Benefits and challenges in forecasting hotel demand
20 December 2022
Forecasting in the hotel industry involves predicting future demand for rooms and other hotel services. This can help hotel managers make informed decisions about pricing, staffing, and marketing strategies. Hotel forecasting can be challenging, as it involves anticipating and responding to many variables. However, it is an essential aspect of hotel management, as it can help hotels maximize revenue, optimize operations, and improve the overall guest experience.
Several factors can influence demand for hotel rooms, including the time of year, local events and attractions, and overall economic conditions. Hotel revenue managers may use various tools and techniques to make accurate forecasts, such as historical data, market research, and industry benchmarks. This blog post answers many of the commercial team's challenges when setting up the most productive forecasting process in a hotel group or an independent hotel.
Why is forecasting important to hotels?
Forecasting demand for overnight accommodation is crucial because it helps hotels plan for the future and make informed business decisions. Accurate demand forecasting allows hotels to optimize their room inventory, pricing, and staffing levels to meet the expected demand.
A good understanding of future demand helps hotels plan for peak periods and ensure enough rooms available to meet the expected demand. It allows hotels to identify opportunities to sell rooms at higher prices during times of high demand while avoiding overbooking or selling out at a low rate.
Demand forecasting also helps hotels optimize their staffing levels by allowing them to plan for the number of employees they will need to schedule for cleaning rooms and servicing guests. This can help improve operational efficiency and reduce labor costs while ensuring that the hotel can provide good customer service to guests.
Overall, forecasting demand for overnight accommodation is a crucial aspect of hotel management and helps to ensure that hotels can meet their guests' needs and reach a healthy profit level.
To make it easy to navigate the blog post, here is a summary of the remaining content.
- What is total revenue forecasting?
- Who is responsible for forecasting
- What are the challenges in forecasting?
- How much better is a system in forecasting than a human being?
- What are the benefits of replacing a human with a system?
- What should a hotel forecast?
- What does a typical hotel guest funnel look like?
- Forecasting using the guest funnel
- How can hotels forecast demand for overnight stays?
- How can a hotel find its ideal market segments?
- How many segments can a hotel realistically handle?
- What is the benefit for hotels to forecast by segment?
- What are the challenges for hotels to forecast by segment?
- How can a hotel analyze data to find its highest spenders?
- What are the benefits of focusing on high-spending guests?
- How do hotels onboard their guests?
- How can you upsell hotel guests?
- Forecasting is critical to managing a hotel successfully
What is total revenue forecasting in hotels?
Hotels have focused on forecasting rooms and room revenue and have yet to pay much attention to other revenue sources. Now, hotels take more interest in all revenue sources to maximize the total revenue. Total revenue forecasting in the hotel industry involves predicting the total revenue a hotel will likely generate over a given period.
Total revenue forecasting is essential to financial planning and budgeting for hotels. It helps hotel managers and owners anticipate their business's financial performance and make informed resource allocation and investment decisions.
The hotel revenue manager may use various tools and techniques to create a total revenue forecast, including historical data on occupancy rates, ADR, length of stay, industry benchmarks and trends, market research, and economic indicators. The revenue manager may also use data from reservation systems and revenue management software to make more accurate predictions.
Once the total revenue forecast has been created, hotel managers and owners can use it to set revenue generation targets, identify growth opportunities, and make informed decisions about pricing, marketing, and other operational strategies.
Who is responsible for forecasting in hotels?
In a hotel, forecasting is typically the responsibility of the revenue management team or department. The revenue management team is responsible for maximizing the revenue and profitability of the hotel by forecasting demand and setting pricing strategies. They use various tools and techniques to forecast room demand and other revenue-generating areas of the hotel, such as food and beverage, meetings and events, and spa services.
To forecast demand, the revenue management team may use data from various sources, including historical data on occupancy and room rates, market trends, competitive analysis, and events or activities in the area. They may also consider other factors such as seasonality, holidays, and special events.
