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How to think about forecasting

24 November 2022
All hotels have an idea about the future. In other words, they have a forecast of what will happen in the future. Their judgment might not be based on data, systematic, or realistic. These forecasts are based on the daily information flow from multiple media channels. Therefore, the forecast is a guess, a hunch, or an opinion of what the future might look like. That type of forecast is more of an opinion than a well-grounded forecast of how much revenue the hotel possibly would capture from the demand for overnight stays in the destination where the hotel is located.

Many independent hotels do not forecast because of a lack of time and easy-to-use forecasting tools and systems. The simplest and straightforward solution is to use Excel or any other spreadsheet software. Please keep it simple. It is better to have a forecast made by a revenue manager or hotel manager than to have many people spend time figuring out what the occupancy will be in the future. Any housekeeping manager without an official forecast will still make a forecast when scheduling the housekeepers. The question is whether you want one person to spend time forecasting or many people in the organization to do the same job repeatedly.

Forecast the core business

Hotels are in the business of providing overnight accommodation. Some hotels call this a guest experience, but the core product is still the hotel room. Therefore hotels need to understand the demand for hotel rooms at the destination and, specifically, the demand for staying at their hotel. The demand for overnight accommodation is a function of the reason for traveling to the destination. Hence, hotels need to understand all travel reasons and also how the demand varies by day of the week and season. In addition, destination-wide and local hotel events will impact the demand for overnight stays. Therefore, hotels need to forecast the number of rooms day-by-day for every single day at least 12 to 18 months out. Making a forecast for a year, quarter, month, or week without the granular day-by-day forecasts is more an opinion than a well-underbuilt forecast.

Three good reasons hotels should forecast

Forecasting the number of occupied rooms day-by-day is the minimum a hotel must do to have a plan on how to run the business. If the hotel has an occupied room forecast, the hotel can plan and schedule the correct number of housekeepers needed to clean the occupied rooms. Efficient labor scheduling is an excellent reason to forecast day-by-day.
However, the primary reason for forecasting is to be able to set the correct rates for the different room categories on any given day. The higher demand, the higher rates. Hotels selling out too early leave money on the table without good reason. Setting the correct rates to capture a fair share of the market or steal market share from the competition is what revenue managers and hotel owners dream about. The only way to succeed is to work with and update the forecast continuously. Keep listening for changes in reasons for travel to the destination and take action accordingly.
The third reason to forecast is to plan purchases of guest amenities, laundry, cleaning materials, food & beverage, and other supplies that are part of the cost of goods sold.

Pitfalls in forecasting

Do not get too clever in forecasting. If the hotel has less than 150 rooms, there is a low added value to split the room forecast into smaller parts than the total occupied rooms and the average rate, generating the room revenue for each day. The more granular the revenue manager makes the forecast, for example, a forecast for each distribution channel, feeder market, or segment, there is the risk that the sum of each error will be higher. Some errors will be positive and some negative, so what is the point of spending time making many different forecasts when the forecasting accuracy will not improve? In addition, the extra time needed to create separate forecasts for distribution channels, feeder markets, and segments will divert the revenue manager from more critical tasks. Please keep it simple and high-level for adjusting rates, labor scheduling, and purchasing.

What else should hotels forecast?

Instead of putting more effort into forecasting occupancy and room revenue, hotels should start forecasting other significant revenue sources, such as food & beverage, meetings, spa, golf, etc. Forecasting other revenue sources will impact pricing, labor scheduling, and purchasing as it does for room occupancy forecasting, thereby growing long-term revenue and profit.