How to conduct a displacement analysis for your hotel

The old saying “a bird in the hand is worth two in a bush” is a valuable lesson for us all. It simply means you should stick with the modest prize you’ve already secured instead of chasing what you might not get, even if it’s worth more.

In many scenarios, it’s good advice. But in the often subtle and sophisticated world of hotel revenue management, one that’s becoming ever-more supported by rich data and smart technology, you could be missing out if you always take that approach.

Never more so is this true than when weighing up whether it’s better to book guaranteed group business at a lower unit rate or hope enough individuals book single rooms at a higher price further down the line.

While making this assessment can be tricky, help is at hand when you choose the right software solutions to aid your informed decision-making – and in understanding the basics of this conundrum, which we lay out in this blog post.

What is a hotel displacement analysis?

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.

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.

Collect past hotel data

There’s no limit to the types of past data you could collect, with many of these metrics explained in this glossary. But some of the more important ones include:

• Past and current occupancy

• Average daily rate (ADR) for different room types

• RevPAR, which can be calculated in a number of ways, including by multiplying the two metrics above

• Historic revenue and bookings

• Pickup and pace

This data can be found in the various systems you use to run your hotel, such as your property management system (PMS), customer relationship management system (CRM) and, to an extent, revenue management system (RMS).

Data doesn’t alone equate to insight, though, and it’s often difficult to know where to start with it, so you can knit it all together for analysis with business intelligence solutions.

Account for booking variables

Don’t forget to take ancillary spending into account and weigh them up in the formula below. We touch on them above but let’s look at longer list of items on which your guests might spend money and therefore boost revenue, including:

• Food

• Drink

• Hire of meeting rooms

• Parking

• Other transport costs

• Casinos and gambling

• Entertainment

The list goes on. In some cases, you’ll roll these into packages to increase demand in your low season, but where you don’t, these must be factored in. And don’t forget items that negatively impact your revenue, such as online travel agent (OTA) fees and other distribution and marketing costs.

Discuss some of the factors that impact revenue generation. Go beyond the cost of the room to discuss ancillary spending like parking costs, restaurant/bar sales (if the hotel has one), transportation, casino/gambling (if applicable), OTA fees, etc.

Estimate revenue for group and individual traveler bookings

With this data at your disposal, insight into how to make sense of it and the right software to analyze it, you’re now equipped to estimate revenue from two opposing scenarios: group bookings and individual travel bookings.

The first should be straightforward; you’ll have your price lists and will have been approached by someone asking to make a group booking based on the relevant rate for the size of group and length of stay in question.

When it comes to the second – individual traveler bookings – we return to speculation; educated and informed speculation, based on the data and variables we discuss above.

Look at how far in advance the group booking is. That’s your starting point.

Then use historic data, ideally for the past five years so that the effects of Covid don’t skew your analysis, to compare what individual bookings you secured versus the time it took to secure them – pickup and pace are crucial in this part of the analysis. With the right software, you’ll have the necessary data granularity to make this analysis possible.

Factor in projections on rates and demand, and knowledge of any local events that could increase demand and therefore price, and you’ll be in a good position to decide whether these individual bookings will, in aggregation, exceed the value of your group bookings.

Which brings us to the formula.

Performing a hotel displacement calculation with the standard formula

This is the standard formula:

Displacement = revenue on constrained/identified dates (1) − potential revenue on non-constrained dates (2)

Where:

1. = revenue from group bookings

2. = revenue from individual traveler bookings

And:

• Constrained dates are those associated with a group booking you take there and then

• Non-constrained dates are those left open for potential future business from individuals

So if the calculation yields a positive number, take the group booking, whereas if it’s negative, reject it and hold out for individual bookings.

Let’s get more granular.

That first term, (1), group value, can be calculated with this formula:

Group value = number of rooms x (ADR − room cost) + additional revenue − related expenses

Whereas for (2), displacement cost, this formula can be used:

Displacement cost = number of rooms displaced x (ADR − room cost) + additional revenue − related expenses

In case you need it, here’s an over-simplified example to illustrate the first formula:

• For a group booking on specified dates, this is the expected revenue, which factors in operating costs: $4,375 (25 rooms x $175) + £1,500 in ancillary spending = $5,875.

• Whereas, based on an occupancy rate of 76%, you can expect room revenue of $4,750 (19 rooms x $250) + $1,700 in ancillary spending (based on past performance of business travelers) = $6,450.

Because 5,875 − 6,450 is negative, holding out for individual bookings would make sense in this particular scenario.

Make informed decisions that drive bookings and revenue with tools designed specifically for hotels

We’ve already touched on the importance of software that can aid you in your displacement analysis efforts, but we’ll finish with a few specific solutions that you might want to consider, along with their most relevant features:

• Business Intelligence for revenue management – forecasts, custom reports, assessing your KPIs: this is the platform to understand your hotel’s performance and drive strategy

• Market Insight – spot and analyze demand patterns and get a view on trends before your competitors

• A range of other tools, including Rate Insight, that helps you assess competitors’ room prices for more informed decisions to maximize revenue

As with so much in revenue management and the hospitality industry more generally, the basic theory is relatively straightforward but, without the right data and tools, you can’t make the reliable decisions on which your hotel depends.