The revenue management team works closely with other departments in the hotel, such as sales, marketing, and operations, to ensure that forecasting and pricing strategies are aligned with the overall business goals of the hotel. They also communicate with the hotel's management team to provide updates on demand forecasts and performance and to make recommendations for adjusting pricing or promotions as needed.
What are the challenges in forecasting demand for hotels?
There are several challenges in forecasting demand for hotels:
- Seasonality: Hotels often experience fluctuations in demand due to seasonal factors such as holidays, weather, and local events.
- Economic factors: Economic conditions can impact demand for overnight accommodation, as travelers may be more or less likely to take trips based on their financial situation.
- Competition: The number of hotels in a particular area and the quality and pricing of those hotels can affect demand.
- Unforeseen events: Natural disasters, political instability, and other unexpected events can disrupt travel and impact hotel demand.
- Changing traveler preferences: Trends in travel, such as an increased interest in eco-tourism or the popularity of specific destinations, can impact hotel demand.
- Accuracy of data: Accurate and up-to-date data is essential for accurate demand forecasting, but collecting and analyzing data can be challenging, particularly for smaller hotels.
Forecasting demand for hotels is a complex task requiring careful analysis and consideration of different factors.
How much better is a revenue management system in forecasting than a human being?
If forecasting is complex, wouldn't a system be better at forecasting than a human? It isn't easy to quantify how much better a revenue management system is at forecasting compared to a human being, as it can depend on the specific system and the person making the forecast. However, revenue management systems are designed to analyze large amounts of data and use complex algorithms to generate forecasts, which can make them more accurate than a human in some cases.
Revenue management systems can also be more consistent in forecasting, as they do not have the same biases or fluctuations in performance as a human might. Additionally, they can process data more quickly and often be more effective at detecting trends and patterns in data that a human might not be able to discern.
Overall, revenue management systems can be a valuable tool for helping businesses make informed decisions about pricing, inventory, and other factors that impact revenue. However, it is essential to note that these systems are not always perfect and may still require human oversight and judgment to ensure that their forecasts are accurate and relevant to the business.
What are the benefits of replacing the revenue manager with a revenue management system?
The complexity is overwhelming for a human, so here are some benefits of replacing the revenue manager with a revenue management system.
There are several potential benefits to replacing a revenue manager with a revenue management system:
- Increased accuracy: Revenue management systems are designed to analyze large amounts of data and use complex algorithms to generate forecasts, which can make them more accurate than a human in some cases.
- Consistency: Revenue management systems are consistent in their forecasting, as they do not have the same biases or fluctuations in performance that a human might.
- Speed: Revenue management systems can process data more quickly than a human, which can help businesses make faster and more informed decisions about pricing and inventory.
- Cost savings: Implementing a revenue management system can save hotels money by reducing the need for a revenue manager or team of revenue managers.
- Improved decision-making: Revenue management systems can help businesses make more informed decisions about pricing, inventory, and other factors that impact revenue.
Again, It is important to note that revenue management systems are only sometimes perfect and may still require human oversight and judgment to ensure that their forecasts are accurate and relevant to the business. Additionally, replacing a revenue manager with a system may require significant upfront investment and the company to adapt to new processes and technologies.
The conclusion is that forecasting is still too complex for a revenue management system and too complicated for a revenue manager. Hotels need a system and a human to reach high productivity and the best possible forecasts to optimize revenue and maximize profits.
What should a hotel forecast?
The core business for a hotel is overnight accommodation, so forecasting demand for rooms and room revenue is essential. There are several critical details that a hotel should consider when forecasting demand for overnight accommodation:
- Occupancy rate: This is the percentage of rooms expected to be occupied over a given period. Forecasting the occupancy rate can help a hotel to optimize its room inventory and pricing to meet the anticipated demand.
- Average daily rate (ADR): This is the average amount of money a hotel expects to charge per room per night. Forecasting the ADR can help a hotel to identify opportunities to increase prices during times of high demand and make informed pricing decisions based on market conditions.
