Determining the optimal group rate in the hotel industry
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RESEARCH ARTICLE
Determining the optimal group rate in the hotel industry Yunmei Bai1 · Chun‑Hung Tang1 Received: 11 June 2020 / Accepted: 11 August 2020 © Springer Nature Limited 2020
Abstract This paper aims to develop an analytical model that prescribes the optimal group rate for hotel group business. Theoretically, this paper fills two gaps in the literature by proposing a model that determines the optimal, not minimum, group rates while considering competing bids. The simulation results show that the optimal group rate is positively affected by the forecasted transient rate and the effect is contingent on the forecasted transient demand. Furthermore, the optimal rate is moderated by group size with respect to both internal (expected transient demand and transient rate) and external (competition) factors respectively. Keywords Group rate · Optimal bid price · Competition · Group size
Introduction Group revenue management is an important component of a successful hotel revenue management program (Noone 2016) and is driven by two factors: (1) the booming convention and event business and (2) the popularity of leisure group tours. According to U.S. Travel Answer Sheet (U.S. Travel Association 2017), direct spending on meetings, incentives, conventions, and exhibitions (MICE) totaled up to $131.8 billion, 38% of the business travel market. In the leisure market, the inbound market during the summer peak season showed a steady increase of 8% per year (ABTA Travel Trends Report 2018). The industry is responding to the trend. For example, Hilton is launching a new brand, Signia, to focus on business meetings and events. Correspondingly, group revenue management deserves the attention of the academia because of its impact on the overall revenue management (Yuen 2002). Like revenue management for transient guests, group revenue management aims to maximize group revenue or profit by finding the optimal price. Unlike transient revenue * Yunmei Bai [email protected] Chun‑Hung Tang [email protected] 1
School of Hospitality and Tourism Management, Purdue University, Marriott Hall, 900 W. State Street, West Lafayette, IN 47907, USA
management, group rates are set with a long lead time and cannot be easily changed. At the time of setting group rates, hoteliers only have historical data instead of daily pick-up and reservation updates. In addition, group pricing usually involves a bidding process and/or negotiation between sales personnel and event planners (Guadix et al. 2010). Once the group rate is agreed upon, hotels cannot continuously update it in response to demand and supply changes. This process also suggests that individual guests’ preferences and heterogeneity are superseded by event coordinators. Another distinction of group business is that multiple guests arrive at the same time. The algorithms designed for the transient market are not suitable for the group market. For example, the Littlewood rule can efficiently address whether to reject or accept a single discount room reservation but cannot process si
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