19Jul

Revenue Management Forecasting:  Outrun Your Pace Group

Author: Dan Skodol

In the last mile of a recent distance race, I suddenly found myself running alongside a pace group leader. If you’re unfamiliar with pace groups, they’re an optional means to assure yourself of a certain finishing time so long as you stick with the group for the entire race. This particular pacer turned to me and said, “I’m just the pacer – go on, go ahead and beat me!”  I mustered up some energy and pushed myself a little harder to see what I was capable of at that late stage of the race.

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Business Forecasting

Business forecasting – the practice of projecting a final result for occupancy, ADR, and revenue for a day, month, or year, often at a market segment level – is a common task of the revenue manager. Most of the time the business forecast is delivered to the revenue manager’s superiors or the hotel’s owners, and guides top-level decision making for the hotel.

In many ways, our business forecast is like the pace group we’ve signed up for in advance of the race – it represents what we expect to accomplish and the specific result we’ll see if we follow a set of decisions as planned.  This might include pricing our product at a certain level, running a promotion to target incremental business, or putting new third-party contracts in place.  In the race, our sole decision would be to keep up with the pacer, and that would deliver our predetermined result.

Revenue Management Forecasts

The revenue management forecast, in contrast, provides a picture of total, unconstrained demand for future dates, typically ignores rate, and is usually generated by an automated revenue management system, if a property has one.  The revenue management forecast helps revenue managers make both strategic and tactical decisions on business mix, channel management, and pricing.  In the context of an automated system, the forecast will also serve as an input to the system’s optimization, which will produce recommendations for the revenue manager on how to price and manage channels in order to achieve the best possible mix and best possible revenue result.

The revenue management forecast is analogous to what we’re truly capable of in the race that we’re running. It represents the best we can possibly do given our training, how well we sleep the night before, and how much we’re fueled by the breakfast we eat. There may be other factors like the wind speed, weather, and on-course congestion and runner traffic, that we won’t be able to measure until the race is actually in progress.

Based on these we may be able to go faster than our pace group, or the very best we might do could be to fall short of the pace group.  During the actual race we’ll be making these decisions as to how to run the race dynamically and in real-time.  Our result then will not be predetermined such as in the case of a pace group, but rather a function of the various adjustments we make in response to these many conditions.  While we may not be exactly certain of the outcome ahead of time, we will know that the result is truly the best possible one we could have achieved.

Revenue Managers and Incentive Plans

I’ve spoken to a few revenue managers who are held accountable for the accuracy of their business forecast – in fact, they are even bonused based on that accuracy. I find the use of business forecasts in these incentive plans somewhat baffling, as it implies a lack of adaptability to changing conditions. If it were up to me, I would want to miss my original forecast, so long as it was in the upward direction, as it would be an indication that I found and captured additional opportunities in the course of my revenue management forecasting and the resulting tactics.

I wouldn’t want to be “dinged” for that forecast miss in my incentive plan. And if I happened to miss in the other direction, I could feel confident that it was still the best result given the changing circumstances. I would propose that these incentives should instead be based on the accuracy of the revenue management forecast and the degree to which the revenue manager is able to capture the total revenue opportunity.

In sum, don’t end up being the runner that commits himself to following his pace group for the entire race, lest the result become a self-fulfilling prophecy. Treat your decisions as still unwritten, rather than assumed as part of your forecast. And don’t spend too much of your time as a revenue manager trying to predict the outcome instead of focusing on making the right decisions that will steer you towards the best possible outcome. Staying the course might get you across the finish line, but making sure you measure your total opportunity and adapt to changing conditions will assure you of your personal best.

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