- Revenue per available room (RevPAR): A hotel that forecasts occupancy and ADR will automatically forecast RevPAR, which is calculated by multiplying the occupancy rate by the ADR. Forecasting RevPAR can help a hotel to understand its expected financial performance and to identify opportunities to increase revenue.
In addition, two significant factors affect occupancy and ADR.
- Seasonality: Many hotels experience fluctuating demand due to seasonal variations in travel patterns. Forecasting demand during different seasons can help a hotel plan for variations in demand and optimize its room inventory and pricing accordingly.
- Group bookings: Hotels often receive group bookings from organizations or companies that want to book a block of rooms for a specific event or purpose. Forecasting group bookings can help a hotel to understand the expected demand from these types of bookings and to plan accordingly.
Forecasting these key factors can help a hotel make informed business decisions and optimize its operations to maximize profits based on the expected demand for overnight accommodation.
The next level of forecasting is total revenue forecasting. Instead of forecasting each revenue source, hotels should start from the guest's perspective and forecast how much each guest will spend in the hotel during the stay. The next step in forecasting is to look into the different stages in the typical hotel guest funnel.
What does a hotel guest funnel look like?
A typical hotel guest funnel is a series of steps or stages a potential guest goes through to make a reservation at a hotel. The hotel guest funnel differentiates from the traditional customer purchase funnel since the driver of demand for overnight accommodation is travel reasons. The hotel room is always secondary to the reason the guest travels to the destination.
There are two perspectives on the guest funnel. One is the hotel's perspective in capturing the market. The other is the guest's perspective on how to select where to stay.
The specific steps in the funnel can vary, but generally, it includes the following:
- The market: The hotel needs to understand the demand, which means extensive knowledge about why people travel to the destination.
- Segmentation: Hotels cannot accommodate everyone traveling to the destination, so hotels must select market segments that best fit the hotel.
- Identify high spenders: Within each segment, guests spend differently. Hotels must decide which guests they would like to attract to the hotel. When the hotels have more knowledge about the potential guests, they can craft product offerings and campaigns to create awareness of the hotel.
- Awareness: The potential guest becomes aware of the hotel and its offerings. This can happen through advertising, word of mouth, or searching various channels, such as metasearch, social media, and online travel websites, for a place to stay.
- Consideration: The potential guest begins to consider the hotel as a possible option for their stay. They may research the hotel and its amenities, compare prices with other hotels, and read reviews from past guests.
- Decision: The potential guest decides to book a room at the hotel. They may do this through the hotel's website, by calling the hotel directly, or by using an online travel agent.
- Booking: The potential guest completes the booking process and pays for their room. This may involve providing personal and payment information and selecting room type and other preferences.
- Onboarding: The hotel can onboard the guest to the stay from the time of booking to the day of arrival. The hotel can prepare the guest for the stay in this window and sell additional products and services.
- Arrival: The guest arrives at the hotel and checks in. Here, the hotel has another opportunity to upsell the guest to a higher room type and promote other facilities in the hotel.
- Stay: The guest stays at the hotel and uses the hotel's amenities and services which brings in more revenue to the hotel.
- Departure: The guest checks out of the hotel and leaves. The hotel can now analyze how successfully it maximized the total spending per stay or guest.
- Feedback: The guest may provide valuable feedback on their stay through a review or survey, which may give the hotel useful information on maximizing average revenue per guest.
This is just a general overview of a typical hotel guest funnel. The specific steps and details may vary depending on the hotel and the guest's experience.
I want to let you know that not all potential guests will progress through every stage of the funnel. The hotel decides to focus on specific guest categories, which means that the hotel also skips some types. Guests might not be attracted by the offering and may drop out at any point. Hotels aim to attract and retain as many guests as possible by providing a seamless and enjoyable experience at each funnel stage.
Now, let's apply forecasting to each step in the guest funnel. This will enable the hotel to understand its business better and take action to improve revenue and profits.
