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Definition
Yield management is the practice of maximizing profits from the sale of perishable assets, such as
hotel rooms/airline seats, meals & beverages, by controlling price and inventory and differentiating
product and service. Yield management is based on:
The differentiation of tariffs/rates/margin
Segmentation of consumers, understanding of consumer lifetime value and understanding
specific consumer needs
Differentiation of products and services
Statistical modelling and forecasting demand
By seizing control of the sold volume at each price level, Yield Management permits a significant
augmentation of revenue. Yield Management (Revenue Management) presents a more basic
measure of performance because it combines Occupancy Percentage with Average Daily Rate
(ADR) into a Single Statistic called the Yield Statistic. Thus, yield management is an evaluative
tool that allows the front office manager to use potential revenue as the standard against which
actual revenue can be compared. A successful yield management requires analysis, evaluation and
strategy.
Origin
Yield management first appeared in the aviation industry, when in the 1970s the deregulated
industry began to maximize efficiency, ensuring all seats were occupied before take-off, and
offering varied price structures to the consumer. For the first time, it was acknowledged that having
passengers paying at least something towards operating costs was better than flying with empty
seats. The element that links aviation to the hospitality industry is that both inventories are
“perishable” – once the plane takes off, there is nothing you can do about trying to sell any of the
seats on the plane. Similarly, when a room is empty on any overnight, the opportunity for revenue
of that night is lost forever. A room has a 24 hour “shelf life”. In the manufacturing and other retail
industries, there may be capacity to keep the stock and put it on the shelf if not sold, but that luxury
is not available to the hospitality industry.
Concept
Time Focus
Customer Focus
Capacity Management
It is also called as “Inventory Management or Selective Booking”. The major aim of capacity
management is to fill up the hotel rooms as much as possible. Sometime properties also take
the overbooking for the hotel rooms because properties want to offset the potential impact of
early check-outs, cancellations, and no-shows.
With the help of historical data or experience, hotels can also project the walk- ins and on-
day pick up figures which produce good revenue to the hotel. In case of capacity
management, hotels also need to control and limit the space to prevent the walking out guests
because it can create a negative impression in the mind of the guest for the hotel which may
also affect future business.
Discount Allocation
The theory is that the sale of a perishable item (guestroom) at a reduced rate is often better
than no sale at all. The discount is usually allowed to the group travellers, long staying guest,
guest with confirmed booking or during off – season when demand is low for the hotel
rooms.
So, with the help of discount policy hotel can cover at least their operational costs, like –
room maintenance cost and staff salary. Price elasticity (it means price should be dynamic in
nature, it may be according to the season, according to the guest like individual guest, group
travellers, walk – ins, reservation guest). Room rates are usually high for the walk –ins guest,
individual guest and low for the group travellers, reservation guest.
Duration Control
It means, place time constraints on accepting reservations in order to protect sufficient space
for multi-day requests. It is preferable that a reservation for one night stay may be rejected,
even though space is available for that night, if there is any request for more days by some
other guest because it gives more profit to the hotel.
Properties have to adopt the strategy of minimum length of guest stay. Sometime properties
should also adopt the combined strategies like – duration and discount, in order to fill up the
hotel rooms or to generate the good revenue.
Special events
At here special events refer to concerts, festivals and sporting events which may take place in
the locality or nearby your hotel.
During such kind of events, hotels have a great chance to maximize its total revenue due to
such demand-enhancing activities by restricting room rate discounts or requiring a minimum
length of stay restriction.
Measuring Yield
Measuring yield means to judge the outcomes of the planned strategies which were designed to
maximize the hotel’s revenue and also consider as one of the principal computations involved in
revenue management i.e. the hotel’s yield statistic. The yield statistic is the ratio of the actual
revenue (total revenue generated by the number of rooms sold at different room rates) to potential
revenue (the amount of money that would be received from the sales of rooms at a rack rate). The
following equations are required to handle to measure the hotel’s yield -
Note. * Multiple occupancy percentage differs from double occupancy percentage. Double
occupancy percentage is calculated by total number of guest (house count) less total number of
occupied room (multiple by 100) and divided by total number of occupied room.
Practical Problem
Suppose, hotel XYZ has total 250 rooms and currently it is operating at a 60 percent average occupancy. The
collected actual average room rate is around 3000 per room with 105 rooms are occupied by more than one guests.
The hotel also forecast that in near future, the actual average rate may raise to 3, 500. This increment of Rs. 500 will
also produce an additional marginal cost of Rs. 150 per room. On the other hand, if occupancy percentage goes
below to forecasted figure then hotel may offer discount of 10 % of average room rate. Now, let’s handle the
equations -
Formula 1: Potential Average Single Rate = Single Room Revenues at Rack Rate
Number of Single Rooms Sold
= 7, 75, 000 = 3100 is potential average single rate.
250 rooms (sold)
Formula 2: Potential Average Double Rate = Double Room Revenue at Rack Rate
Number of Double Rooms Sold
= 10, 75, 000 = 4300 is potential average double rate.
