An automated machine learning based decision support system to predict hotel booking cancellations

Abstract

Booking cancellations negatively contribute to the production of accurate forecasts, which comprise a critical tool in the hospitality industry. Research has shown that with today’s computational power and advanced machine learning algorithms it is possible to build models to predict bookings cancellation likelihood. However, the effectiveness of these models has never been evaluated in a real environment. To fill this gap and investigate how these models can be implemented in a decision support system and its impact on demand-management decisions, a prototype was built and deployed in two hotels. The prototype, based on an automated machine learning system designed to learn continuously, lead to two important research contributions. First, the development of a training method and weighting mechanism designed to capture changes in cancellations patterns over time and learn from previous days’ predictions hits and errors. Second, the creation of a new measure – Minimum Frequency – to measure the precision of predictions over time. From a business standpoint, the prototype demonstrated its effectiveness, with results exceeding 84% in accuracy, 82% in precision, and 88% in Area Under the Curve (AUC). The system allowed hotels to predict their net demand and thus making better decisions about which bookings to accept and reject, what prices to make, and how many rooms to oversell. The systematic prediction of bookings with high probability of being canceled allowed hotels to reduce cancellations by 37 percentage points by acting to avoid their cancellation.