Demand Forecasting in

the Hospitality Industry

HBM491
Operational analysis

“With better forecasting

comes better revenue.”
Operational analysis
Agenda

• Objectives

• The Importance of Accurate Forecasting

• Forecasting Methodology

• Recommend the appropriate forecasting model for a given situation.

• Describe the features of exponential smoothing.

• Exercises

• Q&A

Demand Forecasting in Hospitality Industry ,

Objectives

• Describe the nature and limitations of forecasting and identify the kinds of
patterns that emerge from historical data of hospitality operations.

• Explanation of why collecting and analyzing data about customer demand for lodging products
and services are essential for forecasting sales

• Describe and apply various quantitative forecasting methods and explain how they differ from
qualitative forecasting methods.

• Identify factors hospitality operations should consider when selecting a

forecasting method.

• Calculate a forecast using a moving average, weighted moving average, and exponential
smoothing

• Describe the purpose of, and methods used to create, short-term forecasts in
the lodging industry.

Demand Forecasting in Hospitality Industry ,

“With better forecasting comes better revenue.”
Why bother?
Let’s consider of not forecasting how many rooms in your hotel / seats at the
restaurant you will sell next Saturday night.

If you don’t know how many guests you’ll have:

• You won’t be able to sell the empty rooms
(losing revenue)
• You won’t know how many sausages, or how
much bread to order for breakfast Your ability to manage
demand successfully
• You won’t know how many clean sheets and
and maximize revenue
towels you will need will depend on the
• You won’t know how many staff to call in on accuracy of your
Sunday morning to serve breakfast and clean forecasts.
the rooms.

Imagine the same situation on other types of the industry i.e. airlines,
hospitals, catering etc.
Demand Forecasting in Hospitality Industry , 9 of 54
A Revenue Management Cycle
There are many components to implementing a
successful revenue management culture
and process in a hotel. Forecasting demand
Optimizing demand
Controlling demand
Monitoring demand

Demand Forecasting in Hospitality Industry , 10 of 54

What is forecasting?

Forecasting is a tool used for predicting

future demand based on past demand
information.

Demand Forecasting in Hospitality Industry ,

What is
Forecasting
• Forecasting can be defined as
‘calculation and prediction of
short-term future events such as sales
for the following day, week, or month.’

• Forecasting is necessary in order to

plan the most effective and efficient
ways to meet expected sales volume.

• The accuracy of sales forecasts is a

major determinant of the cost
effectiveness of the hospitality
operation.

Demand Forecasting in Hospitality Industry ,

 Uses of Forecasts Yield
• Selling strategy
• Staffing
Management
• Maximisation of occupancy and rate
• Open / closure policy for outlets
• Purchasing and storage
• Cash flow.

Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MI IT/IS systems, services

S
Operations Schedules, MRP, workloads
Product/service design New products and services
Demand Forecasting in Hospitality Industry ,
What is forecasting all about?
Demand for Hotel Rooms We try to predict the future by
400 looking back at the past

200

150

100 Predicted
demand
50
looking back
Time
Jan Feb Mar Apr May Jun Jul Aug six months

Actual demand (past sales)

Predicted demand

Demand Forecasting in Hospitality Industry ,

 should be
Elements of a Good Forecast accurate
The forecast
• should be timely
• should be accurate*
• should be reliable
• should be expressed in
• meaningful units
• should be in writing
• technique should be simple to understand and use
• should be cost effective
Demand Forecasting in Hospitality Industry ,
 The forecast

Accurate Forecasts Count should be accurate*

• In revenue management, your goal is to work with demand and the resources
you have to maximize your revenue. To do this effectively, you need to
understand the subtleties of constrained and unconstrained demand and why
accurate forecasting is a necessary part of any revenue management system.

Constrained Demand
• The total of all realized demand, for instance, for rooms at a particular hotel.
Constrained demand is understood to reflect the limitations of inventory and
the influence of availability controls.

