Restore contribution at an Agra hotel
Before the decision
Occupancy recovered, but discount bundles and channel commissions eroded cash contribution. The hotel discounts on dates with empty rooms. The revenue manager suspects the same offers also fill dates where travellers would have booked directly at the regular rate.
The problem
Should the team choose Improve direct mix or Reduce variable housekeeping costs for the next 12 months?
Decision owner: The business unit lead.
Direct acquisition only helps if it displaces paid bookings on comparable dates.
Option economics
Scroll the table to see all figures.
| Option | Volume (room-nights) | ₹ per unit | Fixed cost | Net contribution |
|---|---|---|---|---|
| Improve direct mix | 22,000 | 2150 | ₹280 lakh | ₹193 lakh |
| Reduce variable housekeeping costs | 25,000 | 1910 | ₹275 lakh | ₹202.5 lakh |
Make the call
- Calculate net contribution for Improve direct mix and Reduce variable housekeeping costs. Which assumption makes the comparison most fragile?
- If the leading option delivers 10% fewer room-nights, does your recommendation change?
- What evidence would you ask for before the team makes an irreversible commitment?
Reveal the worked solution
Start by validating Reduce variable housekeeping costs. It contributes ₹202.5 lakh after fixed costs and leads by ₹9.5 lakh. Treat that gap as the amount of unmodelled cost or lost contribution the option can absorb before the ranking reverses.
- Frame the decision
Start with price, volume, mix and cost. Reconcile the gap at the transaction or batch level before treating a forecast as an explanation of past performance.
- Calculate both options
Improve direct mix: 22,000 room-nights × ₹2,150 less ₹280 lakh in fixed costs gives ₹193 lakh. Reduce variable housekeeping costs: 25,000 room-nights × ₹1,910 less ₹275 lakh in fixed costs gives ₹202.5 lakh.
- Stress-test the forecast
Reduce variable housekeeping costs leads by ₹9.5 lakh in the base case. If Reduce variable housekeeping costs delivers 10% fewer room-nights (22,500) at the same margin and fixed cost, it contributes ₹154.75 lakh. Holding the other option constant, the stressed result falls behind. This isolates volume risk. Check whether both options would respond to the same change in demand.
- Set a decision threshold
Holding the other option’s result fixed, Reduce variable housekeeping costs needs at least 24,503 room-nights to match or beat it under the model. Match booking window and stay dates before comparing channel contribution.
Direct acquisition only helps if it displaces paid bookings on comparable dates. Compare the cost of a limited test with the loss the business would face if the full commitment failed. Ask the team to agree the decision criterion before collecting more evidence.
What if the whole market moves?
The worked solution tests a change to one option at a time. Here, both options gain or lose the same percentage of volume. Unit contribution and fixed costs stay constant.
| Volume scenario | Improve direct mix | Reduce variable housekeeping costs | Higher contribution |
|---|---|---|---|
| Both lose 10% of volume | ₹145.7 lakh | ₹154.75 lakh | Reduce variable housekeeping costs |
| Base assumptions | ₹193 lakh | ₹202.5 lakh | Reduce variable housekeeping costs |
| Both gain 10% of volume | ₹240.3 lakh | ₹250.25 lakh | Reduce variable housekeeping costs |
Explain which option you would take forward. Check whether capacity, price or customer mix would also change as the market moves.