How does the pandemic change demand forecasting?

03 March 2022
During the pandemic, hotels started to question the need for revenue management since there was no demand to manage. As a result, many highly knowledgeable people left the industry. Maybe the revenue management discipline lost some self-esteem and started questioning some of their methods, such as how they forecast and what data they need.
Revenue management is critical for a hotel to succeed, so let's look at what data revenue management teams should prioritize and if there is a difference in pre-pandemic and post-pandemic forecasting?

Definition and the purpose of forecasting

There is some confusion about forecasting. First, there is a mixup between goal, budget, and forecast. Second, forecast and prediction are not precisely the same. Third, it is not about being right.

The difference between goal, budget, and forecast

The goal is an ambition and can be anything from realistic to stretched. A budget is a financial plan for a specific period, usually a fiscal year. A forecast is a continuously updated realistic view of the future based on current knowledge.

The difference between forecast and prediction

Generally speaking, the prediction is based on a hunch drawn on random amounts of similar prior incidences. In contrast, a forecast is based on a formulation derived from studies of measured results of similar incidences over time. Forecasting makes a realistic assessment of future demand based on presently available data, insights, and knowledge.

Forecasting accuracy

Forecasting is all about better understanding what actions the hotel needs to implement to reach its goals or stretched goals or come close to its budget. With a realistic forecast, it will be apparent where the hotel needs to take action. If the revenue manager base the forecast on anticipated tactical decisions and actions that the hotel might not execute, there is a high risk of disappointment when the actuals come in below the forecast. The whole idea with forecasting is to get a realistic view of the future demand and then create a better future revenue.

Data to better understand the future

There are no limits in available data, so the data itself is not a problem. Getting the data might be slightly more complicated, but the most challenging part is understanding whether the data has some meaning in forecasting demand for hotel accommodation. During the pandemic, hotel revenue managers have been using the word "future data" and "future-looking data." There is no such thing as future data because the future has not yet happened, so no data has been captured. All data is history, and everything in the future is a forecast. Hotel revenue managers have had the ambition to find data that would indicate future demand to make it easier to forecast.

Basics

The driver for hotel accommodation is the travel reason. If there are no reasons for travel, there will not be any demand for hotel accommodation. Therefore, it is critically essential for hotels to understand the travel reasons to the destination. The pandemic has not changed the fundamental travel reasons, such as holidays, visiting family and friends, and business. People could not travel because governments restricted travel. The pandemic also accelerated digitalization, such as virtual meetings, which partly replace the physical meeting and eliminate the travel reason and the need for accommodation. Travel for business will be a travel reason also in the future, but the volume will be lower for a few years, and the future growth will be shared between physical and virtual.
 
Hotels need to forecast demand based on travel reasons to the destination. Therefore the most important tool is still the old-fashioned calendar showing the workweek, weekends, holidays, and events. The job of the hotel is to capture the demand for accommodation generated by many different travel reasons. This is where segmentation is valuable to better understand the needs and behavior of the traveler.
 
Part of the basics is to understand the present and future supply of hotel rooms in the destination. Knowledge about both demand and supply in a market is essential for success.

Understand patterns

Everyday life patterns change at a very slow pace. Children go to school, parents work, weekends are free, holidays during the summer, etc. Not even a pandemic can change these patterns. The basic patterns will remain the same even if volumes temporarily have shifted during the pandemic due to travel restrictions.
 
Historical data is, therefore, still crucial for understanding patterns. In addition, historical information is also helpful in understanding shifts in demand from different segments.

Understand behavior

Consumer behavior typically also changes slowly, but the pandemic has accelerated changes in consumer behavior. Some of these changes are because of travel restrictions and accelerated digitalization. For example, hotels have seen increased demand for larger room types, shorter booking windows, a higher flexibility for cancellations, more extended stays, and a shift to bookings on the hotel website. The behavior might change again when travel restrictions have been removed.

Understand travel intent

Hotels have been looking for signals of future travel. Travel searches increased and brought hope to the hotel industry. People were dreaming about travel, but restrictions prevented them from realizing their dreams. The data gave hotels false hopes in the short-term perspective. Again, when there are no travel restrictions, people will go back to their usual travel patterns.

Forecasting is still the same

There will not be any significant differences between forecasting pre-pandemic and post-pandemic. Travel patterns will return as soon as all the travel restrictions are gone, and the travel demand will soon surpass pre-pandemic levels. Consumer behavior will, in the end, not change much, and people again look for the cheapest rates with restrictions far in advance.