Unconstrained Demand – The total of demand as unlimited fraction

• A calculation of demand for the rooms, rates, and other products sold by a
hotel-including demand which the hotel is currently incapable of satisfying-
which is the sum of constrained demand plus the sum of denials.

Demand Forecasting in Hospitality Industry ,

The Importance of Demand Forecasting

Decision on Prices

Demand Forecasting in Hospitality Industry ,

 Steps in the forecasting process
Forecasting begins with reservation data.
A skilled forecaster charts and analyzes
the data, building curves and calculating
averages, to get the information needed
for an accurate forecast.

The forecast
reservations-on-hand
(ROH)
S
t
e
p

M
o
n
i
t
o
Demand Forecasting in Hospitality Industry , 22 of 54
Forecasting in the Hospitality Industry
Hotel Revenue Managers forecast mainly Room
Demand for a future period of time measured Demand (customer)
either in: The number of potential
buyers with the interest
• Number of Rooms and ability to purchase the
• Number of Room Nights products sold by a business
at the specific price offered.
• Number of Guest Nights

Room Nights = Occupancy Rate x Hotel Rooms x Average Length of

Stay

Guest Nights = Occupancy Rate x Hotel Rooms x Average Guest

per Room
To forecast accurately, RMs use three types of data:
Type of Information Describes
Historical data Events that have already occurred
Current data Events occurring now or in the very near term
Future data Events that will occur in the future
Demand Forecasting in Hospitality Industry ,
Forecast Variations
Types of Forecasts
• Arrivals Forecast - An arrivals forecast includes guests arriving on the forecast day, but
does not include guests arriving prior to the forecast day for multi- night stays.
• Room-Nights Forecast - A room-night forecast includes guests arriving on the forecast day
and guests arriving prior to the forecast day for multi-night stays.
Levels of Forecast Detail
• Day of week - Most forecasting is done by the day of the week, that is, a Monday
forecast would be built using data from previous Mondays, a Tuesday forecast would be
built using data from previous Tuesdays, and so on. Demand varies reliably by day of the
week, with certain obvious exceptions (holidays, emergencies).
• Length of stay - For length-of-stay forecasting, individual forecasts are created for each stay
length (one-night, two-night, three-night, etc.).
• Rate class - For a hotel that offers more than one rate class (for instance, rack rate, discount,
or super discount), forecasts can be created for each rate class individually.
• Inventory type - In the case of hotel-room forecasting, a forecast by inventory type might be
characterized by king-or queen-sized beds, or view.
• Aggregate - Arrivals or room-nights are forecasted as one group, without
regard to individual subgroups such as length of stay, rate class, or room type.

Demand Forecasting in Hospitality Industry ,

The Importance of Demand
Forecasting
The Four Components of an Effective Forecast

RM’s “study the

past to define
the future”

Demand Forecasting in Hospitality Industry ,

Historical Data
Common historical data tracked by RMs include:

• Number of reservations/ room nights booked per day

• Number of reservations/ room nights denied per day

• Occupancy % achieved
• By the property
• By room type
• Average number of guests per room
• Average length of guest stay

• Number of daily reservation cancellations

• Total number of room nights canceled
• Number of check-ins (arrivals)
• Number of check-outs (departures)
• No-shows
• Walk-ins
• ADR achieved
Demand Forecasting in Hospitality Industry ,
Historical Data
Trailing period
A data collection method characterized by the act of discarding the oldest piece of
data in a data set when the newest data are added, thus updating the set’s
information while keeping the set size constant. Data contained in a trailing period
are often used in calculating a rolling average.

