The paper examines the possibilities to manage the overbookings in the hotel industry. The basic mathematical model for calculating the optimal number of overbookings is analysed and techniques for calculating the optimal number of overbookings for a hotel with two different types of rooms and for two different hotels which coordinate their reservations are proposed. The managerial decisions and operational procedures connected with walking guests are also discussed.

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The paper examines the possibilities to manage the overbookings in the hotel industry. The basic mathematical model for calculating the optimal number of overbookings is analysed and techniques for calculating the optimal number of overbookings for a hotel with two different types of rooms and for two different hotels which coordinate their reservations are proposed. The managerial decisions and operational procedures connected with walking guests are also discussed.

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International University College – Albena

3, Bulgaria Str., 9300 Dobrich, Bulgaria

telephone: +359 58 655612

fax: +359 58 605760

e-mail: stanislav_h_ivanov@yahoo.com

Abstract:

The paper examines the possibilities to manage the overbookings in the

hotel industry. The basic mathematical model for calculating the optimal

number of overbookings is analysed and techniques for calculating the

optimal number of overbookings for a hotel with two different types of

rooms and for two different hotels which coordinate their reservations are

proposed. The managerial decisions and operational procedures connected

with walking guests are also discussed.

1

INTRODUCTION

defined as confirming more rooms than the available capacity of the hotel.

It has attracted the attention of researchers who usually discuss the problem

Olsen, 1990; Desiraju and Shugan, 1999; Lee-Ross and Johns, 1997;

Netessine and Shumsky (2002) indicate that the optimal overbooking level

balances the lost revenue due to empty seats/rooms, and the penalties

customer goodwill when the firm is faced with more demand than available

capacity (p. 39). They also stress the theoretical and practical problems in

variation of capacity (pp. 40-41). The authors use the standard expected

marginal revenue technique, applied also in our paper. According to it, the

2

Kotler, Bowen and Makens (1996) analyse the problem as a demand

and travel agencies, in particular (pp. 439-440). Wirtz et al (2002) add that

potential of future lost business, and poor word-of-mouth (p. 14). In order

to avoid or recover from such problems the authors advise that companies

availability policies for loyal customers. Baker, Bradley and Huyton (1994)

the procedures in walking guests (pp. 67-68, 129-132), while Kimes and

problem has not been approached in a systematic way and only separate

aspects of it have been discussed. In this regard, the current paper focuses

3

on the management of overbookings, viewed as a continuous process in

and some additional considerations that should be taken into account when

CHARACTERISTICS

each date and its controlled modification according to the market changes

4

Managerial decisions and operational activities connected with

different reasons some of the guests do not arrive and are considered no

show, other bookings are cancelled or amended in the last minute, the stay

of other guests is reduced, and the rooms remain unsold. For nonguaranteed

the hotel because of no shows and late cancellation some of the rooms will

be empty and the goal of maximizing the revenues and profits will not be

fulfilled.

other geographical location. The lost revenue from each unsold room is

they react to short-run changes in demand with changes in prices and the

5

When carefully managed, overbookings do not cause any problems –

if X rooms are confirmed in excess of the available capacity and the same

number of rooms are no show or cancelled at the last moment, then the

number of the occupied rooms for this particular date will be equal to the

ceteris paribus, will be maximum. At the same time, if the last minute

cancellations and no shows are less then the number of the overbookings,

then some of the clients will not be accommodated and should be walked to

other hotels. This incurs costs for the hotel – accommodation at the

alternative hotel, transportation to it, etc. On the other hand, if the number

of no shows and last minute cancellations is greater than the number of the

occupied and the hotel misses revenues. That’s why, from a broader

confirmed bookings for a specific date do not arrive at the hotel (no shows,

6

last minute cancellations, last minute amendments of reservations of

sells all its rooms at one rate r. If the hotel sells all its rooms without

overbookings, but guests for X * rooms do not arrive, the hotel will have

confirms X * rooms more than its available capacity. If the guests for X *

rooms do not arrive the number of the occupied rooms will be equal to its

shows are X 1 < X * ? In this case, the number of rooms of guests holding

confirmed bookings is greater than the available capacity of the hotel and

hotel will pay net costs c per room/night, or total c.( X * − X 1 ) . But if the last

minute cancellations, amendments and no shows are X * < X 2 , the hotel will

have missed benefits of r.( X 2 − X * ) although less than compared with the

must define the marginal revenues MRob and marginal cost MCob associated

7

number of rooms that do not arrive at the hotel and their rooms remain

unoccupied. The total costs of the overbookings TC ob include the net costs

and missed benefits. From a theoretical point of view we have two possible

situations:

differentiating (1):

∂ TC ob

(2) MCob = = r.[1 − F ( X )]. − c.F ( X )

∂X

On the other hand, the hotel does not receive any revenues from the

(3) MRob = 0

The hotel can afford to overbook until the marginal revenues from

1

See Additional considerations and extensions further in the text for a discussion of the case of positive

marginal revenue from unoccupied rooms.

