Case Study - Revenue Management at Harrah's

1)     Suppose that, at the start of August 15, most of the hotel’s rooms have been booked for the Labor Day weekend and only the rooms in Table 1 remain free. Now consider the list of 6 reservation requests that came in on August 15, as shown in Table 2. Using the clearing prices that were computed in Table 8 in the Case, determine which customers should be offered a room and what prices they will be charged in the following two scenarios:

a)     Suppose that customers will always take a room that is offered to them regardless of the price. How much room and gaming revenue will the accepted guests generate for the hotel?

The first three customers would be offered rooms and would accept. Total room and gaming revenue would be $4,690 [Exhibit 1].

b)     A problem with the analysis in Question 1(a) is that it ignores potential price sensitivity. Suppose that Tiers 1 and 2 customers will pay at most $250 per room per night. Giving this willingness to pay, assume that these customers will be charged a minimum of $250 per night. How much room and gaming revenue will the accepted guests generate for the hotel? What drives the differences in your answers?

The first, third and fifth customers would accept our quoted price. Total room and gaming revenue from these three guests would be $4,405. Caller #6 would be turned away. Callers 2 and 4 would not accept our quoted price because the total price was more than $250 per night [Exhibit 2].

2)     Recall that Harrah’s computes its clearing prices by splitting its forecasts for multiple-day stays (LOS >1) into distinct single-night stays. This calculation does not fully capture the effect of multiple-night stays, however. For example, if you honor a request for LOS = 3, then a room must be blocked for three consecutive nights. How can you modify the clearing price calculation to explicitly account for the effect of multiple-night stays? As in Question 1(b), assume that Tiers 1 and 2 customers will be charged a minimum of $250 per night.

a)     With these assumptions in mind, develop a method to account for multiple-night stays, and apply that method to determine revised clearing prices for the nights of August 31 through September 4. Explain the methodology that you used and report your modified clearing prices.

To calculate the new clearning prices, one will have to account for two factors, the change in the room rate, with the tier 1&2 paying $250 per night and the impact of multiple-day stays.

To achive this objective, we will have to consider a sample of data, based on the tier, their corresponding ADT value and the accepted room rate. The total revenues from a given tier per stay (stay could correspond to multiple nights) would be = {number of nights of stay * (ADT + room rate)}. Then based on this data, we will calculate the total revenue generated from Aug 31 till Sep 4th, by running a liner model against the number of people admitted into the rooms for a given tier and for a given day.

Once, the values are obtained, we could then calculate the revenue generated for a demand of 1 more room on a particular day. The difference between this revenue and the previous revenue obtained (before we increased the demand by 1 more) would give the clearing price for that particular day.

Based on the above method used, we get the below set of the revised clearning price. We have also mentioned the previoud clearning price to show the difference in the clearning price.

Clearing Price	31-Aug	1-Sep	2-Sep	3-Sep	4-Sep
Revised	319	751	881	535	535
Previous	285	285	881	285	69

b)     How do your clearing prices compare to the clearing prices shown in Table 8 of the Case? If they differ, why? If not, why not?

Clearing prices per our sensitivity analysis and Table 8 in the case differ because Table 8 does not consider the length of stay for each tier level [Exhibit 4].

3)     Using the clearing prices you calculated in Question 2, go back and re-solve Question 1(b). Determine which customers will be offered a room and what prices they will be charged. How much room and gaming revenue will these guests generate for the hotel? How does this value compare to the value computed in your original answer to Question 1(b)?

We determined that customers 1, 3 and 5 will accept our quoted price and will book rooms [Exhibit 3] and will generate the same revenue calculated in question 1b. of $4,405. These are also the same customers that accepted room offers in question 1b.