ECONOMIC PRINCIPLES &

FORECASTING DEMAND
CUSTOMER SATISFACTION IS
WORTHLESS; CUSTOMER
______________ IS PRICELESS
Jeffery Gitomer
CUSTOMER SATISFACTION IS
WORTHLESS; CUSTOMER
LOYALTY IS PRICELESS
Jeffery Gitomer
 • Collect and store relevant historical data (prices, demand, causal factors).
Data
Collection

• Estimate the parameters of the demand

• model; forecast demand based on these parameters; forecast other relevant
Estimation & • quantities like no-show and cancellation rates, based on transaction data.
Forecasting

• Find the optimal set of controls (allocations, prices, markdowns, discounts,

overbooking limits) to apply until the next re-optimization.

Optimization

• Control the sale of inventory using the optimized control.

Control
 IMPORTANT ECONOMIC CONCEPTS &
TERMS

Opportunity Cost

 The cost (lost benefit) of an alternative that must

be forgone in order to pursue a certain action.
Put another way, the benefits you could have
received by taking an alternative action.

 Opportunity cost is assessed in not only monetary

or material terms, but also in terms of anything of
value.
 CETERIS PARIBUS
 Latin phrase that translates approximately to "holding other
things constant" and is usually rendered in English as "all
other things being equal". In economics and finance, the term
is used as a shorthand for indicating the effect of one economic
variable on another, holding constant all other variables that
may affect the second variable.

 For example, when discussing the laws of supply and demand,

one could say that if demand for a given product outweighs
supply, ceteris paribus, prices will rise. Here, the use of
"ceteris paribus" is simply saying that as long as all other
factors that could affect the outcome (such as the existence of
a substitute product) remain constant, prices will increase in
this situation.
 DEMAND

 The number of potential buyers with the interest

and ability to purchase the products sold by a
business at the specific price offered.

SUPPLY

o The amount of a good or service that a seller is

willing and able to sell for any given price at any
given time.
 THE LAW OF SUPPLY
 A microeconomic law stating that, all other
factors being equal, as the price of a good or
service increases, the quantity of goods or
services offered by suppliers increases and vice
versa.

As the price of a good increases, suppliers will

attempt to maximize profits by increasing the
quantity of the product sold.
 THE LAW OF DEMAND
 A microeconomic law that states that, all other
factors being equal, as the price of a good or
service increases, consumer demand for the good
or service will decrease and vice versa.

This law summarizes the effect price changes

have on consumer behavior. For example, a
consumer will purchase more pizzas if the price
of pizza falls. The opposite is true if the price of
pizza increases.
MARKET EQUILIBRIUM
 A situation in which the supply of an item is
exactly equal to its demand. Since there is
neither surplus nor shortage in the market, price
tends to remain stable in this situation.
PRICE ELASTICITY
 Veblen Goods??????
ADVANTAGES OF DEMAND FORECASTING
 Accurate estimates of future sales help to better
manage pricing. It allows managers to make
better decisions about how to modify and manage
the prices of their products and services.
 Efficiently schedule the departmental staffing.

 Purchasing supplies in the correct quantities.

 Accurate revenue forecasts allow managers and

owners to estimate the future profitability of
their properties.
EFFECTIVE DEMAND FORECAST

Insight

Effective
Historic Future
demand
data data
forecast

Current
data
 DATA TYPES
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
 HISTORICAL DATA
 Data describing events that have already
occurred. a.k.a Actual Data/Results Data

 “ study the past to define the future”

 USING HISTORICAL DATA
 Is future performance likely to resemble past
performance? As market and business conditions
change, so does the validity of using historical
data in the forecasting process.

 When looking at historical data, it is important to

identify and in some cases isolate “special events”
that may have influenced performance and
patterns.

 Business practices can significantly affect the

way that historical data “looks.”
 STUDY THE PAST TO DEFINE THE FUTURE

Average Last 8 Last 8 Last 8 Last 8 Last 8 Last 8 Last 8

200- Mon Tues Wed Thurs Fri Sat Sun
room
Hotel
Occ. % 88% 91% 78% 67% 45% 51% 29%
ADR ($) 158.75 188.75 148.75 138.75 155.75 159.75 129.75
RevPar 139.70 171.76 116.03 92.96 70.09 81.47 37.63
($)

Do you recommend that the hotel fill a tour

operator’s request to reserve 100 rooms on
Monday nights that is three weeks from now, if
the room rate requested by that tour operator is
$ 109.00/ room ?
 Step 1 – Calculate the forecasted RevPar based on the
estimated demand for rooms that does not include the
new piece of business.

 RevPar
 RevPAR is revenue per available room,
 Rooms Revenue is the revenue generated by rooms
sales
 Rooms Available is the number of rooms available for
sale in the time period
 An often used short cut to estimate RevPAR is to
multiply Occupancy % times Average Daily Rate
(ADR)
 Revpar (estimated) = Occ % * ADR
$ 158.75 X 0.88 = $ 139.70 Rev Par
forecast
STEP II
 Calculate the forecasted RevPar based on the
estimated demand for rooms that includes the
new ( proposed) piece of business.

 $109.00 X 0.50 ( occ% @ 100 rooms) = $54.50

 PLUS

 $158.75 X 0.50 ( occ% with sellout) = $79.38

 Total RevPar = $133.88

STEP III

 Revenue Impact
 Expense Impact

 Impact on future pricing

 HISTORICAL DATA OF INTEREST-
 Number of reservations/ room nights booked per
day
 Number of reservations/room nights denied per
day
 Number of daily reservation cancellations

 Total number of room nights canceled

 Number of arrivals

 Number of departures

 No- shows

 Walk-ins

 ADR
CURRENT DATA
“ understanding the present”
 MAIN REPORT AREAS

 Occupancy and Availability Reports

 Group Rooms Pace Reporting

 Non rooms revenue Pace Reporting

OCCUPANCY & AVAILABILITY REPORTS

 The number of rooms available to sell

 The number of rooms reserved

 The number of rooms held or blocked

 Estimated Revenue/ADR/RevPar from currently

reserved or blocked rooms
 GROUPS ROOMS PACE REPORTING
 Pace Reports – A summary report describing the
amount of future demand for a lodging property’s
rooms or other services and the rate at which
that business is being captured.

 A Group room pace report summarizes future

demand for group rooms. This is considered
current ( not future) data because the rooms
identified in these reports ,regardless of the
number of years in advance ,represent rooms
that are already sold or are being held for sale.
NON ROOMS REVENUE PACE
REPORTING
 FUTURE DATA
 Demand Generators - An entity or event that
produces a significant increase in business
 Demand Drains – A circumstance that produces
a significant decrease in business.

 BASIC FORECAST TYPES

 Occupancy Forecast

 Demand Forecast

 Revenue Forecast
Creating
Demand????