UNIT-1

YIELD MANAGEMENT

Yield management is a variable pricing strategy, based on understanding, anticipating and

influencing consumer behaviour in order to maximize revenue or profits from a fixed, time-limited
resource (such as airline seats or hotel room reservations or advertising inventory).
As a specific, inventory-focused branch of revenue management, yield management involves
strategic control of inventory to sell the right product to the right customer at the right time for the
right price. This process can result in price discrimination, in which customers consuming identical
goods or services are charged different prices.
Yield management is a large revenue generator for several major industries; Robert Crandall, former
Chairman and CEO of American Airlines, gave yield management its name and has called it “the
single most important technical development in transportation management since we entered
deregulation.”
By optimising yield management, an independent hotel or a chain of hotels can adjust its
prices, to meet the total demand characteristics of its markets.
Prices can be determined by:
 Service

 Group of services

 Market (consumer type or geographical), or

 A combination of the above

Yield management models are most effective where the service being supplied is characterized as:
 Capital intensive

 Perishable (revenue is lost if the product/service is not sold at a particular point in time)

And the demand side is characterized by:

 Variability of demand, and

 Variability of value

These days, smart yield managers or yield management teams use specifically- developed software,
particularly when formulating variable pricing strategies.
 Concept of Yield Management
The concept of yield management originated in the airline industry. Most travellers know that
passengers on the same flight often pay different fares. Super-saver discounts, three-day advance-
purchase plans, stay-over-Saturday-night packages, and so forth have become the norm for airline
pricing. What is not as widely known is the potential application of yield management to other
service industries. Yield management has proven successful in the lodging car rental, cruise line,
railroad, and touring industries – basically, in situations where reservations are taken for a perishable
commodity. The key to successful implementation appears to be an ability to monitor reservations
and to develop reliable forecasts.
Yield management is based on supply and demand. Prices tend to rise when demand exceeds supply;
prices tend to fall when supply exceeds demand. Pricing is the key to profitability. To increase
revenue, the hospitality industry is attempting to develop new forecasting techniques that will enable
it to respond to changes in supply and demand with optimal room rates. The hospitality industry’s
focus is shifting from high – volume bookings to high – profit bookings. By increasing bookings on
low – demand days and by selling rooms at higher prices on high – demand days, the industry
improves its profitability. In general, room rates should be higher when demand exceeds supply.
They should be lower (in order to increase occupancy) when supply exceeds demand.
Application of Yield Management in Hospitality Sector
In the hospitality industry, yield management – sometimes called revenue management – is a set
demand – forecasting techniques used to determine whether prices should be raised or lowered and
whether a reservation request should be accepted or rejected in order to maximize revenue.
Hospitality industry managers have successfully applied such demand – forecasting strategies to
room reservation systems, management information system, room and package pricing, rooms and
revenue management, seasonal rate determination, pre-theatre dinner specials, and special, group,
tour operator, and travel agent rates.
Benefits or Importance of Yield Management
1. Improved forecasting

2. Improved seasonal pricing

3. Identification of new market segments

4. Identification of market segment demands

5. Enhanced coordination between the front office and sales divisions

6. Determination of discounting activity

7. Improved development of short-term and long-term business plans

8. Establishment of a value based rate structure.

9. Savings in labour costs and other operating expenses

10. Planned responses to guest inquiries or requests regarding reservations.

Applicability to rooms division: Yield Management

Introduction
Yield management is the technique which is used to increase the room revenue. In the hotel
industry, yield management is also sometimes called revenue management.
Hotel’s daily performance like most of other industries is evaluated on the basis of either occupancy
percentage or average daily revenue. The tariff may be reduced or discount percentage may be
increased to increase the occupancy but it may not increase the revenue in the same proportion.
Some hotels prefer to keep the tariff low in order to increase the occupancy percentage and on the
contrary some hotels prefer to increase the tariff in spite of low occupancy percentage. The most
appropriate room tariff will be which gets the maximum possible revenue and maximum possible
occupancy percentage and this is called yield management.
Application of Yield Management to Rooms Division:-
1. Capacity Management

