How to calculate the group room rate?

A method that calculates the minimum acceptable hotel group room rate based on total transient and total group revenue contributions.

Alex Kapichin 22 Oct 2020

Group is a guaranteed business that is booked in advance at a discounted fixed rate. Transient business comes closer to arrival date at a higher room rate and is not guaranteed. Revenue managers face a dilemma - accept the group now or reject it and save rooms for the transient guests. Also, how much should be the group rate?

Let's see how we can answer these questions.

There are two potential scenarios:

1). Group rooms + Transient rooms (forecasted) <= hotel capacity

In this case, group business is not displacing transient business. The group is bringing new demand that otherwise would not materialize. By accepting the group, the hotel will maximize the total revenue. The discounted room rate should be based on the group's budget, competitors' group rates, and overall group demand for the market.

2). Group rooms + Transient rooms (forecasted) > hotel capacity

This scenario is more complicated because hotel displacing part of higher rate transient business to accept lower rate group business. Still, we can not just reject the group because its overall revenue contribution can be higher than the displaced transient contribution at a specific price point.

How can we calculate the minimum group rate to ensure the hotel will not lose on displaced transient business? How can we calculate optimal group rate that will maximize total revenue?

Step 1 - Displaced Transients.

Our example hotel has 200 rooms, and we received a 410 rooms group request for Tuesday - Sunday.

First, we need to make sure an accurate transient forecast is created for the dates in question. There are various forecasting methods. I show how to develop transient rooms forecast that is based on short-term booking trends here.

Once we know how many transient rooms we expect to be occupied, we can enter the group rooms request. Then we calculate the total number of rooms that will be occupied if the group is accepted. Finally, we consider the hotel's capacity and calculate how many transient rooms will be displaced if the group is accepted.