250 rooms (sold)
Formula 3: Multiple Occupancy Percentage*= Number of Rooms Occupied by more than 1 Person
Total Number of Rooms Sold
= 105 rooms x 100 = 42 % is multiple occupancy %
250 rooms
Formula 4: Rate Spread = Potential Average Double Rate – Potential Average Single Rate
= 4300 – 3100 = 1200 is rate spread.
Formula 5: Potential Average Rate = (Multiple Occupancy Percentage x Rate Spread) + (Potential
Average Single Rate)
= (0.42 x 1200) + 3100 = 3604 is potential average rate.
Yield Statistic = Actual Rooms Revenue Or Rooms Nights Sold x Actual Average Room Rate
Potential Rooms Revenue Rooms Nights Available Potential Average Rate
Or
Formula 8: Identical Yield Occupancy = Current Occupancy Percentage x Current Average Rate
Proposed Average Rate
Situation A When hotel consider that the future average room rate will be raised up to 3, 500 (3, 000 + 500). The
premium of Rs. 500 is expected raised figure.
Equivalent Occupancy = (Current Occupancy Percentage) x ((Rack Rate – Marginal Cost) / (Rack
Rate x ((1 – Discount Percentage)) – Marginal Cost)
Situation B When hotel consider 10% discount on average room rate (3, 000). Now the actual average room rate
will be 2,700 (3, 000 – 300). The Rs. 300 is discount.
As we all know that during the peak season almost every hotel earn good revenue by selling maximum number of
rooms per night. But this revenue can also maximize beyond the thinking with the same number of available room
inventory. The tactics which used to generate highest possible room revenue during the peak season is called as high
demand tactics. Some important tactics for high demand periods are mentioned below -
Tighten Policy
At here, policy is related with guarantee and cancellation policy. If you tighten the guarantee and
cancellation policy, you can reduce the number of no-shows which leads towards high room revenue. Hotel
requires intimating the guest regarding the cancellation time well in advance during the reservation
enquiry/first conversation.
Hotel must provide full information regarding the cancellation or amendments procedure i.e. specific time,
percentage of deduction of money and so on.
It is just opposite of high demand tactics. At here, hotel management must forecast then implement various
techniques in order to maximize the room revenue during the off season. Again, the available number of room
inventory is same but demand is on lower side, so what methods or tactics hotel used to sell these rooms in off
season will be collectively called as low demand tactics. Some important tactics for low demand periods are
mentioned below -
Offer Packages
Generally, in off season hotels apply various strategies to enhance the room sales and offer a package is one
of the strategies among it. In it hotels includes tactics like – giving tickets for free movies, discounted
coupons & so on.
In package system, there are multiple things which sell to guest at a particular price. For example – majority
of hotels, offer multiple nights and days stay with other recreational facilities like mountain climbing,
sightseeing & so on at single rate.
Encourage Upgrades
It means that if any guest ready to pay a certain amount for a particular room then receptionist or reservation
agent must has ability to encourage the guest for buying an upgraded room like suits room.
Agent can encourage guest to go for upgraded room by showing that there is a very little difference between
the room rate of standard room and suite room and inform him about the additional/upgraded suits room’s
services & facilities. Better rooms will encourage to guest to return.
Managing Overbooking
It means yield management software automatically manage the risk of overbooking. The yield management
system uses the expected demand (pre fed by the hotel) to calculate maximum revenues in an optimal
configuration of different available rates. This is usually called as “Logical availability”; the availability of
different rates (combined with conditions) with an automatic overbooking level when necessary.
It is different from the physical availability (i.e. the number of room you have available), since a room may
be counted for different rate and conditions. Obviously, as the hotel will get nearly full, the logical
availability approaches the physical availability (including overbooking percentage).
Determining Availability
The yield management system is designed to provide hotels with the power to analyze and suggest the most
profitable room yields. The system analyzes the multilevel pricing structure and automatically proposes rates
based upon future occupancy trends.
Extensive room forecasting (for individual, group as well as sales mix ratio) capabilities help you to project
the number of rooms that will be sold. Room rates can be changed based upon a specific date,
room/reservation type and current house count/occupancy level.
Create Reports
Yield management systems create various required reports for hotel management, like – future arrivals status
report, weekly recapitulate report, room statistics tracking sheet and so on. On the basis of these reports,
yield management team can do better forecasting for room sales and revenue management.
General Manager
He/she is the chief operating officer of a hotel or manager in a hotel organization. Principally he/she is
responsible for the successful operation of the hospitality establishment and for making long term planning
for hotel in terms of budgeting & forecasting, room rate determination, discount policy & so on.
General Managers have all rights to change room rates as & when (required), so for the successful
implementation of yield management, it is very important to have a full support of general manager.
Reservation Manager
He /she is the person who has a complete understanding of all of the hotel’s booking, the future booking
style and the past histories of the hotel’s status i.e. arrival, occupancy, under stays, overstays, no – shows,
etc. Therefore, he plays a key role in increasing the hotel’s revenue or yield.