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In Revenue Management, You Can Have Good Timing AND Good Forecasting

In Revenue Management, You Can Have Good Timing AND Good Forecasting

I recently read a piece about an international resort company that introduced a Revenue Management System (RMS) within the last five years.

NB: This is an article from Rainmaker

Like many resort properties around the world, their hotels have a high degree of dependence on contracted tour business and other leisure-oriented distribution channels. Because of the long lead-time associated with forming these contracts, “timing” is a very important focus of Revenue Management as missing a contract season means missing out on bookings that are essential to their performance.

This certainly makes sense. But I got lost when the Revenue Manager stated in an interview that due to the long lead times, timing was more important than forecasting. I was surprised that for the very same reason, forecasting wasn’t an integral component of their practices.

I don’t think the two are mutually exclusive – in fact, I can’t imagine a scenario where you wouldn’t want to have a sense of what your future business mix might look like when making some crucial decisions that could ultimately make or break performance several months down the line.

I know of several resort hotels that have regretted certain advance decisions that “locked” them into an outcome and potentially displaced more valuable, potentially direct-booking business. On the flip side, being too optimistic and getting too aggressive in negotiating with third parties could end up shooting a property in the foot when their occupancy suffers in need periods.

While hotels may not have as much ongoing control as they’d like over structured contracts once they are within their booking horizon, there are still some key decisions and levers to pull at contract time that would benefit largely from having a forecast in place ahead of time. Hotels need to understand and anticipate segment mix by season, length of stay patterns, value associated with each segment (even better if that value extends beyond rooms revenue to look at ancillary streams and profit), and when demand is expected to materialize.

First and foremost, a hotel should have a specific overall volume target they anticipate needing to reach via contracts, driven by the forecast. Perhaps the resort can negotiate guarantees during peak periods, or rates that are percentages of current BAR as opposed to fixed rates. With a forecast of anticipated need periods, the hotel and third party can agree on more attractive terms for the latter in order to drive volume. The more granular the forecast, the more precise the parties can be in negotiating mutually beneficial terms. Finally, a hotel needs to know what other contracts it may or may not pursue, or otherwise fall victim to a “first-come, first-served” result that would favor the first-movers.

One may argue that it is difficult or impossible to formulate an accurate forecast so far ahead of time. That is not a valid reason to forego a forecast entirely, or even discount its importance. Even the least bit of advance information or remote prediction can help shape important decisions in a hotel’s favor. If I told you I could roll a pair of dice such that rolling a four, five, or six on each die was even slightly more likely than rolling the other numbers, it would probably lead you to conclude I’ll be rolling more nines and tens on the pair. This may not end up as too accurate of a prediction, but it could help out in a craps game. Likewise, your hotel forecast, regardless of its accuracy, will help steer you in the right direction in your third-party negotiations. As with any negotiation, understanding your alternatives is what ultimately prevents you from giving up more than you need.

In summary, your hotel doesn’t need to sacrifice forecasting for timing or vice-versa – both will be important in maximizing results. If you share the challenges of the resort company described here, think about the key decisions that you are faced with during contract season and identify as part of your Revenue Management strategy how a forecast will help guide those decisions.

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