Professional Documents
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YIELD MANAGEMENT
The
Center for
Hospitality Research
at Cornell University
CHR Reports
Executive Summary
Yield management is the umbrella term characteristics to their willingness to
for a set of strategies that enable pay—ensuring that the customer
capacity-constrained service industries acquires the desired service at the
to realize optimum revenue from desired time at an acceptable price,
operations. The core concept of yield while the organization gains the
management is to provide the right maximum revenue possible given the
service to the right customer at the right customer and business characteristics.
time for the right price. That concept The strategic levers of yield management
involves careful definition of service, can be summarized as four Cs: namely,
customer, time, and price. The service calendar, clock, capacity, and cost. They
can be defined according to the are bound together by a fifth C: the
dimensions of the service, how and customer. The strategic levers of yield
when it is delivered, and how, when, management are geared to matching
and whether it is reserved. Timing service timing and pricing to customers’
involves both the timing of the service willingness to pay for service in relation
delivery and the tining of when the to its timing. Based on customers’
customer makes known the desire for demand levels and characteristics,
the service, whether by reservation or by management can shift the demand of
walking in to the business. Price can be those customers who are relatively price
set according to the timing of the sensitive but time insensitive to off-peak
service, the timing of the reservation, the times. Shifting that demand clears prime
type of service, or according to other times for customers who are relatively
rules that seem appropriate. Finally, the time sensitive but price insentive.
customer can be defined according to
demand characteristics relating to the C1: Calendar. Calendar-related yield-
service, the timing, and the price. The management levers rely on demand
ideal outcome of a revenue- forecasts to determine the dates on
management strategy is to match which demand is strong or slack. By
customers’ time and service correctly forecasting demand, a yield-
management system can recommend
Yield management has developed into a powerful strategy for boosting revenues and
improving the flow of customer demand. To accomplish those objectives, yield manage-
ment uses the basic stratagy of providing the right service at the right time to right cus-
tomer at right price. Each element of that strategy involves specific strategic levers that
allow a manager to conduct an effective and profitable yield-management strategy. The
most important strategic levers connect price with timing. This report explains those
strategic levers and give the steps for applying them in a variety of service organizations.
The key concept underlying yield clock, capacity, and cost. The 4-C factors are
management’s strategic levers is to match the inextricably bound together as yield-manage-
timing of service delivery with the customer’s ment revenue levers. The calendar-related tactics
willingness to pay for a service rendered at that involve controlling when the sale (or reserva-
time. The time element is a key to yield manage- tion) is made. Clock-related tactics revolve
ment, both in terms of when a service is around the timing of the service delivery. The
ordered (or reserved) and when that service is capacity issue involves clearing the market by
performed. Most yield-management strategies selling available capacity, while smoothing out
involve the peaks and valleys in customer demand.
price- Finally, cost is the price of the service, which is
The goal of yield management is to related set at a level that permits the effective function-
use strategic levers to match demand methods ing of the other factors. Ideally, a manager can
with availability. of control the flow of customer demand by setting
shifting a market-clearing price according to when the
demand sale is made and when the service is delivered,
according to a consumer’s price sensitivity and so that the business sells its available capacity for
the duration of the service involved. To shift the most possible revenue.
demand, a manager must be able to predict the Yield management is not per se a discount-
peaks and valleys, either by keeping track of past
ing strategy, even though it does involve
experience or by watching reservation patterns.
adjusting prices and giving discounts under
The goal of a successful yield manage- certain conditions. What sets yield management
ment strategy is to gain control of customer apart from blanket discounting strategies is that
demand by using the time- and price-related yield management sets rules (known as rate
strategic levers. Four factors enter into the fences) on offers of discounted prices. Yield
tactics used to execute this strategy. These management works most effectively at the
factors can be remembered as “4Cs”: calendar, margin—as companies seek to expand overall
Predictable
service is rendered or a reservation is made. To Movies
Airlines
obtain service at premium times, price-insensi- Stadiums and arenas
Rental cars
Convention centers
tive customers pay top dollar, while price- Cruise lines
Duration
sensitive customers take advantage of lower
prices during non-peak times. The outcome of a
well-executed yield management strategy should
Unpredictable
be higher revenue for the operation and
customers who are satisfied that their particular Restaurants
Golf courses Continuing-care
demand characteristics have been met. That is,
Internet-service hospitals
customers who are willing to pay for peak-time providers
service will receive that premium service, while
customers who seek a price concession are
happy to pay a reduced price in exchange for
their willingness to follow whatever policies
qualify them for that price. Although all of the businesses in the boxes above have capacity
constraints, they are subject to different combinations of pricing
The nature of the service business and duration for their services. A classic yield-management tactic
dictates which strategic levers will be most is to use a variety of price classes to shift demand for a service of a
effective. Businesses that offer a service with a known duration. Thus, airlines and hotels are ideally suited to
known or fixed duration, but which have a operating yield-management levers. Restaurants and golf courses,
variable price can use price incentives to on the other hand, have to adapt the strategic yield-management
manipulate demand. Businesses that do not levers, because their prices are largely fixed and the duration of
offer a service of specific duration must work to the service is variable and unpredictable. By using price fences of
various kinds and by using process management and other tactics
define their service in terms of duration.
to standardize their services, restaurants and golf courses can
Restaurants, for instance, should work to define figuratively move their operations into the upper right quadrant
their service as duration at table, rather than as a occupied by classic yield-management firms
meal. Since their prices are relatively fixed (that
is, they generally cannot change the price of a
meal according to, say, when a reservation came
in), restaurants must use other tactics, such as
forecasting and controlling guests’ arrival and
departure to maximize revenue from available
customers.