Capacity Management involves a number of methods of controlling and limiting room supply.
For example, hotels will typically accept a statistically supported number of reservations in excess
of actual room availability in an attempt to offset the effects of early check-outs, cancellations, and
no-shows. Capacity management (also called selective overbooking) balances the risk of overselling
against the potential loss of revenue arising from spoilage r(rooms going unoccupied after
reservations were closed out).
Other forms of capacity management include determining how many walk-ins to accept on the day
of arrival based on expected cancellations and no-shows. Capacity management usually varies with
room type. That is, it might be economically advantageous to overbook more in lower-priced rooms
because upgrading to higher-priced rooms is an acceptable solution to an oversell problem. The
amount of such overbooking depends, of course, on the demand for the higher-priced rooms. In
sophisticated computerized yield management systems, capacity management may also be
influenced by the availability of rooms at neighboring hotels or competing properties.
2. Discount allocation

Discounting involves restricting the time period and product mix (rooms available at reduced prices
(prices below rack rate). For each discounted room type, reservations are requested at various
available rates, each set below rack rate. The theory is that the sale of a perishable item (the
guestroom) at a reduced price is often better than no sale at all. The primary objective of discount
allocation is to protect enough remaining rooms at a higher rate to satisfy the projected demand for
rooms at that rate; while at the same time filling rooms that would otherwise have remained unsold.
This process is repeated for each rate level from rack rate on down. Implementing such a scheme
requires a reliable mechanism for demand forecasting.
A second objective of limiting discounts by room type is to encourage upselling. This technique
requires a sound estimate of price elasticity and/or the probability of upgrading. (Elasticity refers to
the relationship between price and demand.)
3. Duration control

Duration control places time constraints on accepting reservations in order to protect sufficient space
for multi-day requests (representing higher levels of revenue).
This means that, under yield management, a reservation for a one night stay may be rejected,
even though space is available.
For example, if Wednesday is close to selling out but other nights are not, a hotel may want to
optimize the revenue potential of the last few rooms on Wednesday by requiring multi-day stays,
even at a discounted rate, rather than accepting reservations for Wednesday only. similarly, of the
hotel will be close to capacity Tuesday, Wednesday and Thursday, then accepting a one-night stay
during any of those days may be detrimental to the hotel’s overall room revenue. Hotels facing such
dilemmas often require all reservations for projected full-occupancy periods to be for more than one
evening.
 Measuring Yield : Yield Management
The Yield Statistic is the Ratio of the Actual Revenue (Generated by the Number of Rooms Sold) to
Potential Revenue (THE Amount of Money that would be received from the Sales of Rooms in the
Hotel at a Rack Rate)
Formula 1: Potential Average Single Rate:
♦Potential Average Single Rate = (Single Room Revenues at Rack Rate) / (Number of Rooms Sold
as Single)
Formula 2: Potential Average Double Rate:
♦Potential Average Double Rate = (Double Room Revenue at Rack Rate) / (Number of Rooms Sold
as Double)
Formula 3: Multiple Occupancy Percentage:
♦Multiple Occupancy Percentage = (Number of Rooms Occupied by more than 1 Person) / (Total
Number of Rooms Sold)
Formula 4: Rate Spread:
♦Rate Spread = (Potential Average Double Rate) – (Potential Average Single Rate)
Formula 5: Potential Average Rate:
♦Potential Average Rate = (Multiple Occupancy Percentage * Rate Spread) + (Potential Average
Single Rate)
Formula 6: Room Rate Achievement Factor:
♦Room Rate Achievement Factor = (Actual Average Rate) / (Potential Average Rate)
Formula 7: Yield Statistic:
1. Yield Statistic = (Actual Rooms Revenue) / (Potential Rooms Revenue)
2. Yield Statistic = ((Rooms Nights Sold) / (Rooms Nights Available)) * ((Actual Average Room Rate)
/ (Potential Average Rate))
3. Yield Statistic = Occupancy Percentage * Achievement Factor
Formula 8: Identical Yields Occupancy:
♦Identical Yields Occupancy = (Current Occupancy Percentage) * (Current Rate / Proposed Rate)
Formula 9: Equivalent Occupancy:
1. Equivalent Occupancy = (Current Occupancy Percentage) * ((Rack Rate – Marginal Cost) / (Rack
Rate * ((1 – Discount Percentage)) – Marginal Cost)
2. Equivalent Occupancy = (Current Occupancy Percentage) * ((Contribution Margin) / (New
Contribution Margin))
Potential High Demand Techniques:
 Try to define the Right Mix of Market Segments in order to sell out the Highest Possible Room
Rates
 Monitor New Business Bookings and use these changed Conditions to reassign Room Inventory
(As Occupancy increases, consider closing out Low Room Rates and open them Only when Demand
decreases)