Average Last 8 Mon Last 8 Tue Last 8 Wed Last 8 Thu Last 8 Fri Last 8 Sat Last 8 Sun
Occ % 88% 91% 78% 67% 45% 51% 29%
ADR $158.75 $188.75 $148.75 $138.75 $155.75 $159.75 $129.75
RevPAR $139.70 $171.76 $116.03 $92.96 $70.09 $81.47 $37.63

Demand Forecasting in Hospitality Industry ,

Historical Data Rolling average
An average calculated by using historical data generated during a changing time
period. Seven Day Rolling Average
Date 1-7 2-8 3-9 4 - 10 5 - 11 6 - 12 7 - 13 8 - 14

1 $1,350
2 $1,320 $1,320
3 $1,390 $1,390 $1,390
4 $1,440 $1,440 $1,440 $1,440
5 $1,420 $1,420 $1,420 $1,420 $1,420
6 $1,458 $1,458 $1,458 $1,458 $1,458 $1,458
7 $1,450 $1,450 $1,450 $1,450 $1,450 $1,450 $1,450
8 $1,460 $1,460 $1,460 $1,460 $1,460 $1,460 $1,460
9 $1,410 $1,410 $1,410 $1,410 $1,410 $1,410
10 $1,440 $1,440 $1,440 $1,440 $1,440
11 $1,470 $1,470 $1,470 $1,470
12 $1,460 $1,460 $1,460
13 $1,418 $1,418
14 $1,494
Total $9,828 $9,938 $10,028 $10,078 $10,108 $10,148.00 $10,108.00 $10,152.00
7-Day $1,404.00 $1,419.71 $1,432.57 $1,439.71 $1,444.00 $1,449.71 $1,444.00 $1,450.29
Rolling
Average

Demand Forecasting in Hospitality Industry ,

Historical Data Usage
Assume that you are the manager in a 200 room hotel. You are now confronted with the
following question:
• Do you recommend that the hotel fill a tour operator’s request to reserve 100 rooms on
the Monday night that is three weeks from now, if the room rate requested by that tour
operator is $109.00 per room?
To answer if you have to accept or denied the request you have to proceed as following:
1.Calculate the forecasted RevPAR based on the estimated demand for rooms that does
not include the new piece of business.
$158.75 (trailing ADR) x 0.88 (trailing Occupancy %) = $139.70 RevPAR forecast
If 100 rooms are sold at $109.00, it is reasonable to assume a sellout of all remaining
available rooms.
The estimated RevPAR generated in such a case would be calculated as:
$109.00 (proposed tour operator rate) x 0.50 (Occupancy % @ 100 rooms) =
$54.50
plus
$158.75 (trailing ADR) x 0,50 (Occupancy % with sellout) = $79,37

Total RevPAR $133.88

The difference between the two RevPAR is $5.82 ($139.70 - $133.88 = $5.82)

Thus the RM should rejectDemand

the group
Forecastingbusiness due to lower RevPAR.
in Hospitality Industry , 30 of 54
 Minimum length of stay

Current Data (MLOS)

A revenue management strategy
RMs monitor: that instructs reservationists to
decline any room reservation
 Occupancy and Availability Reports request that does not equal or
 The number of rooms available to sell exceed the predetermined
minimum number of nights
 The number of rooms reserved allowed.
 The number of rooms held or blocked
 The estimated ADR resulting from currently reserved or blocked rooms

 Group Rooms Pace Reporting

 A summary report describing the amount of future Pick up
demand for a property’s group rooms and the rate(s) at The proportion of
which that group business has been captured. Also previously reserved
referred to as a group rooms booking pace report. rooms that are
ultimately occupied.
 Non-rooms Revenue Pace Reporting

• Who are our key buyers of conferences?

• What is their lead time for reserving space?
• What is the role of price in converting a prospect to a customer?
• What meetings business has recently been lost, and why?
• What meetings or conference business has been denied, and why
Demand Forecasting in Hospitality Industry , 31 of 54
Forecasting Future

“My interest is in the future because I

am
going to spend the rest of my life there”
Charles F. Kettering
(inventor, engineer, businessman, and the holder of 186 patents)
Forecasting Future Demand
To best forecast future demand RM’s:

1. Know about special citywide or area-wide events in the area that affect demand

2. Understand demand for competitive hotel properties in the area

3. Consider the opening or closing of competitive hotels

4. Adjust demand forecasts quickly when faced with significant demand- altering events
(i.e., unusual events, inclement weather, power outages and airport or highway
closings)

