what is yield management in hotel industry

Yield Management in Hotel: Strategies, Benefits and History

What is Yield Management?

Yield management in the hotel industry can be defined as techniques based on the principle of demand and supply, used to maximize the revenue generation of any hotel by lowering prices to increase sales during the off-season and increasing the prices in high demand periods.

To maximize the revenue generated from rooms, Hotels now sell their rooms at varying prices. Yield management is composed of a set of demand forecasting techniques, which are used to determine whether the room rates should be raised or lowered and whether a reservation should be accepted or rejected in order to maximize revenue.

A guest room is one of the highly perishable products of the hospitality sector, if a room is not sold on a particular day, the entire potential revenue that could be generated from it is lost forever.

Hotels have come to realize that more volume sales do not generate the desired revenue and that they have to think of quality deals in terms of revenue generated per sale. Their focus is shifting from high volume reservations to high-profit reservations.

Pricing and demand are interrelated and need to be coordinated. In the hospitality industry, demand for a room is cyclic in nature and follows a trend. Revenue management models help pinpoint demand by minimizing uncertainty and producing the best possible forecast.

Revenue management helps in the allocation of the inventory of hotel rooms among the different segments of guests. Pricing is different for the two rooms, each of them is targeted at different customer sets.

Based on the historical preference pattern of guests in each segment, it would be possible to estimate the number of guests who would be willing to buy these rooms at a given price with reasonable variance.

Benefits of Yield Management in Hotel Industry

There are a lot of benefits or advantages associated with the use of yield management in the hospitality sector, especially in hotels.

These yield management benefits include the following:

1. Improved Forecasting: Revenue management helps improve forecasting.

2. Improved Seasonal Pricing and Inventory Decisions: It helps in deciding the season and off-season pricing for accommodation products and also in making important inventory decisions like renovation.

3. Identification of New Market Segments: Newmarket segments can be identified on the basis of Yield management.

4. Determination of Discounting Activity: Yield management helps determine the number of discounts to be offered, depending on the dates and periods.

5. Improved Development of Short-term and Long-term Business Plans: Revenue management helps develop business plans as the management can forecast the revenue that can be generated and take measures to generate those figures.

6. Establishment of a Value-based Rate Structure: It helps define rates structures, based on perceived values.

7. Increased Business and Profit: Good revenue management helps increase revenue and profit.

8. Savings in Labor Costs and Other Operating Expenses: As most of the revenue management tools are computerized, it helps in saving labor costs and other operating expenses.

9. Initiation of Consistent Guest Contact Scripting: Revenue management helps initiate consistent content with guests.

Yield Management Strategies for Hotels

Revenue management strategies differ during high demand and low demand periods.

1. High Demand Periods

During high demand periods, as indicated by the forecasts, the management would use the following tactics:

  • Close or restrict discounts to generate more revenue.
  • Apply a minimum length of stay restrictions carefully.
  • Reduce group room allocations as groups get very low room rates.
  • Reduce or eliminate 6 p.m. holds to avoid last moment no-shows or cancellations.
  • Raise rates as consistent with competitors to generate optimum revenue.
  • Consider a rate increase for packages instead of giving more discounts.
  • Apply rack rates to a higher category of rooms like suites and executive rooms.
  • Select dates that are to be closed to arrivals.
  • Apply deposits and guarantees to the last night of stay.

2. Low Demand Periods

During low demand periods, as indicated by the forecasts, the management would use the following tactics:

  • Sell value and benefits like spa treatments.
  • Offer packages and special offers.
  • Keep discount categories like advance purchase rates, corporate rates open.
  • Encourage upgrades.
  • Offer stay-sensitive price incentives.
  • Remove stay restrictions.
  • Establish relationships with competitors.
  • Lower rates to attract more guests and generate more revenue for the hotel.

Elements of Yield Management

While developing a successful Yield strategy, the following elements are very important:

1. Group Room Sales

By studying group booking data, Hotels can anticipate the group
behavior and accordingly make provisions in group reservations. The group’s booking pace indicates the rate at which group business is being booked as per the historical trends.

