structured as follows:
Step 1: Calculate Group Revenue
Group Revenue = Number of Rooms * Length of Stay * Group Rate
Step 2: Additional Revenue from the Group
Additional Revenue = Revenue from F&B + Meeting Rooms + Other Services
Step 3: Revenue Loss from Displaced Individual Guests
Displaced Revenue = Number of Displaced Rooms * Length of Stay * Average Daily Rate (ADR) of Individual Guests
Step 4: Variable Costs of the Group
Variable Costs = Number of Group Nights * Average Variable Cost per Room
Step 5: Calculate Net Profit
Net Profit from the Group = (Group Revenue + Additional Revenue) – (Displaced Revenue + Variable Costs)
If the net profit from the group is higher than the potential revenue from individual bookings, accepting the group is economically beneficial.
Practical Example
A hotel has an Average Daily Rate (ADR) of €150 for individual guests. A group offers €120 per night and room but generates additional revenue of €3,000 from meeting rooms and catering.
Calculation:
- Group Revenue: 30 rooms * 3 nights * €120 = €10,800
- Additional Revenue: €3,000
- Displaced Revenue: 20 rooms * 3 nights * €150 = €9,000
- Variable Costs (assumed €30 per room/night): 30 rooms * 3 nights * €30 = €2,700
- Net Profit from the Group = (€10,800 + €3,000) – (€9,000 + €2,700) = €2,100
Since the net profit is positive, it would be economically beneficial for the hotel to accept the group booking.
Conclusion: Displacement Analysis as a Decision-Making Tool
Displacement analysis is an essential instrument in revenue management. It helps hotels make informed decisions and maximize revenue potential. By applying this method strategically, hotels can ensure they select the most profitable mix of group and individual bookings in the long term.
