DECISION THEORY AND THE INNKEEPER: AN APPROACH FOR SETTING HOTEL RESERVATION POLICY

Hotel room demand stems from three sources: stayovers, reser- vations, and walic-ins. These demands are random, but the reservations demand can be partially controlled by varying the number of reservations accepted. An approach for setting reservation poiicies is developed and illustrated, Three choice criteria are suggested. I. Introduction Setting reservation policy is an important, recurring problem in hotel manage- ment. The problem can be particularly acute during peak demand periods which, de- pending on the hotel, might comprise several months of the year. The difficulties arise, of course, mainly because human behavior is somewhat un- predictable. Many prospective guests make reservations which, for one reason or an- other, they cannot honor. Some cancel (often as late as the scheduled arrival date); others simply become "no shows". Occasionally, trips must be taken on short notice, forcing the traveler to seek accommodations as a "walk-in" (a prospective guest who has no reservation). Even when a guest makes and honors a reservation, the estimated length of stay might prove inaccurate. A businessman who planned a three day mit, for example, might need four or five days to settle his affairs, thus necessitating a longer stay. Conversely, he might finish in a day or two, permitting eariy departure. All of these factors combine to make the demand for rooms an uncertain quan- tity, only partially controllable by the hotel manager. In a sense, then, during peak de- mand periods the hotel manager plays a continual game of chance with reservations. While the stakes in this game are not overwhelming, they are deflnitely not inconse- quenUal. A vacant room (which could have been occupied had more reservations been accepted) inflicts a lost opportunity cost which probably ranges between $40 and $75 per day, depending on the hotel's rate structure. Each "walk" or "turnaway" (a guest holding a reservation that the hotel cannot honor) inflicts a cost -both the cost of se- curing accommodations for that individual and, more importantly, the loss of good will and future business that almost certainly stem from not being able to honor a re- servation. A good reservations policy strikes an appropriate balance between these costs.