Forecasting using the guest funnel
Forecasting in hotels involves predicting future demand for rooms and other revenue-generating areas of the hotel, such as restaurants, conference and event spaces, and other amenities. There are several dimensions to consider when forecasting demand in hotels. A hotel can reduce complexity and improve accuracy using the guest funnel steps.
Forecasting starts with the demand for overnight accommodation in the hotel's destination with seasonal variations, day-of-the-week variations, and the impact of events at the destination. The number and quality of other hotels in the area can affect the demand for rooms at a particular hotel. The better a hotel understands its market, the more opportunities will open up to grow revenue to maximize profits.
The next step is to segment the market better to understand the target audience's specific needs to create attractive offerings that will make the guests aware of the hotel and attract them to book. The hotel can maximize the total and average revenue per guest by focusing on high spenders.
The onboarding process aims to sell more to each guest while ensuring that each guest will be satisfied with the total guest experience during the stay.
Forecasting revenue per guest is better than forecasting each revenue source separately.
By forecasting demand in these dimensions, hotels can better plan for staffing, inventory management, and pricing strategies to maximize revenue and profits. Let's look into the details of forecasting each step of the guest funnel.
How can hotels forecast demand based on travel reasons?
There are several ways that hotels can forecast how many people will travel for a specific reason:
- Market research: Hotels can conduct market research to gather data on travel patterns and trends. This can involve surveying travelers, analyzing data from travel websites and booking platforms, and tracking industry statistics.
- Collaboration with travel industry partners: Hotels can work with travel industry partners, such as travel agents, tour operators, and airlines, to get a better understanding of travel demand and trends.
- Use of data analytics tools: Hotels can use data analytics tools to analyze historical data on bookings and occupancy rates to forecast future demand. These tools can help hotels to identify patterns and trends in travel behavior, such as the popularity of specific destinations or the impact of external events on travel.
- Marketing and promotion strategies: Hotels can work closely with destination marketing companies and use marketing and promotion strategies to attract travelers and increase bookings. For example, hotels may offer special promotions or packages targeting specific groups of travelers, such as families or business travelers.
- Local events and attractions: Hotels can also consider the impact of local events and attractions on travel demand. For example, if a city is hosting a major sporting event or music festival, this may increase the demand for hotel rooms in the area.
Overall, forecasting travel demand involves gathering and analyzing a wide range of data from various sources to help hotels make informed decisions about how to best meet the needs of their guests. However, more guests are traveling and looking for hotel rooms that the hotel can accommodate, so hotels must segment the market and focus on segments with the best fit for the hotel.
How can a hotel find its ideal market segments?
There are several ways that a hotel can find its ideal market segments:
- Conduct market research: This can include gathering data on guest demographics, preferences, and behavior through surveys, focus groups, and other research methods. This information can help a hotel understand the needs and preferences of different market segments and tailor its marketing and sales efforts accordingly.
- Analyze customer data: A hotel can also analyze data on its current guests, such as booking and reservation patterns, to identify patterns and trends that can help it determine its ideal market segments.
- Identify target markets: A hotel can identify target markets by considering location, amenities, and pricing factors. For example, a hotel near a beach may target leisure travelers, while a city-center hotel may target business travelers.
- Use segmentation tools: There are also several tools and resources available that can help a hotel segment its market, including market research firms, customer relationship management (CRM) software, and industry-specific segmentation tools.
- Test and refine: Once a hotel has identified its target market segments, it can test its marketing and sales efforts to see how well they resonate with those groups. This can involve analyzing data on bookings, revenue, and other metrics and making adjustments to target better and serve the hotel's ideal market segments.
How many segments can a hotel realistically handle?
There is no specific number of segments that a hotel can realistically handle, as it will depend on the size and resources of the hotel, as well as the complexity of the segments. A small hotel may only have the capacity to manage a few segments, while a larger hotel may be able to handle a more diverse range of segments.
