A key ingredient to optimize your revenue is to forecast properly and then to base your strategies on that forecast.

If the demand is lower than expected you could try to stimulate demand by lowering your price or create a promotion or increase your value proposition.

If the demand is higher than expected you could aim to restrict the demand by adding a length of stay restriction, increase your price or even close certain channels/roomtypes.

The success of whatever strategy you choose depends a lot on the accuracy of the forecast. Let’s say you decided to decrease the price to increase your occupancy, but the demand was not low, but instead the booking pace has shifted to be closer to arrival.

So occupancy would certainly increase by your price action, but at a much lower price than was necessary, because demand would have come in anyway, but a bit later. Or you decided to increase the price due to a much higher demand expectation, but missed the mark by not properly calculating price elasticity and suddenly your On-The Books, which was ahead of pace falls behind and you are forced to reverse course.

Accurately forecasting demand within an error of margin of 2.5% 30 days before arrival is not easy, as there are many factors to consider and consumers have a lot of options on both product and channel nowadays. But this article is not about the process or challenges of forecasting instead it aims to advise of the negative financial impact to base your strategy on the “owner” forecast.

So what is an owner forecast? To get to that we should understand that there are many types of hotel asset owners for example institutional investors, private family offices, REITs, private equity firms, hospitality companies, real estate developers and while the common ground is their desire to maximize the return of the investment in the asset, there are a lot of different ways and envisioned timelines to achieve that objective.

Let’s compare the buy & hold versus the buy &f lip strategy. While the first one is focused on the long term value appreciation of the asset and a steady cash flow, the second strategy aims to improve the asset value quickly, so it can be sold at a premium. There is nothing inherently wrong with either strategy, but the buy & flip owner will more likely than not put a lot of pressure on the operations to show a positive performance and forecast.

Working in the corporate office of many hospitality operators exposed me to many different kind of owners and understanding their objective in owning the asset helped me a lot during budget/forecast discussions. If you have a buy & flip owner asking you to show a forecast that is according to the data analysis not achievable, I recommend to create an “owner forecast” as arguing that the numbers are not achievable is most likely not getting you anywhere.

So you would have in fact 2 different set of numbers one for the owner and one based on scientific analysis of demand pattern. I know – definitely time consuming and at times frustrating, but the worst thing (even for the owner) would be to inflate the numbers and show a high ADR and then base your strategy on these inflated numbers and increase your price to achieve such ADR.

As the demand is not there (as you have correctly forecasted) this strategy will decrease your occupancy (and with it ancillary revenue) even more and your RevPAR will decrease.

From a financial perspective it is better to base your commercial strategy on a fact based data analysis and create strategies to stimulate demand if required and applying the correct price point to optimize RevPAR.

At the end the owner won’t be happy that you didn’t achieve the “owners forecast”, but financially you are still in a better position if you follow a fact-based strategy instead of creating a strategy based on unrealistic wishful thinking.

If you need help with fact-based decision making and building a profit optimization strategy for your asset, please reach out to info@wolfcommercialconsulting.com or check out one of our revenue management culture building packages.

Stefan Wolf
Managing Director - Wolf Commercial Consulting

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