Displacement analysis:
Balancing group and transient business

Which one is better, transient or group business? For hotel revenue managers, that’s an easy question: both are important. The hard question is knowing which one is better in any given situation. 

Imagine you have the opportunity to sell 20 rooms to a group six months from now. Your hotel capacity is 50 rooms, and based on historical data, you expect 40 reservations from transient guests on those days. The rooms requested by the group plus the transient forecast (20 + 40) exceed your hotel capacity by 10 rooms. 

If you accept the group at a discounted rate, you will reach 100% occupancy, but you will also have to turn down 10 reservation requests from transient guests for a higher rate. Is the group booking worth giving up those 10 rooms?

A displacement analysis will give you the answer.

A displacement calculation is particularly useful for revenue managers of independent hotels who face the typical dilemma between securing group revenue today at a discounted rate or transient revenue at a higher ADR (average daily rate) tomorrow but want to make decisions based on data and not on gut instinct. 

Displacement analysis example 

You don’t necessarily need a software tool to do a displacement analysis: a spreadsheet with the right formulas will do. To populate it, however, you will still need your: 

• Property management system (PMS) for historical data on room bookings, cancellations, occupancy rates, and key revenue metrics
• Revenue management system (RMS) for historical data on pricing strategies, trends, and forecasts
• Customer relationship management (CRM) system for information on past group bookings and repeat guests

The scenario

Let’s imagine a basic scenario that would call for a displacement analysis: your hotel has a maximum capacity of 100 rooms, and you receive an inquiry from a group that wants to book 50 rooms for three nights during a specific weekend. The information you work with is:

• The rate proposed by the group is $60 per room/night
• The ADR for transient guests for those days would be $90 per room/night
• The forecast of transient guests on those days is 50 rooms for day 1, 90 rooms for day 2, and 85 rooms for day 3
• The variable cost for each room (cleaning, toiletries, laundry, electricity, etc.) is $17

We can complete the displacement analysis in three steps. 

Step 1. Calculate displaced rooms

Displaced rooms are those you would have to give up if you accepted the group. The formula for displaced rooms is: 

Displaced rooms = expected transient rooms + group rooms – total rooms

Whenever the result is zero (like on day 1) or a negative number, it means there is no room displacement.

Step 2. Calculate the displaced contribution

The displaced transient room revenue  would be: 

Displaced transient revenue = transient ADR * displaced room nights 

$90 x 75 = $6,750

From here, we subtract the variable cost of each room to obtain the displaced contribution: 

Displaced contribution = displaced transient revenue – (variable cost * displaced room nights)

$6,750 – ($17 x 75) = $5,475

Using contribution (revenue from sales minus variable cost) instead of revenue will make the analysis more accurate, especially if you’re adding different revenue streams, such as F&B and meeting spaces, which have different profit margins.

Step 3. Compare it to the contribution from the group

By now you know that if you accepted the group, you would lose $5,475 of profit from transient. That means you would have to make the same amount from the group to break even.

To translate that into a per-room rate, we divide the displaced contribution by the room nights granted by the group (50 x 3) and add back the variable costs for each room: 

($5,475/150) = $36.50 +$ 17 = $53.50

At $60 per room, accepting the group is, therefore, the more profitable option. 

The response of the analysis may not always be in favor of the group, though. Let’s suppose that the forecast for that weekend is much higher, and you would have to displace 95 rooms instead of 75. In that case, the displaced contribution would go from $5,645 to $6,935, and the minimum rate for the group would be higher than what was offered:

($6,935/150) = $46.23+$17 = $63.23

5 factors to consider in your analysis

In this example, there were different variables at play: 

• The ADR for transient bookings
• The days of the week and the time of the year which impact demand and room rates
• The room rate proposed by the group
• The variable cost of each room type

In fact, during a displacement analysis, you will have to consider more variables, which will increase or decrease the total value of the transient or group side. The most common ones are:

1. Additional revenue

Groups tend to request extra services, for example, meeting space and food & beverage. When you factor those into the analysis, it’s important to know the exact contribution margin of each stream.

2. Acquisition costs

Commissions on transient or group bookings will decrease the value of their contributions. Typical examples are those charged by online travel agencies (OTAs) and tour operators. To increase the accuracy of the transient side of the analysis, you should try and separate the forecast of direct bookings from those coming from OTAs or other channels that charge commissions.

3. Shoulder nights

Accepting a group may have an impact on the demand for room nights before and after the group block. For example, if a group is asking for a Saturday only, you may be displacing rooms on Friday too, because you’ll turn away transient guests looking to book a room for both days. 

4. Long-term potential

Another factor to consider, which may not immediately stand out from the spreadsheet, is the revenue potential of a group. Will it bring additional business in the future? Is it connected to a regular event that the hotel wants to retain? 

5. Lead time

The success of the analysis will greatly depend on the accuracy of the transient business forecast, which is based on historical data. However, the further into the future the forecast is, the less accurate it becomes. If you receive a group request that is two or more years ahead of time, you will have to determine whether you have enough data for an accurate forecast.

Overall, you should approach a displacement analysis with a total revenue mentality by considering all the possible variables that feed into it. Transient business and groups contribute to total revenue differently. While groups invest in different ancillary revenue, secure a higher volume of rooms, and give predictability, they also expect discounted rates; transient rates are higher but will also have higher acquisition costs, and the contribution of transient guests to ancillary profit is very unpredictable.

When to use a displacement analysis 

While a displacement analysis should be used for most group bookings, there are times when it’s especially important:

During high season.

When demand of transient business is higher, room displacement is also likely to be higher, so it’s particularly important to determine whether the profitability of the group is enough to offset that of transient guests.

When hosting events.

Group bookings may be related to events that generate additional ancillary revenue, such as F&B and rental of meeting rooms and AV equipment. If more revenue is involved, the group opportunity may seem like a very profitable one. However, more services will also consume more resources, reducing margins. With a displacement analysis you can make a more objective evaluation. 

To decide what discount to apply.

When you receive an inquiry from a group, they may let you know their budget right away or simply ask for a quote. In that case, a displacement analysis will help you calculate the minimum rate and then compare it to the discounted rates you typically charge to groups.

To assess long-term contracts.

Displacement analysis can also be used to analyze the profitability of current corporate accounts and evaluate if contractual terms are causing you to leave transient money on the table. 

For example, if you have an LRA (Last Room Availability) clause, which allows the corporate account to book a room at the discounted rate regardless of occupancy, you may find out that it’s displacing too much transient revenue, and that a NLRA (Non-last Room Availability) clause would be better.

To evaluate campaigns with OTAs.

Let’s suppose that one of the OTAs you work with is offering to participate in a promotional campaign that will guarantee a minimum amount of extra bookings for a higher commission. A displacement analysis will help you understand whether you should accept it or not. 

Balancing sales and revenue management 

However accurate your displacement analysis is, an optimal revenue mix will still depend on a balanced and tight-knit relationship between revenue management and sales. While these teams have similar goals, sometimes their attitudes vary: sales will want to close the group, even with aggressive rates, whereas the revenue manager will try to maintain rate integrity and get the highest RevPAR possible. A displacement analysis can help foster a fruitful collaboration between revenue management and sales by bringing objective data into decision-making.