8

In microeconomic analysis total revenues are maximum when

MR= MC , but because we look for an integer solution, the equation may

not be kept.

r

(8) F ( X ) ≥

r+ c

example:

hotel finds that the number of the last minute cancellations, amendments

EUR and the net costs of walking of guests are c = 155 EUR. From these

85

(9) F ( X ) ≥ = 0,3542

85 + 155

9

With the help of Excel through the function

1. The basic mathematical model assumes that the hotel offers all its rooms

by the marketing information system of the hotel and its own computer

booking request.

10

2. It is possible that a customer holding a confirmed overbooking for a

more expensive available room with rate rH at the same hotel (e.g.

deluxe room) rather than being walked. In this case the hotel will have a

missed revenue equal to the price difference of the two types of rooms

in a cheaper room and given refund equal again to the price difference

should be done separately for each room type. Let a hotel have only two

the overbookings for the cheaper room with rate rL , distribution function

is the optimal number of the overbookings for the more expensive room

on Figure 1:

11

2 1

X L ≤ X L* X L > X L*

X H > X H* X H > X H*

X H* 4 3

XL ≤ X *

L XL > X *

L

X H ≤ X H* X H ≤ X H*

0 X L*

Figure 1. Possible situations of last minute cancellations, amendments and no shows

for hotel with two types of rooms with different rates

In situations [1] and [2] the last minute cancellations, amendments

and no shows for the more expensive rooms are higher than their optimal

cases from the unoccupied expensive rooms. In [1] the hotel also loses

revenue from the unsold cheaper rooms rL .[1 − F ( X L )].( X L − X L* ) . In [2] some

of the guests that have arrived with confirmed overbookings for the cheaper

loss of revenues (rH − rL ).F ( X L ).( X H − X H* ) . The rest of the guests in [2] will

The sum of the four elements of the costs and missed benefits gives the

12

(10) TC ob ( X H > X H* ) = rH .[1 − F ( X H )].( X H − X H* ) + rL .[1 − F ( X L )].( X L − X L* ) +

in the cheaper rooms, causing a refund (rH − rL ).F ( X H ).( X L − X L* ) . The rest

The sum of (10) and (11) gives the total costs of the overbookings

(12) TC ob ( X L ; X H ) = TC ob ( X H ≤ X H* ) + TC ob ( X H > X H* ) =

+ c L .F ( X L ).( X L* − X L − X H + X H* ) + c H .F ( X H ).( X H* − X H − X L + X L* )

the overbookings are equal to the marginal revenues from them for both

room types:

13

∂ TC ob ( X L ; X H )

= 0

∂XL

(13)

∂ TC ob ( X L ; X H )

= 0

∂XH

rH − F ( X H ).(rH + 2c H ) − F ( X L ).(rL + c L − rH ) = 0

(14)

rL − F ( X L ).(rL + 2c L ) − F ( X H ).(rL + c H − rH ) = 0

F ( X L* ) ≥ F ( X L0 )

(15)

F ( X H* ) ≥ F ( X H0 )

Example 2: A hotel has 2 types of rooms with rates rL =50 EUR and

rH =90 EUR, the net costs of walking guests are c L = 80 EUR and c H =130

X L (number of rooms) 0 1 2 3 4 5 6 7 8

P( X L ) 0.10 0.12 0.15 0.26 0.11 0.12 0.05 0.05 0.04

F(X L ) 0.10 0.22 0.37 0.63 0.74 0.86 0.91 0.96 1.00

X H (number of rooms) 0 1 2 3 4 5

P( X H ) 0.20 0.28 0.16 0.19 0.11 0.06

F(X H ) 0.20 0.48 0.64 0.83 0.94 1.00

14

Substituting the symbols in (14) with their numerical values we

come to:

90 − 350.F ( X H ) − 40.F ( X L ) = 0

(16)

50 − 210.F ( X L ) − 90.F ( X H ) = 0

3. Some hotels have a joint reservation policy with other hotels – they act

as one hotel, have the same rates and clients are accommodated at any

of them (they learn the name of the exact hotel at the day of arrival).

Rome hotels Centre One, Centre Two and Centre Three are an excellent

i

F ( X 1i ) = ∑

k=1

P ( X 1k ) . We denote with X 2 the discrete random variable of the

last minute cancellations, amendments and no shows at the second hotel. Its

15

specific values are X 2 j with probabilities P( X 2 j ) and cumulative

probabilities F ( X 2 j ) = ∑

m= 1

P( X 2 m ) .