Hotels need to identify the most critical segments of their business and focus on serving them effectively. This may involve developing targeted marketing campaigns and customizing the hotel's offerings to meet each segment's specific needs and preferences.
It is also essential for hotels to regularly review and assess their segmentation strategy to ensure that it is still relevant and practical. This may involve adding or removing segments or adjusting each segment's marketing and service offerings.
What is the benefit for hotels to forecast by segment?
Forecasting by segment allows hotels to understand better and anticipate the demand for different types of rooms or services within their property. This enables them to optimize their pricing and inventory management strategies based on the expected demand for each segment. For example, if a hotel expects a high demand for luxury suites, it can adjust its pricing accordingly to optimize room revenue for each room type. On the other hand, if the hotel expects low demand for higher room categories, it can overbook a lower room category to be available to drive more demand.
Forecasting by segment can also help hotels identify opportunities to upsell or cross-sell to their guests. For example, suppose a hotel expects high demand for premium products and services such as spa services or fine dining. In that case, it can use this information to encourage guests to upgrade their stay by purchasing these additional services.
Forecasting by segment can help hotels maximize their revenue and profitability by better aligning their pricing and inventory management strategies with the expected demand for different room categories and other products and services.
What are the challenges for hotels to forecast by segment?
There are several challenges that hotels may face when trying to forecast demand by segment:
- Increased complexity: Forecasting rooms and ADR is complex in themselves. Adding another layer of detail will increase complexity exponentially and require substantial time and effort from the revenue management team.
- Lack of historical data: If a hotel is new or has not previously collected information on specific segments, it may be difficult to accurately forecast demand.
- Seasonality: Demand for different segments may vary significantly based on the time of year. For example, demand for business travel may be higher during the week and lower on weekends, while demand for leisure travel may be higher on weekends and holidays.
- Competition: Hotels may face competition from other hotels and vacation rental properties, making it difficult to forecast demand accurately.
- Changes in market conditions: Economic conditions, government policies, and other external factors can significantly impact demand for different segments.
- Limited forecasting tools: Many hotels need access to advanced forecasting tools, making it difficult to predict demand accurately.
Accurately forecasting demand by segment can be complex and challenging for hotels. It requires a thorough understanding of market conditions, historical data, and market needs and preferences of different segments.
How can a hotel analyze data to find its highest spenders?
There are several ways that hotels can analyze data to identify their highest spenders, also known as their top customers or "VIPs." Here are a few approaches:
- Analyzing customer spending patterns: By examining customer spending habits, hotels can identify guests who consistently spend more than others on things like room rates, dining, and other hotel services.
- Using customer loyalty programs: Many hotels have loyalty programs that track customer spending and reward frequent guests with free nights or room upgrades. By analyzing data from these programs, hotels can identify their top spenders.
- Analyzing customer demographics: Data on customer demographics, such as age, gender, income level, and location, can help hotels identify groups of guests who tend to spend more than others. For example, a hotel might find that business travelers tend to spend more on average than leisure travelers.
- Examining booking patterns: Data on how guests book rooms (e.g., through the hotel's website, through an online travel agent, or by calling the hotel directly) can provide insight into which customers tend to spend more on their stays.
By analyzing this data, hotels can identify their highest spenders and tailor their marketing and customer service efforts better to meet the needs and preferences of these valuable customers.
What are the benefits of focusing on high-spending guests?
Focusing on high-spending guests can be beneficial for hotels in several ways:
- Increased revenue: High-spending guests are more likely to book higher-priced rooms and spend more money on amenities and services during their stay, resulting in increased revenue for the hotel.
- Repeat business: High-spending guests are often more loyal and more likely to return to the hotel for future stays, providing a steady revenue stream.
- Positive reputation: Attracting high-spending guests can also enhance the hotel's reputation, as it may be seen as a desirable destination for affluent travelers. This can attract even more high-spending guests in the future.