Anticipated group business helps watch out for repetitive group patterns and accordingly forecast the pressure on the market, and hence adjust selling strategies.

Group booking lead time measures how far in advance of a stay the group bookings are made. This is very important in determining whether to accept an additional group and at what room rate to book the new group.

A displacement of transient business occurs when a hotel accepts group business at the expense of individual guests. This might cause profitability problems and a bad reputation.

2. Transients or Individual Room Sales

The Front Office management should monitor the booking pace and lead time of individual guests to understand how current reservations compare with historical and anticipated rates.

3. Food And Beverage Activities

Even when a Hotel is not in the immediate vicinity of a convention, individual guests and small groups, who have been displaced by the convention, may be referred to your hotel and this may have a tremendous impact on the hotel’s revenue.

4. Special Events

During special events, Hotels might decide to benefit from high demand by
restricting room rate discounts or requiring a minimum length of stay.

Challenges or Problems in Yield Management

The yield management techniques and the models of overbooking, if applied aptly, would definitely maximize the revenue of the hospitality industry. But there are some pros and cons in this which includes,

1. Measuring the Performance of Yield Management System

Occupancy rates and yield are measures that are affected by external competition. Therefore, an ideal measurement can be done using the opportunity model.

For Example, if the hotel segments the market and fixes different rates for different guests, then it has to see that the revenue is generated from those rooms and it has to be utilized ideally.

2. Guest Satisfaction

Some guests do not like the practice of differential pricing. In evaluating the efficiency of the Yield management system, the trade between generating short-term profits and creating long-term guest loyalty needs to be studied carefully.

3. Employee Malpractice

Revenue management may influence the employees to follow the wrong
practices.

For example, Hotels might offer incentives to the staff for selling higher category rooms and this might motivate the reservation agents to upsell while making reservations. So the agents might not sell the basic category rooms and offend certain guests.

History of Yield Management

The concept of yield management was introduced by the Airline industry. Yield is the revenue generated per statistical unit.

For example, an Airline’s yield would be stated as the average revenue per mile per paying passenger.

In 1985, American Airlines launched Ultimate Super Saver fares to compete with a low-cost carrier. This was a very successful scheme.
The airline’s operators realized that their product was highly perishable as a seat left unoccupied in-flight results in a loss of revenue of that seat forever.

To maximize the revenue generated from selling the seats in a flight, the airlines adopted a technique based on demand and supply.

When the demand for seats in a particular flight exceeded the supply of seats, the airlines charged higher rates. But when the supply exceeded demand, the airlines offered various types of discounts and package plans, resulting in the lowering of prices, which would lead to the selling of
more seats on that particular flight.

The challenge is to sell the right resources to the right customer at the right time for the right price. This process can result in price discrimination, where a firm charges different prices from customers consuming otherwise identical goods or services.

In general, the tickets purchased much earlier than the date of travel are less expensive than bookings made a little in advance.

Yield Management Prospects

Yield management is a comparatively new concept. It has the following prospects in the future:

1. One to one Revenue Management: Sophisticated hotels will move to one-to-one revenue management, where each individual will be a market segment in himself.

In the future, technology will support calculating the total customer value and potential total customer spend, based on history and future potential from demographics, to determine what rate and what availability should be offered to a potential guest.

2. Total customer value Integration: The future of revenue management will include a focus on the revenue per available guest and total customer value. The next generation of revenue management systems will create offers based on the value or the potential value of each individual guest.

3. Function Room Yield: Forecasting and yielding of function space will be a focus in the future for Hotels. Many large hotel companies and revenue management systems are working to develop effective models in this area.

4. Cost of Business Analysis: Different revenue streams and channels do not yield the same profit, even when the rate is exactly the same. In the future, channel cost will be incorporated into rate and inventory decisions for each channel individually.

5. Goal Alignment: The goals of the entire Hotel team, from the property or Hotel level to corporate, will need to be aligned in order for revenue management to reach its full potential.

6. Automation: There is a gap between the Sophistication of the revenue management practice and the technology available to support it. Adoption of the new available technologies and the use of minds to manipulate them expertly would help achieve ultimate success.

Also read: What is Facility Management: Importance, and Process of it