Pricing a Six-Room Homestay Against OTA Commission
A six-room homestay in coastal Konkan has an ₹8 lakh bank loan at 11% interest. Annual occupancy is 48%, the average room rate is ₹2,200, variable cost is ₹450 per occupied room night, and annual fixed costs are ₹6.2 lakh. About 25% of bookings come direct and the rest through online travel agencies that charge 18% commission. The owner is offered a shoulder-season campaign: 20% off the room rate on the OTA, with commission still charged at 18% on the discounted rate. The OTA forecasts 120 extra room nights, but the owner fears the discount will also be taken by guests who would have booked direct. Separately, the owner needs a second person for reception and housekeeping coordination. A trained hospitality graduate wants ₹22,000 per month; a local cousin with no formal training would cost ₹12,000 and could start immediately. The owner must decide on the campaign and on the hire before the season begins.
1. Calculate the contribution per occupied room night for a direct booking and for an OTA booking at the current rate. Then calculate the contribution under the 20% campaign. What does this show?
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Use contribution, not room revenue, because commission and variable cost change the value of each booking.
- Direct: ₹2,200 - ₹450 = ₹1,750.
- Current OTA: ₹2,200 x 0.82 = ₹1,804; ₹1,804 - ₹450 = ₹1,354.
- Campaign: ₹2,200 x 0.80 = ₹1,760; ₹1,760 x 0.82 = ₹1,443.20; ₹1,443.20 - ₹450 = ₹993.20.
The campaign still gives a positive contribution of ₹993.20 per room night, but it is ₹360.80 lower than the current OTA rate and ₹756.80 lower than a direct booking. For 120 extra nights, the campaign contributes ₹1,19,184. If it displaces 40 direct bookings, the loss is 40 x ₹756.80 = ₹30,272, leaving a net gain of about ₹88,912. If it displaces 40 current OTA bookings, the loss is 40 x ₹360.80 = ₹14,432, leaving about ₹1,04,752. The campaign is financially worthwhile if the extra nights are genuinely incremental, but it becomes much weaker if it cannibalises peak-season direct business.
2. Recommend whether to run the campaign and state two controls to prevent the discount from eroding direct business.
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Run the campaign, but only as a controlled shoulder-season offer. The homestay has spare capacity at 48% annual occupancy, and the campaign contribution is positive, so filling empty rooms is better than leaving them unsold. The risk is not the discounted rate itself; it is allowing the discount to spread into peak dates and into guests who would have paid direct. The owner should keep the campaign dates narrow and measure actual incremental bookings rather than relying on the OTA forecast.
Two controls: first, restrict the offer to specified shoulder-season dates, a minimum stay, and a limited number of rooms per night, with a non-refundable or partly refundable condition. Second, protect direct business with a best-rate guarantee and a direct-booking benefit such as breakfast or a room upgrade, and require the OTA rate to remain visible so the owner can compare. The owner should also track promo codes and ask guests at check-in how they found the homestay. If the campaign starts displacing peak-season direct bookings, stop it.
3. Compare the two hiring options and recommend one, using revenue, risk, and guest-experience reasoning. What training or trial condition would you attach?
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The salary difference is ₹10,000 per month, or ₹1,20,000 per year. At a direct contribution of ₹1,750 per room night, the trained graduate needs to generate about 69 extra room nights to cover that difference. A 6.6% increase on the current 1,051 occupied nights would do it, which is plausible if better reception, faster responses, and fewer housekeeping errors improve reviews and repeat bookings. The cousin is cheaper and local, but untrained staff can cause overbooking, billing errors, poor complaint handling, and hygiene lapses that cost more than the salary saving.
Recommend the trained graduate for the season, with a three-month probation and a clear checklist for reservations, check-in, housekeeping coordination, and guest follow-up. Attach a review threshold: guest rating, repeat bookings, and error rate. In parallel, train the cousin as a paid backup for peak weekends so local knowledge is not lost and the business is not dependent on one person. If cash flow cannot support ₹22,000, offer ₹18,000 plus a performance bonus rather than defaulting to the untrained option.