Top 3 Forecasting Ideas to Avoid The Continuous Improvement Trap

Author: Erik Browning

We are well into 2016 and it is apparent that while we see RevPAR growth, it is considerably lower than years past.  As a result, hotels are going to have to work very hard this year to achieve their targets. Many hotels have a budget that is built on a continuous improvement philosophy.  For instance, if the hotel expects the market to grow by 6%, they may budget 7%.  However, what if this isn’t good enough? What if your RGI is far below expectations?  What happens when a disruptor shows up in the marketplace and changes everything?  To combat this, hoteliers should be thinking about discontinuous improvement.  In other words, not just marginally better results, but finding ways to create dramatically improved performance.

lightbulb illustrating an idea

There are many strategies that can be executed.  I have seen examples where a hotel decided to cut out 80% of their negotiated accounts with unprofitable booking patterns and replace them with better business.  Other hotels have exercised the “out” clause on their airline crew rooms because of too much displacement.  Commonly, hotels that have undergone a renovation need to reposition the property to attract higher valued customers to allow them to hit the pro-forma and budget.  Sometimes these are multi-year plans, but hotels should always be looking for ways to generate value back to ownership.

two workers renovating a hotel

Discontinuous improvement plans are difficult and create anxiety within the team, as history may not show that the results are possible.  However, through the forecast process it is possible to create an environment and culture where this risk is embraced.  Hotels build many forecast types, but too often they are only done to meet a deadline.  Instead, properties should leverage this forecast process to create this strategy:

  1. Annual Budget – This is the full year forecast which is delivered to and approved by ownership.  The marketing plan, action plans, incentive plans, and purchasing plans are all built around it.  Usually, this forecast is aspirational, yet achievable if all necessary steps are taken.  The budget should reflect discontinuous improvement.  In certain situations with a high degree of risk, it may come in the form of a second “stretch” budget.  This is the foundation for your business plan and daily activities throughout the year.  Once approved, it usually doesn’t change. 
    • Annual Budget has a large margin of error and uncertainty when you are forecasting for unusual changes in strategy.  Status Quo budgets have better certainty and lower margins of error.
  2. Rolling Forecast – Each month, the forecast is updated with your best knowledge.  Hotels will update anywhere from the next three months up to the next 12 months on a monthly basis.  The window for forecast revisions is dependent on where the forecast uncertainty is highest in the annual budget. This forecast is compared to the Annual Budget and historical actuals.  Progress relative to the budget is tracked here and hotels should update their strategic plans and tactics based on the current market conditions. 
    • The short term rolling forecast (45 days), should be extremely accurate.  As you move further away from the arrival date, the uncertainty and accuracy will be lower.
  3. Revenue Management System Forecast – A system generated forecast which is based on historical and forward looking data and improved by user input.  These forecasts are largely predicated upon trend data and created using sophisticated statistical models.  This type of forecast are always based on a continuous improvement process (i.e., better mix, better rate, more customers with higher profit contribution, etc.) when there is no additional user input.  Compare the system generated forecast to the rolling forecast and annual budget to identify gaps and opportunity. 
    • The short term system forecast (45 days), should be extremely accurate.  If the hotel leverages the system forecast to determine need dates and then acts differently to improve performance, there will be higher uncertainty and lower accuracy. 

Identifying the need for discontinuous change best occurs the Annual Budget process.  If missed there, it can be picked up in the Rolling Forecast.  It takes someone to step back and see that the current trajectory isn’t going to be good enough.  If you live by continuous improvement, someone will disrupt your model.  Savvy hoteliers will create their own discontinuous improvement strategy by taking calculated risks.  Hotels will leverage business intelligence, revenue systems, market statistics, historical performance, and other data to create a plan around this change.

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