EasyBeds Case © 2004 Stefan Scholtes (Cambridge) OVERBOOKING AT EASYBEDS Background The hotel chain EasyBeds1, with headquarters in London, has been operating throughout Europe for several years and has recently expanded into the Asian market. Their customers in Asia are international leisure and business travellers. EasyBeds’s strategy is based on a no-frills business model. EasyBeds hotels compete with 5-star hotels but at a substantially reduced cost base. This enables EasyBeds to offer international service standards at a price considerably below the 5-star hotels but above the 2- to 3-star local hotels that cater for the national market. Reservations can only be made centrally over the internet and are paid by credit card at the time of booking. By cutting out non-essential services, such as hotel bar and restaurant, and centralising others, EasyBeds is able to operate at substantially lower costs than the 5-star hotels. In addition, the company uses a sophisticated yield management system to better match demand to capacity. High capacity utilization is a key success factor in the hotel industry because its cost structure is largely fixed, dominated by capital and maintenance costs, relative to which the marginal cost of an additional customer is negligible. The core of EasyBeds’s yield management system is a dynamic pricing model, adapted from the airlines industry, which adjust room prices on a daily basis, depending on how demand is evolving, to better match demand to capacity. EasyBeds offers only one type of room with en-suite showers and a double bed, allowing for doubleoccupancy at no extra cost to the customer. All rooms are equipped with cable TV with international programmes and a 24/7 internet connection. Breakfast cannot be booked but is available on a payfor-service basis at all hotels. The simple internet booking process works as follows: 1) Enquiry: Customers input the destination and arrival and departure times 2) Pricing: The booking system checks if rooms are available and if so, the revenue management system compares the current booking level for the dates requested with today’s booking target for these dates and calculates a price in $US, depending on the gap between achieved booking level and target level. If rooms are available, customers are quoted the price and asked if they wish to book. 3) Booking: Customers book and pay immediately by credit card in $US. The Situation Bill has recently graduated from the Cambridge MBA programme and has been hired by EasyBeds to help with the Asian expansion. His remit over the next 6 months is to identify untapped profit opportunities and report them to the board. To get a better idea of the situation in Asia, he decides to have a closer look at the EasyBeds Hotel in Shanghai. The hotel was opened two years ago and is relatively small with 150 rooms The revenue management system shows that last year’s revenues amounted to $2.8 M with an the average price per night of $55, considerably lower than the $150-$180 for a 5-star hotel in Shanghai. Due to the mix of leisure and business customers, the average stay of EasyBeds customers is about 3.5 days, significantly longer than the 2.5 days an average customer stays in a 5-star hotel, which cater primarily for business customers. Demand has constantly increased over the past years and EasyBeds is likely to build a second hotel in Shanghai in the near future. EasyBeds revenue management system shows that the hotel was fully booked roughly 50% of days over the last quarter. It comes as a big surprise to Bill when staff in Shanghai tell him that they hardly ever have all rooms occupied. Indeed, the hotel’s registration data shows that the capacity utilization of the hotel is only moderate at 81% during the last quarter. This is considerably better than the 55%60% utilization in Shanghai’s 5-star hotels, but leaves room for more business. The hotel director tells Bill that the reason for the moderate utilization is a considerable number of no-shows. Upon reflection, this shouldn’t be a surprise. Although EasyBeds offers no cancellation refunds, the occasionally very low prices quoted by the pricing system entice customers to book even if they are not sure that they will need the room. Because there is no refund, customers don’t bother to cancel unneeded rooms. This has become very pronounced over the past year with the proportion of no1 The set-up of the case and the names of companies and people are fictitious. EasyBeds Case © 2004 Stefan Scholtes (Cambridge) shows averaging at about 14% of bookings. Although the company has received payments for the rooms, no-shows do create under-utilization and, in the presence of stiff demand, cause considerable opportunity costs. This could be an untapped profit opportunity! Bill decides to look into this. Last year at the Cambridge alumni fair, Bill had met Jacques, who had done his MBA a few years ago and is now yield management director of a successful French low-cost airline with headquarters in Paris. They naturally started talking about their businesses and discussed the similarities and differences of the no-frills model in their industries. Following their meeting, they had been in regular contact by email. Bill picks up the phone to call Jacque and explain the situation. Jacque tells him that the low-cost airline companies have the same problem and deal with it through fairly aggressive overbooking: They sell a significant proportion of seats twice. If too many customers show up for a particular flight, some passengers need to be “bumped” as the airlines call it. Airport personnel ask if any passengers are willing to wait for the next flight and offer a generous compensation. Jacque says they almost always find young leisure customers who do not mind waiting for the next flight, which is often on the same day, if compensated through flight vouchers and accommodation if necessary. A simple Approach to Overbooking Over lunch, Bill discusses the issue with his golf-mate Karl, who is in the company’s revenue management team. Karl is excited about the prospect of overbooking. Bill asks what he would suggest as overbooking policy. Karl thinks for a few minutes and then suggests EasyBeds would utilize its capacities best if each hotel’s booking limit is set so that hotel capacity equals the expected number of show-ups if the booking limit was reach. In other words, the formula for the booking limit should be Booking Limit = Hotel Capacity / Percentage of customers showing up. For the Shanghai hotel the booking limit would be 174 customers. Questions - - How can Bill use the airline industry’s overbooking approach for his business? What would he do with the “bumped” customers? How much overbooking, if any, should he suggest? Does Karl’s booking limit make sense? Or should EasyBeds overbook by more or less? Discuss this first intuitively. Then simulate what could happen next year in the Shanghai hotel for various booking limits. How would you communicate your analysis to Karl? Has Bill discovered an untapped profit opportunity? If so, how should he communicate this to the board of the company? Data. The computerized booking system allows Bill to access the number of booking enquiries and the number of actual bookings for each day. Bill has also access to the hotel records, which register the number of no-shows. Last year’s data is provided in the accompanying spreadsheet EasyBedsData.xls.