Let me ask you a simple revenue strategy question: Which metric is more important, forecasting error or revenue per available room? Revenue, of course. So what’s more important, getting your price right or your forecast right?
This isn’t a trick question, but for many in the hotel industry, the answer is complicated. Revenue managers have been trained for three decades that to get the right price, you need the most accurate forecast. For most revenue management systems, if you don’t like the recommended price, it must mean the forecast is off and you have to override and adjust it until you get that more optimal price.
This is completely backwards and most revenue managers intuitively know this. If a revenue team is told the hotel must be at 90% occupancy on a specific day, most revenue managers would do everything in their power to make that happen by yielding rates to land at exactly that number and be 100% accurate. I know this is possible because I’ve been forced to do it in the early days of my revenue management career at Caesars and Wynn. But you know what, although we may have hit 90% occupancy exactly, we didn’t make as much money as we could have.
The world and your market changes more rapidly than ever before, and by not reacting to those changes, and sticking with this number you picked, you’re leaving money on the table. Price is the main driver of demand, not the other way around.
Instead of starting with the “perfect” forecast, optimizing for that and finding the right prices to hit that number, why not find the price that will make you the most money and let that drive the forecast we know can’t be perfect.
It’s not that a forecast isn’t important, but it shouldn’t be a firm road map. At most, it’s a guiding light or starting point as to what the current conditions are trending toward. The difference being that any changes to those conditions will affect your forecast, and in today’s world, those conditions change more than ever.
Here’s another example:
Consider a situation when your competitor across the street suddenly slashes rates.
You can obsess over how this will hurt your demand and forecast, drop your prices to chase and get the pickup, but then watch everyone cancel their reservations and rebook at the lower rate. Good news, you’ve got an accurate forecast. Bad news, you’ve done a horrible job at bringing in revenue.
Or you realize this sudden change is a fact of life. You may lose occupancy to your crazy neighbor, but you’ll still get some bookings at the higher rates, especially once the hotel sells out across the street, and across other channels where you may not compete, all the while maintaining your price and brand integrity.
The world is going to change around you in a way you’re never going to accurately predict and it will affect your forecast. When that happens, would you rather focus on forecast error or optimizing revenue?
If you chose revenue, then finding the right price is the most important objective in smart hotel revenue strategy. Yes, of course you still need to forecast and the goal of the initial forecast is to guide you on how business is trending. The forecast matters most as you approach the stay date for operational purposes, and any good revenue manager or system should produce accurate forecasts when you get down to a couple weeks or days out. But don’t obsess over a 5% or higher error further out (and remember there’s a right and wrong way to calculate forecast error, too). These are guiding lights and should not be set in stone. Focus instead on making sure you’ve got the optimal price to make the most money.
A good forecast needs to signal whether you have low demand or very high demand, but from there, the magnitude should be driven by price. As you adjust those prices along the way in real time to react to dynamic market conditions, especially across all segments, channels and even room types, your forecast will be noisy. In fact, it won’t be exactly right. But remember, the forecast is a byproduct of price, which is what ultimately drives your revenue.
A better forecast doesn’t make you more money, a better price does. Don’t lose sight of that.
Source: Duetto Research