 Consider establishing a Minimum Number of Nights per Stay

 Select the Group that offers the Highest Total Revenue

 Try to displace Price-sensitive Groups to Low Demand Days

High Demand Tactics includes:-

1. Close or restrict discounts – Analyze discounts and restrict them as necessary to maximize the
average rate. You may offer discounts to those who book longer stays, or restrict bookings to shorter
stays.
2. Apply a minimum length of stay restrictions carefully – A minimum length of stay restriction can
help a property increase room nights. For groups, study the groups’ patterns and decide how many
days they are likely to add to their stay.
3. Reduce group room allocations is another great tactics– Communicate with group leaders on a
regular basis. Make sure the group actually needs the number of rooms identified in its contract. If
not, make adjustments.
4. Reduce or eliminate 6 P.M holds – Reduce or eliminate the number of unpaid rooms that are being
held until 6 p.m. When demand is high, you need rooms available to fill.
5. Tighten guarantee and cancellation policies tactics– Tightening guarantee and cancellation
policies helps to ensure payment for room nights. Charge credit cards for the first night’s stay on the
day the reservation is made.
6. Tactics on raise rates to be consistent with the competitors – Charge rates consistent with the
competition, but limit rate increases to those rates published in the central reservations systems and
listed in brochures for the period.
7. Consider a rate raise for packages – If you are already offering a package discount, consider
raising the rate for that package.
8. Apply full prices to suites and executive rooms – In a high-demand situation charge full price for
suites and executive rooms.
9. Reserve close to arrival dates – By allowing the reservations to be taken for a certain date as long
as the guest arrives before that date, a property is able to control the volume of check-ins.
10. Evaluate the benefits of sell-throughs – With a sell-through, the required stay can begin before the
date the strategy is applied. This is often used when one day has a peak in occupancy and
management does not want the peak to adversely affect reservations on either side of the peak day.
11. Apply deposits and guarantees to the last night of stay – For longer lengths of stay, make sure the
deposits and guarantees apply to the last night of the stay, minimizing early departures.

Potential Low Demand Techniques:

 Carefully design a flexible Rating System that permits Sales Agents to offer lower Rates under
Certain Situations

 Strive to accurately project expected Market Mix

 Management shall closely monitor Group Bookings and Trends in Transient Business

 Do Not close off lower Rate and Market Segments arbitrarily

 As Low Occupancy Periods become inevitable, open Lower Rate Categories, solicit Price Sensitive
Groups, promote Corporate, Government, and other Special Discounts, and Develop New Rate
Packages

 Consider maintaining High Room Rates for Walk-in Guests

 A Non-Financial Technique involves upgrading Guests to nicer Accommodations than they are
entitled to by virtue of their Room Rate

Low-Demand Tactics includes:-

1. Sell value and benefits tactics– Rather than just quoting rates, make sure guests know you have the
right product for them at the best value. Sell the various values and benefits of staying on your
property versus others that the guests may be considering.
2. Tactics on Offer packages – To increase room nights, one tactic is to combine accommodations
with a number of desirable products and services into a single package with one price. Mention any
additions, renovations, or new amenities. Non-room revenue can be included, for example – free
movies, discounted attraction tickets, and shopping coupons.
3. Keep discount categories open – Discounts are directed toward particular markets or are instituted
during a particular time or season. During low-demand time, it is important to accept discounts to
encourage room nights.
4. Encourage upgrades is another great tactics– Move guests to a better accommodation or class of
service to enhance their experience and encourage them to come back to the property again and
again.
5. Offer stay-sensitive price incentives – A stay sensitive price incentive provides a discount for
guests who stay longer. For example, a guest staying 3 nights might get an additional Rs.2000/- per
night discount, while a guest staying one night might not
6. Remove stay restrictions – Remove any stay restrictions so guests are not limited as to when they
can arrive or depart. Guests who can stay only one night will be encouraged to stay as well as those
who are staying for a week. This will help to maximize occupancy.
7. Involve your staff – Create an incentive contest to increase occupancy and room nights. Make sure
to involve all members of revenue department as well as central reservations staff.
8. Establish relationships with competitors – Having a cordial relationship with competitors can help
with referrals and can help to carry out cross-marketing efforts.
9. Lower rates tactics– There is great value in keeping guests at the property as long as you are at
least covering the cost of occupancy. You may want to lower your rates as low as possible. Identify
the hurdle rate, which is the lowest rate acceptable at that given date.
Yield Management Software
There are many companies that offer a variety of revenue management software programs designed
for lodging companies. Although the individual tasks of revenue management can be performed
manually, the most efficient means of handling data and generating yield statistics is through
revenue management software. Revenue management software can integrate room demand and
room price statistics to simulate high revenue-producing product scenarios.
Revenue management software does not make decisions for managers. It merely provides
information and support for managerial decisions. Since revenue management is often quite
complex, front office staff will not have the time to process the voluminous data manually.
Fortunately, a computer can store, retrieve, and manipulate large amounts of data on a broad range
of factors influencing room revenue. Over time, revenue management software can help
management create models that produce probable results of decisions. Decision models are based on
historical data, forecasts, and booked business.

