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Demand Forecasting vs. Financial Forecasting
By Jason Q. Freed
Thursday, 19th September 2019
 

A financial forecast helps hoteliers predict the financial performance and operational performance of a hotel, this can be equated to making bets on not only what's happening with demand and customers, but then how the hotel is going to respond to that demand and how performance will end up.

For example:

  1. How many transient room nights will the hotel have available?
  2. How many reservations will the hotel have on that particular night?
  3. What channels are those reservations going to come from and at what price?

These data points and others help hotels more accurately predict occupancy, ADR and RevPAR for future dates, whether that be this weekend or a year from now.

A good financial forecast takes into account the decisions a hotelier will make in the future, as well as predicting what decisions the competition will make and how customers will respond. It's a complicated optimization problem that is in part data-driven and part judgment of the hotelier.

A demand forecast, however, is a very specific forecast that's not constrained to the size of the hotel. So, a hotel could be pacing to 120% occupancy, which means the hotel, at its current pricing and distribution strategies, has more demand than it can accommodate. It’s an important signal that could mean the hotel should raise its rates and lower any discounts on outstanding channels (without closing them out).

Why are demand forecasts unconstrained?

This is because, while a constrained forecast would indicate the hotel is going to sell out and reach 100% occupancy, a revenue manager might want to know whether the hotel is pacing for exactly 100% occupancy or how much additional demand there is. Is the hotel pacing toward 110% occupancy or 200% occupancy? The difference would significantly alter the hotel’s pricing strategy.

Therefore, a constrained financial forecast is useful for resource planning and variance to budget, etc. An unconstrained demand forecast is there to help make tactical decisions around maximizing RevPAR and profitability.

Unfortunately, hoteliers often confuse the two types of forecasts, particularly when it comes to measuring forecast accuracy. It’s common for hoteliers to want to know exactly how accurate their forecasts are, and they’re usually most concerned about measuring the accuracy of predicted demand.

But it’s financial forecast accuracy that’s easy to measure: After the date or time period in question has passed, hoteliers can simply look back and see how accurate the predicted numbers were. However, the accuracy of demand forecasts are nearly impossible to measure because of their unconstrained nature. For example, it’s impossible to measure unconstrained demand through a third-party channel or OTA.

Over time, a good revenue strategist will gain a sense for how accurate, plus or minus, their demand forecast is.

This blog is adapted from our whitepaper Strength in Numbers: Unlocking Data for Actionable Insights. Download your free copy.

Jason Q. Freed, Managing Editor
Jason joined Duetto as Managing Editor in June 2015 after reporting, writing and editing hotel industry news for a decade at both print and online publications. He’s passionate about content marketing and hotel technology, which leads to unique perspectives on hotel distribution and revenue management best practices.

www.duettocloud.com

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