Imagine the moment when a group sends you a request, everybody knows this situation with its decisions very well. There are a few main decisions which you need to make for example whether you should take the group or not, which rate and how many rooms you should offer them?
Travel groups are an important segment in the hotel’s business. Nevertheless, it can be very difficult to make decisions about groups and set the right prices. Mostly, defined rates are the result of negotiations from a year ago.
In general, when we speak about group management, the hotelier has to face three levels of decisions
Long-term decision: What percentage of the hotel’s business should be covered with group-bookings
Medium-term decision: Should the group be accepted or not?
Short-term decision: Once accepted the group, forecasting how many people in that group are going to show up.
This article deals with medium-term decisions and pays special attention to how to calculate the minimum rate, offering to a group.
When thinking about the first question “should the group be accepted or not”, don’t forget to take into consideration, that groups are always a big opportunity for a hotel. Group participants bring a lot of revenue, not only with accommodation but also with food and beverage packages like half-board or full board. In addition, if there are groups coming cause of a business reason it’s very likely that they also book the MICE offers like the meeting space and coffee breaks. All in all when you consider all these reasons you’ll find out, that a group can be a really good deal for the hotel. The only secret is to calculate the right rate.
One of the most frequently asked questions from hotel managers is “should we reduce the price when a group is booking a lot of rooms?”. Think about the question very well! Almost always groups get a cheaper price than individual guests but when your hotel is sold out to a travel group, you need to reject the individual guests with whom you are normally making more profit.
To evaluate a group, it’s necessary to have a look at all costs and the forecasted revenue. In terms of costs, you need to calculate the opportunity costs from the rejected individual bookings. So if you have a group coming in, they might displace some potential individual guests - these are the costs which need to be considered. Regarding revenue, it is on one hand, the payment for the rooms and on the other hand, some additional earning for meeting space, food and beverage and activities.
Of course, all of these different revenue streams have a different profit margin. So rather than looking at the revenue, it’s much more effective to calculate with the percentage of profit.
That’s how some profit margins could look like
The profit margin for room rental is typically around 90%
Food and beverage profit margin might only be 30%
The profit margin for activities can vary (if you need to outsource it), it’ll be 50%
Once you have fixed your profit margins, we can do an easy example of how to calculate the minimum group rate.
We are now talking about a group that wants to stay with us for three days. Our hotel has 200 rooms in total and the group wants to book 50 rooms each day.
That’s what our forecast says
1. day: we are going to sell 140 rooms individually
2. day: we are going to sell 190 rooms individually
3. day: we are going to sell 180 rooms individually
According to our forecast, the average rate is € 120,00 per room and our variable costs are € 20,00. So we are making a profit contribution of € 100,00 per room.
From the group, we are expecting a minimum of € 1.000,00 additional revenue in food & beverage.
Calculation of the minimum rate
1st day: according to our forecast, we will sell 140 room individually. If we will take the travel group with 50 rooms this will be a total of 190 rooms. We have 200 rooms in our hotel, we don’t need to reject anybody, so on this day, we are fine.
2nd day: On this day 190 individual rooms are forecasted. If we take the group it would be 240 rooms, but we only have 200 rooms in our hotel. That means we would have to reject 40 individual guests.
3rd day: The forecast says we will sell 180 individual rooms plus 50 rooms for the travel group. So we would need to have 230 rooms, but there are still only 200. So we need to reject 30 individual travelers.
To summarize, if I agree to host the group I would need to reject 70 rooms for individual guests in total.
But how does this affect my revenue and should I decide to take the group or not?
To repeat: there are € 100,00 contribution margin per room for individual guests. We would need to reject 70 individual room → € 100,00 contribution margin x 70 rejected rooms = € 7.000,00 (opportunity costs) if we take the group.
From the group, we can calculate with € 1.000 extra income for food and beverage.
We can use this amount to compensate for the loss of displaced rooms.
€ 7.000,00 opportunity costs - € 1.000,00 group income f&b = € 6.000,00 balance.
To be able to break even it’s necessary to make an accommodation revenue of € 6.000,00 from the travel group.
The group wants to stay for three nights and would like to have 50 rooms each night. This is the total number of 150 rooms. At least we need to earn € 6.000,00 opportunity costs divided by 150 rooms. This means the minimum rate per room is € 40,00 but we must not forget to add the variable costs of € 20,00 per room on top.
All in all, to break even, the minimum price needs to be € 60,00 per room per day. But with this rate, you haven’t earned any money yet.
So whether you are a great upseller or you need to set the group rate a little higher.
If you decide that you want to host the group you need to ask for a minimum price of € 60,00 to cover your costs. If the price is less you need to say no or lose some of your money.
Interested in more helpful insider tips? Visit one of our workshops or webinars.