RESULTS
In those industries where computer-based revenue management has been applied, the following
results have been observed:
 Continuous monitoring: a computerized revenue management system can track and analyze business
conditions 24 hours a day, seven days a week.
 Consistency: software can be programmed to respond to specific changes in the marketplace with
specific corporate or local management rules resident in the software.
 Information availability: revenue management software can provide improved management
information which, in turn, may help managers make better decisions more quickly.
 Performance tracking: a computer-based system is capable of analyzing sales and revenue
transactions occurring within a business period to determine how well revenue management goals
are being achieved.
Revenue management software is also able to generate an assortment of special reports. The
following are representative of revenue management software output:
 Market segment report: provides information regarding customer mix. This information is important
for effective forecasting by market segment.
 Calendar/booking graph : presents room-nights demands and volume of reservations on a daily
basis.
 Future arrival dates status reports: furnishes demand data for each day of the week. This report
contains a variety of forecasting information that enables the discovery of occupancy trends by
comparative analysis of weekdays. It can be designed to cover several future periods.
 Single arrival date history report: indicates the hotel’s booking patterns (trends in reservations). This
report relates to the booking graph by documenting how a specific day was constructed on the
graph.
 Room statistics tracking sheet: tracks no-shows, guaranteed no-shows, walk-ins, and turn-aways.
This information can be instrumental in accurate forecasting.
Since management is interested in revenue enhancement, computer-based revenue management has
become a popular hospitality industry software application.

Yield Management Team

Predicting the amount of revenue that a hospitality business will bring in next week, month, or year
can be difficult. This is why the hospitality industry has revenue management teams that specialize
in this area.

Revenue Management Team

In the hospitality industry, it is essential to have a revenue a management team in place to capitalize
on the market and profits. There is more competition than ever in the industry as well as more
channels for travellers to book. Revenue management is the process of using data to predict
consumer behaviour in order to enhance product availability and increase revenue.
For example, Fred is the general manager of a local hotel. He needs to know the probability of
selling out next week. His revenue management team provides him with data including pricing of
competitors, the demand in the market, and availability in the market. This helps Fred decide on
pricing for this hotel in order to maximize his revenue. The revenue management team can consist
of a revenue manager, operational management, the sales team, and the line level employees. We
will take a look at how each member of the team plays a role in the revenue management of the
business.

Revenue Manager
Every revenue management team has a revenue manager. This is a role that has developed over the
years as the hospitality industry has seen the need to use revenue management. At one point the
operational teams were in charge of revenue management before the creation of the revenue
manager. Now there is a need for a revenue manager that is only focused on the revenue
management of the business.
The primary role of the revenue manager is to maximize the businesses’ opportunity for revenue and
profits. In order to do that, the revenue manager is in charge of compiling and analyzing data to
make decisions regarding pricing. The revenue manager compiles data on the business as well as the
competition. They keep up with market changes and identify trends.
For example, a hotel in a corporate location will see high demand for hotel rooms during the week
versus on the weekend. This is a trend that a revenue manager would be aware of and take into
consideration when setting pricing. The revenue manager is in charge of setting rate strategies that
will help the business capitalize their profits. The revenue manager will know what the competition
is selling and how the competition is fairing.
For hotels, there is an STR report that comes out weekly that compares 5-7 hotels in the area and
gives the hotel data on how they are doing compared to their competition when it comes to revenue.
This is a highly used report for revenue managers in the hotel business. If the hotel is not keeping up
with competition, then it lets the revenue manager know they need to change their strategies. The
focus of the revenue manager is knowing what is going on around them in order to be able to react
and price correctly.