(17) P( X n ) = ∑∑

i j

P ( X 1i ).P ( X 2 j ) , for ∀ i, j : X + X = X

1i 2j n

n

(18) F ( X n ) = ∑

s= 1

P( X s )

the smallest whole number for which inequality (8) is fulfilled, given the

X 1i (number of

0 1 2 3 4 5 6 7 8

rooms)

P( X 1i ) 0.10 0.12 0.15 0.26 0.11 0.12 0.05 0.05 0.04

F ( X 1i ) 0.10 0.22 0.37 0.63 0.74 0.86 0.91 0.96 1.00

16

The distribution of the same variable for the second hotel is:

X 2 j (number of rooms) 0 1 2 3 4 5

P( X 2 j ) 0.20 0.28 0.16 0.19 0.11 0.06

F(X 2 j ) 0.20 0.48 0.64 0.83 0.94 1.00

The price of one room at the hotel is r = 85 EUR and the net costs of

which fulfils inequality (9) is X 1* = 2 for the first and X 2* = 1 for the second

hotel.

Let the hotels coordinate their bookings and act as one hotel. The

distribution of X = X 1 + X 2 is:

X n (numbe

0 1 2 3 4 5 6 7 8 9 10 11 12 13

r of rooms)

P( X n ) 0.02 0.052 0.0796 0.1322 0.1526 0.1441 0.1343 0.1017 0.0805 0.0485 0.0286 0.0161 0.0074 0.0024

F(X n ) 0.02 0.072 0.1516 0.2838 0.4364 0.5805 0.7148 0.8165 0.8970 0.9455 0.9741 0.9902 0.9976 1.0000

case X * > X 1* + X 2* .

If hotels increase their rate to r = 100 EUR, keeping c = 155 EUR, the

100

(19) F ( X ) ≥ = 0,3922 .

100 + 155

rooms, so that X * = X 1* + X 2* .

17

If, on the other hand, the critical ratio is F ( X ) ≥ 0,7 , we can find that

case.

4. The basic model assumes that the marginal revenue from the

rooms to be:

r− m c

(23) F ( X ) ≥ = 1−

r− m+ c r− m+ c

18

Inequality (23) is a similar to (8) but instead of r (room rate), it

includes net lost revenue or the opportunity cost of not having overbooked

the room – the difference between the rooms rate and the cancellation

inversely related to the amount of the cancellation charge – the closer the

cancellation charge to the room rate, the lower the missed benefit from the

unoccupied room, and the less the stimuli to overbook. Our personal

booking type.

5. We must also consider the loss of future revenues, caused by the fact

that clients with overbookings might not make a reservation at the same

paper.

sport events and so on. During special events, the demand for hotel

19

number of last minute cancellations and no shows. Thus, the optimal

variable which the hotel cannot control. That’s why walking guests is

on the “first come-first served” basis and walking late arrivals to other

hotels. This approach, however, does not take into account the different

20

– Room rate – Usually hotels walk guests who have paid the

Where to walk the guests? The hotel must redirect its guests to

clients can be walked to a hotel of a lower category and they must receive a

refund equal to the price difference of both hotels. It is possible that the

or other gift.

21

At practical level, hotel managers are required to establish service

receptionists if they find that too many rooms have been overbooked.

excessive overbooking.

accommodating clients from two single rooms into one twin (if

22

– Arrange transportation to the alternative hotel and compensation

to be periodically trained how to deal with overbookings and take their own

CONCLUSION

date. That’s why walking guests is inevitable and managers must strive to

23

guests. We have extended the basic mathematical model to take into

optimal overbooking levels of two differently priced room types, and the

their reservation policies. We have also concluded that the optimal level of

applied by hotels.

overbookings for more than two different types of rooms considering the

at the same hotel. Mathematical models could also include non-linear costs

of walking guests as well as the loss of future revenues from clients with

overbookings.

24

itself, because while mathematical models deal with rooms and variables,

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http://scholar.lib.vt.edu/ejournals/JIAHR/PDF/issue1.pdf, (Accessed

27.01.2006)

http://bear.cba.ufl.edu/shugan/profile/SSPYM.pdf, (Accessed

18.10.2005)

0-697-08400-0

25

Administration, Cornell University, URL:

http://www.hotelschool.cornell.edu/chr/pdf/showpdf/chr/research/worki

66–69, URL:

http://www.business.vu.edu.au/bho5568/confidential_material/Articles/l

http://ite.pubs.informs.org/Vol3No1/NetessineShumsky/NetessineShum

26

http://www.hotelschool.cornell.edu/chr/pdf/showpdf/chr/research/worki

27

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