To return to the the airline industry, for
instance, the duration of the customer’s use of
the service is entirely predictable: it is the length
of an airplane flight. Other industries with
C1: Calendar
The heart of a yield-management strategy is
forecasting demand and having a reasonably
firm idea of when customers will arrive
(and depart) so that one can manage that
demand. Most yield-management systems
rest on historical demand patterns for each
C2: Clock
To reiterate, the essence of
yield management is to
match service timing to
customers’ willingness to pay
for the service. To do that,
0
▼
90
managers must shift demand
D a y s ␣ b e f o r e ␣ a r r i v a l according to customers’
price sensitivities. The chief
price-related mechanism to
Based on its historical records (day 0 on the graph above), a hotel yield accomplish the matching
manager would develop a graph of expected average demand for that date,
represented by the middle line. To activate a yield-management strategy, the
task is differential pricing—
manager sets trigger points at which to open or close rate classes either to which often involves
encourage or discourage demand. If reservations fall on the gray lines below charging customers different
the expected-reservation line, the manager can open low-price rate classes prices for using the same
and accept more business to bring reservations back up to the expected service at the same moment.
average. On the other hand, if reservations exceed the average and rise to the
To accomplish this feat,
lines above the middle, the manager can close low-rate classes and accept
only high-rate business to dampen demand and avoid overbooking. As which some customers
explained on the next page, group business creates distortions in the demand might find offensive,
curve because of group room blocks. managers must use price in
conjunction with other yield-
management levers. To
review, those levers involve duration
management, accounting for arrival uncer-
tainty, and maintaining rate fences for
differential rates.
Duration is the length of time it takes to
complete one service cycle for a particular
▼
that the system rules are substituting for Arrival Greeting Seating
their own professional judgment about
Reservation No host Table management
the mix of price and services they
policy Wait time No host
should offer. In particular, group-sales Renege Can’t find party
departments may feel blocked by yield- Wait management Tables unavailable
management systems. Group sales often No server greeting
involves taking in large volumes of
relatively low-rate business. With yield ▼
▼
Ordering Appetizer Entrée
management, the incentive structure for
the group-sales employees may have to Customer confusion Late delivery Late delivery
be changed to reflect the reality of Inattentive server Wrong order Wrong order
having some room blocks held for Poor timing Poor timing
higher-rate, transient business when the Selling strategy Selling strategy
yield-management system so indicates. Clearing table Clearing table
Pre-bussing Pre-bussing
Companies must also organize
their operations to take advantage of
▼
▼
yield-management systems, by maintain- Dessert Payment Departure
ing strong information systems and by
Late delivery Slow delivery Guests linger
training employees in how yield manage-
Wrong order Inattentive server No farewell
ment works and how to use it. All of Poor timing Bussing
Slow pickup
this stems from strong management Selling strategy Pre-bussing
commitment, without which any sales or Clearing table
marketing program (let alone yield
management) will not succeed.
A service blueprint is an stepwise analysis of the service process. The
Specific applications pinch points for the restaurant in question are listed here, allowing
managers to gain better control of meal duration. Some of the issues
of the 4C Strategic (such as the host’s being occupied and not greeting or seating guests)
Levers occur during busy times. Other pinch points occur because of the
restaurant’s particular layout (e.g., the bar is on a different level from the
Yield-management applications for dining room and can be crowded) or because of a complex menu. The
transient hotel guests and airline restaurant’s upselling strategy also slows service during busy times. The
travelers seem fairly straightforward outcome these service impediments was that meal duration was widely
because the duration of the service variable and difficult to control, thus interfering with the restaurant’s
ability to prosecute a yield-management strategy.
is reasonably well defined. Applica-
tions for other operations, such as
restaurants and country clubs, or group
sales in hotels require additional analysis of
how to control the duration of service, as
discussed below.
The Cal-Mex restaurant studied for this report used process analysis to Restaurant managers who wish to
identify service bottlenecks, as shown on the previous page. Manage- exert control over the duration of their
ment then discontinued certain time-consuming practices during busy customers’ meals have many avenues open
times. The result was not only faster table turns but more consistent to them. To begin with, these managers
meal duration—a key strategic lever for restaurant yield management. must be certain that their operation
functions effectively enough to allow
control of meal duration. The restaurant must
strategic levers that drive RevPASH. Those therefore design its menu and processes to
levers are meals of predictable length, menu ensure that the meal goes smoothly. Managers
design, process analysis (to standardize might consider revising or removing menu items
operations), and labor scheduling, plus that require excessive preparation time—or
certain specific operating policies (such as offering those items only during off-peak hours.
pre-bussing, check delivery, and reducing Similarly, the restaurant might want to remove
turnaround time). menu items that cause diners to linger (particu-
Gaining control of customer demand and larly if those serving those items diminishes
meal duration are the primary goals for restau- RevPASH). To ensure that restaurant procedures
rants pursuing yield management. Most restau- are not interfering with RevPASH, the manager
rants face two challenges with regard to can use process analysis to find and resolve any
customer demand. One is the familiar challenge operating hitches. The example on page 9 shows
of uncertainty of arrival, which bedevils all how pinch points can be found and removed.
hospitality and tourism operators. Restaurants Some specific tactics that can help move
also face an additional problem—uncertainty of guests through the meal in a gracious fashion
departure. Although most restaurant managers include having table server pre-buss tables
have a reasonably solid idea of the typical whenever possible, ensuring a speedy check
Other investigators
John E. Alexander, CBORD Solutions; Deborah Barrash, Cornell University;
Richard B. Chase, University of Southern California; Sunmee Choi, Cornell
University; Philip Y. Lee, Cornell University; and Elizabeth N. Ngonzi,
Cornell University
Center for
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Center for
Hospitality Research
at Cornell University