5. Adjust demand forecasts quickly when faced with significant demand- altering events
(i.e., unusual events, inclement weather, power outages and airport or highway
closings)

Demand Forecasting in Hospitality Industry ,

 Future Future
Forecasting Data Demand
Forecast Type Characteristics/ Purpose
Occupancy forecast • Forecasts at least 1, 2, 7, 14, 21, and 30 days out
• Produces daily and weekly occupancy percentage estimates
• Unlikely to exceed 100 percent
• Helps improve employee scheduling
• Shows guest arrival and departure patterns

Demand forecast • Identifies periods of 100 percent or more occupancy

demand for rooms
• Identifies periods of very low demand
• Forecasts 30, 60, 90 days out
• Produces at least weekly occupancy percentages
• Used to help establish room rate selling strategies
Revenue forecast • Forecasts 30 days out or more
• Estimates RevPAR
• Matches revenue forecasts to pre-established budgets
• Advanced versions help estimates the hotel’s cash flows
• Should not exceed revenue generated by more than 100 percent of
available rooms

Demand Forecasting in Hospitality Industry ,

 Forecasting Approaches
Quantitative Forecasting
• Quantitative techniques involve either the projection of historical data or the development of
associative methods that attempt to use causal variables to make a forecast
• These techniques rely on hard
data
• Involves mathematical
techniques

Qualitative Forecasting

• Qualitative techniques permit the inclusion of soft information such as:

• Human factors
• Personal opinions
• Hunches
• These factors are difficult, or impossible, to quantify
Demand Forecasting in Hospitality Industry ,
Forecasting Methods - Qualitative
• Usually based on judgments about causal factors that underlie the demand of particular
products or services.
• Do not require a demand history for the product or service, therefore are useful
for new products/services.
• Approaches vary in sophistication from scientifically conducted surveys to intuitive
hunches about future events.
• The approach/method that is appropriate depends on a product’s life cycle stage.
Qualitative forecasting methods include:
• Executive opinions
• Sales force opinions
• Consumer surveys
• Outside opinion
• Delphi method (series of questionnaires)
• Opinions of managers and staff
• Achieves a consensus forecast

Qualitative methods emphasize human judgment and may be useful when the data needed for
quantitative methods is not available.

Demand Forecasting in Hospitality Industry ,

 Forecasting Methods
The quantitative methods are divided as:
- Quantitative
• causal approaches, and
• time series approaches;
these methods are based on measurable data.

• Time series approaches assume that • Causal approaches assume that the
a pattern recurs over time; pattern value of a certain variable is a
may be used to forecast. function of other variables.

• Causal methods include

• Time series approaches include • regression analysis and
• naïve methods, • econometrics
• moving averages, and
• exponential smoothing;

Demand Forecasting in Hospitality Industry ,

Time-Series Forecasting - Naϊve
Forecast
Naïve Forecast

•Uses a single previous value of a

time series as the basis for a forecast

•The forecast for a time period is

equal to
the previous time period’s value

–Advantages:
• Simple to use
• Virtually no cost
• Quick and easy to prepare
• Data analysis is nonexistent –Limitations:
• Easily understandable Do not consider potential effects of
• Can provide accuracy decisions (such as pricing and advertising)
• Can be a standard for accuracy made for future periods;
• must take seasonality into account;
• cannot provide high accuracy

Demand Forecasting in Hospitality Industry ,

Time-Series Forecasting - Averaging
Historical data typically contain a certain amount of random variation,
that tends to obscure systematic movements in the data. This randomness arises
from the combined influence of many relatively unimportant factors, and it
cannot be reliably predicted.
• These techniques work best when a series tends to vary about an average
• Averaging techniques smooth variations in the data
• They can handle step changes or gradual changes in the level of a series
• Techniques
1. Moving average
2. Weighted moving average
3. Exponential smoothing

Demand Forecasting in Hospitality Industry ,