If you’re a hotel that caters to group bookings, including meetings and events, you’ll often have to weigh up the value of taking a group booked at a lower, negotiated average daily rate (ADR) against seeing what appears on the books from other segments, including transient. This balancing act is known as displacement analysis.
Sounds simple, right? However, displacement analysis can be one of the most complicated elements of revenue strategy your team has to undertake. But fear not, we’ve got you covered!
6 steps to a successful displacement analysis
1. Scenario planning
The starting point for creating a displacement analysis is to create two different forecasts of the future of your hotel:
- If you take the group
- If you don’t take the group.
Then it’s a case of opting for what scenario you prefer. However, group business can be booked up to five years in advance, and it can be tricky to forecast that far ahead. If you don’t take the group, you need to have a firm understanding of what your transient market will be like in five years. That’s hard to predict, especially without some level of analytics.
“Often, hotels take the group because they're afraid to turn away the business. It’s a ‘bird in the hand’ type of situation. Revenue managers will often say, ‘We know this group and we know they'll be contractually obligated to come and stay in two years, and they'll have to pay us if they don't, unlike the transient guests.’,” explains Daniel Lofton, Director of Hospitality Solutions, Americas.
To create your two scenarios, we suggest you gather historical data on each revenue stream (rooms, meeting space, catering, etc.) for the defined period (e.g., the first week of June) for the years before to serve as your baseline. Try and look back over multiple years to find patterns in demand.
2. Ancillary spend
To muddy the waters further, once you have your two scenarios, you need to also factor in potential ancillary spend. This could be food and beverage, transfers, parking charges, or — in the case of a casino resort — it could be gambling revenues.
“For casinos, this decision could be worth tens of thousands of dollars. You might turn away 20 transient guests to take the group, which doesn't seem like a lot, but if each of those guests usually spends $10,000 in the casino, then you might have made a terrible mistake,” says Lofton.
Accepting a group can also boost ancillaries. You may sell a ballroom for a gala dinner, or meeting space, even the coffee and cookies you put out when the meeting breaks, this is revenue that can’t be achieved through transient guests.
3. Costs
Each stay has a cost associated with it.
There is the cost of acquisition. For transient guests, this might include online travel agent (OTA) fees, the cost of having a call center to take bookings, or marketing spend. For groups, there may be intermediary commissions.
Then there are operational costs: room cleaning, front office staff, in-room amenities, and more. A group of 20 staying three nights can be more cost-effective than 60 transient guests coming in for one-night stays.
4. Profit
However, not all revenue is created equal.
Imagine, you have a group proposal for rooms totaling $10,000. But, you’re convinced that transient will achieve at least the same because they’ll also spend on food and drink. These two $10,000 amounts are not equal.
“If you have $10,000 from room revenue, 70% goes to profit. However, F&B on the other hand is 30% profit. Your transient guests need to bring in more than $10,000 to make up for the lost group profit,” explains Jeong Beom Pyon, Director of Hospitality Solutions, APAC.
5. Lead time
Demand is ever-changing and not all groups are the same. You may get a proposal for a group five years out from the stay date. You run the displacement analysis and decide it’s not for you.
Three years later, you receive another request for proposal for the same dates, but now your on-the-books scenario looks different. For some reason, transient just isn’t there yet. The groups might be very similar, but the situation in terms of your demand forecast, has changed. You may decide to take the second group. But, you could also decide to roll the dice again.
“You might only be quoting for bed and breakfast and, if you’ve got the lead time to potentially replace that group, you might want to hold out for something that is going to take meeting space as well,” says Tomos Jones, Senior Customer Success Manager, EMEA.
6. Days of the week
Sorry – there’s one more consideration for your displacement analysis. And that’s how this group will impact the other days of the week you still have to sell. This is the stay-through factor.
If you take in a large group or agree to a total hotel buy-out, let’s say for a mid-week stay for Tuesday and Wednesday nights, how is that impacting your ability to sell a Monday to Wednesday stay? Or a Monday to Friday stay?
“If I have the availability on the requested dates and I can honor the client budgeted rate and rooms, then I must ask myself ‘Am I impacting my property stay-through availability by allowing a group to take over my house on a Tuesday for my property?’” says Cornelio Encarnacion, Associate Director of Customer Success, LATAM.
Marlene Cazares, Director of Customer Success, North America advises, “If you decide to take a Tuesday or Wednesday group, you must understand how that’s going to impact the day next to it. You need to understand what you've done in the past regarding transient bookings to understand if taking that group makes sense.”
This can get even more granular when you start to consider room types. Groups typically buy standard rooms, so you may be sold out of those on Tuesday, leaving only suites to sell. Will your transient guest want a suite for their Monday to Wednesday stay? Is that something they have budgeted for? Or are you better off upgrading some of the group executives to suites so you still have standard rooms to sell?
So, what’s the verdict?
We’ve outlined six considerations for building out a displacement analysis. But, depending on your hotel type and business mix, there could be many more variables to consider before you can confidently decide on what’s the most profitable decision for your property.
