Displacement Calculations are used in hotel revenue management cost-benefit analysis. They are a calculation of the value of a group bookings versus the value of transient (or walk-in) bookings. Making these calculations requires day-to-day analysis of how a hotel’s TOP accounts (tour operators, corporate, consortia, and IDSs) are producing.
What are Displacement Calculations For?
Displacement Calculations allow revenue managers to identify market segments that are not adding to the hotel’s bottom line.
Most hotels need to keep a certain number of rooms available at transient rates. This allows the hotel to accept last-minute bookings at a higher rate than they’d otherwise accept other bookings. It is important for revenue managers to calculate the value of group bookings versus private bookings because, in some cases, accepting a group booking for a specific date range can actually result in negative revenue.
Benefits of Displacement Calculations
Understanding the costs and/or benefits of group bookings versus transient bookings helps revenue managers block out a certain segment of rooms at walk-in rates. Displacement Calculations also provide a clear economic analysis of whether or not a hotel should accept a group booking in specified date range.
Limitations of Displacement Calculations
The value of any hotel booking goes beyond room rates. Other factors that must be accounted for include expected food and beverage revenue spending, meeting room rentals, spa spending, and any other spending that creates profit for the hotel. Useful Displacement Calculations must take this other spending into account, and must also factor in expected costs to provide managers with accurate numbers for comparison.
How are Displacement Calculations Calculated
Revenue managers can perform Displacement Calculations by subtracting positive revenue on non-constrained dates from revenue displaced on identified dates. Displacement Calculations are usually made to evaluate specific scenarios like the example below.
Example of Displacement Calculations
In this scenario, the managers are asking the following question: “Should we accept a group booking of 20 rooms for one night at $200 each or keep these rooms available for regular corporate and business guests at a nightly rate of $300?”
For the group booking, the hotel expects room revenue of $4,000 (20 x $200) plus an expected $2,000 in revenue from other spending (food and beverage, meeting room rental, etc.). That factors in operating costs and puts expected positive revenue on those dates at $6,000.
If the hotel turns away the group booking, they can reasonably expect to fill 16 of those rooms based on their average occupancy rate of 80%. They can expect a nightly room revenue of $4,800 (16 x $300) plus an additional expected $1600 in other spending revenue (based on their average of $100 per corporate/business guests). So they could reasonably expect positive revenue of $6,400 if they don’t accept the group booking.
In this calculation:
Positive Revenue on Non-Constrained Dates = $6,000
Revenue Displaced on Identified Dates = $6,400
Expected Revenue If Group Booking Accepted = $6,000 – $6,400 = $-400
So, in this scenario, accepting the group booking would result in a net loss of $400 for the hotel.