Lance Irick

Compare one unit sold forward against the same unit held back:

committed = spot price x (1 - discount) - cost x utilization paid whether or not it is used
held for spot = sell-through x (spot price - cost) earns only if it sells
Set them equal and solve:
break-even discount = 1 - [ sell-through x (spot - cost) + cost x utilization ] / spot

This is Littlewood's rule in different clothing. The classic two-class yield result, from 1972, says accept the discounted booking when its price clears the full price times the probability that full-fare demand would have taken the seat anyway. Spot sell-through is that probability here. The marginal cost terms turn it into a contribution comparison rather than a revenue one, and utilization is the piece airline seat inventory does not have, because a seat is either flown or not while a committed unit can go unused and still be paid for. Same decision, wider domain.

Two forces, pulling opposite ways. Sell-through is the cost of saying yes: the tighter your capacity, the more a commitment displaces a buyer who would have paid full price, and the less discount you can afford. Utilization is the benefit of saying yes: unconsumed commitment is revenue without cost, so the more breakage you expect, the deeper you can go. At the defaults, 55% sell-through and 70% utilization support a 40.5% discount. Take sell-through to 90% and it collapses to 16%.

What it does not price. A commitment is worth more than this arithmetic says, and the extra is hard to quantify honestly. Demand certainty lets you plan capacity instead of buying option value. It lowers churn and lengthens the relationship. It can be a beachhead into an account that expands well beyond the committed volume. None of that is in here, which means the break-even figure is a floor on what you should be willing to give, not a target to walk in with.

And what it assumes. One price, one period, one customer, take-or-pay. No overage pricing, no tiering, no ramp, no credit risk, and no competitor who quotes against you the following week. Real commitment deals are negotiations, and this is the number you want in your head before one starts, not the answer you bring out of it.

occupancy(P) = min( occ0 × (P / P0)^e , ceiling ) constant-elasticity demand, capped
RevPAR(P) = P × occupancy(P)
contribution(P) = occupancy(P) × (P − variable cost)
profit(P) = contribution(P) − fixed cost fixed cost shifts the level, never the optimum

Where the answer comes from. Setting the derivative of contribution to zero gives an interior optimum of P* = c × e / (1 + e), which depends only on variable cost and elasticity, not on where you are priced today. With these defaults that lands at $98, well below the price that fills the portfolio, so the ceiling binds first and the answer is fill-constrained: price to the ceiling and stop.

Three regimes, and what decides which one you are in. That interior optimum only exists while demand is elastic. Compare it against the price that fills the portfolio and the answer follows. Below the fill price, the ceiling binds first and you are fill-constrained. Above it, the interior optimum wins and you are margin-constrained: take the rate and accept the empty units. Once elasticity passes −1, contribution rises with price without bound and there is no finite optimum at all, which is the model telling you it has run out of road rather than handing you a number.

What moves you between the first two is contribution margin, not elasticity alone. At these defaults, variable cost is $28 against a fill price near $144, so the interior optimum lands at $98 and the ceiling binds. Push variable cost toward $120 and the interior optimum climbs past the fill price, the regime flips, and the model starts arguing for rate instead. Cheap marginal nights argue for filling. Expensive ones argue for margin. That is the whole trade, and it is why both inputs sit on the same panel.

What this omits, deliberately. Constant elasticity is a local approximation. It is wrong in the tails and should not be trusted far from the observed price. There is no seasonality, no day of week, no competitor response, no length-of-stay mix, and no pacing curve, all of which a production model needs. Fixed cost is shown because it decides whether the unit should exist, not what it should charge.

Why it is still the right first question. Elasticity is the parameter that decides the answer, and it is the one most pricing conversations never estimate. A simple model argued honestly beats a sophisticated one nobody trusts.

commission = ADR × comm%
payment fee = (ADR − commission) × payfee% charged on what you actually collect
booking fee/night = fee / ALOS per-reservation charges spread across the stay
effective CPA = CPA / (1 − cancel%) acquisition is spent per booking made, not per booking honored
net = ADR + ancillary − commission − payment fee − booking fee − acquisition

Not modeled, on purpose. Cancellation here only inflates acquisition cost. It does not price displacement, meaning inventory held for a booking that washes, which is where agency-model channels do their real damage and where an honest number depends on compression and how late the cancel lands. Rate parity spillover and loyalty liability are absent too.

Why it still changes decisions. The ranking reorders once payment fees, per-booking charges, and cancellation-adjusted acquisition sit in one column. The break-even figure turns "we should drive more direct" into a budget a marketing team can be measured against.