- Upselling opportunities: High-spending guests may be more open to upgrading their rooms or booking additional services, providing opportunities for the hotel to upsell and generate additional revenue.
- Higher profit margins: Focusing on high-spending guests can also lead to higher profit margins, as these guests are more likely to pay premium prices for rooms and services.
Focusing on high-spending guests can help hotels generate more revenue, attract loyal customers, and enhance their reputation in the marketplace.
How can you upsell hotel guests?
Upselling is the process of encouraging hotel guests to purchase additional products or services during their stay. Here are a few strategies that hotels can use to upsell guests:
- Offer value-added amenities or services: The hotel can offer guests additional amenities or services that enhance their stays, such as a room upgrade, a spa treatment, or a meal at a hotel restaurant.
- Present options at the time of booking: The hotel can present guests with options for additional products or services, such as a package that includes tickets to a local attraction or a meal plan.
- Cross-sell related products or services: The hotel can cross-sell associated products or services, such as offering a rental car or tickets to a local attraction to guests booking a room.
- Provide personalized recommendations: The hotel can provide customized recommendations to guests based on their interests or needs, such as suggesting a nearby restaurant or activity the guest might enjoy.
- Use customer data: By analyzing customer preferences and spending habits, the hotel can tailor its upselling efforts better to match the interests and needs of individual guests.
Overall, upselling aims to offer guests additional products or services to enhance their stay and create a more positive experience. Hotels need to be respectful and not overly pushy when upselling, as guests may feel pressured or annoyed if they feel like they are being constantly sold to.
How do hotels onboard their guests?
Many hotels must take advantage of the opportunity to onboard their guests to the hotel experience. In most hotels, 80 % of the guests stay in the hotel for the first time. They have seen pictures and read some online facts about the hotel. However, most guests need to learn more about the hotel where they will stay. Hotels can onboard the guest from the time of booking and upon arrival.
Hotels typically have a process for onboarding guests upon arrival, welcoming and orienting them to the hotel and its facilities. This can include the following steps:
- Check-in: The guest arrives at the hotel and presents identification to the front desk staff. The staff will verify the guest's reservation and provide them with a room key and other necessary information or materials.
- Orientation: The guest is given a brief orientation to the hotel and its facilities. This may include a hotel map, information about their room's location, and details about amenities such as the pool or fitness center.
- Room assignment: The guest is taken to their room by a hotel staff member, who will show them how to use the room's features and amenities and provide any additional information or assistance.
- Welcome amenities: The guest may receive welcome amenities such as a basket of fruit or a small gift.
- Follow-up: The hotel staff may follow up with the guest later in their stay to ensure that they are satisfied with their accommodations and to offer any additional assistance or information.
Overall, the onboarding process aims to make the guest feel welcome and comfortable and ensure they have everything they need for a pleasant stay. Hotels may have slightly different onboarding processes depending on their size, location, and guests' specific needs.
By using the guest funnel, hotels follow a process to maximize revenue per available guest and thus maximize the total revenue for the hotel.
Forecasting is critical to managing a hotel
Revenue forecasting in hotels is complex; therefore, hotels need data, tools, systems, and people with analytical skills to produce reasonably accurate forecasts regularly. Without the proper resources dedicated to forecasting, every manager and sometimes every team member needs to make their judgment and predictions on the number of rooms, guests, and revenue to be able to manage their jobs. How could a housekeeping manager plan without forecasting the number of occupied rooms? How could a banquet manager plan without predicting the number of guests? No general manager, CEO, or owner would want everyone to spend time forecasting when the hotel's revenue management team could provide an accurate forecast for the whole hotel.
Many hotels still need to forecast accurately and regularly. The lack of a reliable forecast means that the management drives the business blindfolded. Mistakes happen all the time, and the hotel cannot satisfy the guests, which leads to less favorable guest reviews and fewer returning guests.
Forecasting is the first critical step towards capturing more market opportunities and managing capacity and variable costs based on demand. More revenue and lower costs create long-term financial success.