The first step in creating a revenue management strategy is to forecast future demand. The value of a hotel room perishes, or is lost, for any given night they are not booked. Even if the goal is not full occupancy, there is a real need to understand upcoming demand in order to determine what prices various customers will be willing to pay on a given night. For example, a big event in the local area may create higher demand, which means customers will be willing to pay more for a room. But in lower-demand periods, it may be necessary to lower rates to remain competitive and raise occupancy. A good forecast allows managers to set a detailed strategy that takes all these fluctuations into account.
There are four main types of forecasts that revenue managers use: demand forecasts, strategic forecasts, revenue forecasts, and operational forecasts. The demand forecast informs the other three types of forecasts, which you can learn more about in the Rainmaker Guide to Hospitality Revenue Management.
Demand Forecasting is one of the cornerstones of revenue management. It is critical for revenue managers to understand upcoming demand in order to project occupancy, revenue, and operational needs. Critically, demand forecasting predicts how many rooms would be booked on a given day if there were no constraints; this is often referred to as unconstrained demand. Constrained demand caps demand at on-hand room inventory.
So, for example, a hotel with 350 rooms would show a demand of 350 rooms, and not more. In a hotel organization, there are some departments where this type of forecast is beneficial. The operations team needs to staff housekeeping based on total inventory, and the facilities team needs to create a budget. For revenue management purposes, however, it is important to use an unconstrained demand forecast – i.e., one that provides insight into the market opportunity available to a hotel on any given stay-night.
Unconstrained demand starts with what has already been booked and then considers the pace of booking to determine, at the current price, how many rooms would be purchased on any given day if unlimited rooms were available. For example, if hotel occupancy is 350 rooms and the first day’s forecast is for 360 rooms, and the next day’s booking pace is moving towards booking 375 rooms, in each case there is an excess of demand over supply. This information is critical to revenue managers because it means that the hotel has a pricing opportunity – a subject that will be covered in our next pricing blog post.
Want to learn more about forecasting and pricing now? Download the free Hospitality Revenue Management eBook!