What is yield management? Definition, strategies and examples
Nothing is more frustrating than seeing your hotel revenue stagnate despite your continued effort to fill your rooms.
I know this because I’ve been there many times at my hotel. If that sounds familiar too, then you’re in the right place to learn more about yield management.
In this article, I’ll run through the definition of yield management and explain how it can help your business maximize its revenue streams and financial bottom lines.
Here’s the basic definition of "what is yield management":
"Yield management is selling “the right product to the right customer at the right time to the right price (Robert Cross, 1997)"
Let’s dive straight in.
What is yield management - a definition
Yield management is a variable pricing strategy, commonly used in the air travel and hospitality industry to maximise revenue from a perishable and fixed inventory (e.g. hotel rooms, airline seats, etc).
Generally speaking, engaging into a yield management strategy implies offering different prices to different clients for the same product (at different times).
That’s because different customers are normally willing to pay a different price for the same product in these specific industries based on multiple criteria, such as time of year, level of demand, weather conditions, etc.
As you build your own hotel revenue management strategy, it’s important to think about selling the right room to the right client at the best moment in time and for the highest price possible so as to enhance your hotel's revenue and profitability.
On a basic level, being a good revenue manager is about your capability to find an optimal price zone called equilibrium where you can maximize your revenue.
So, a surefire way to develop your yield management skills is to work on finding the highest price you can sell your rooms for while keeping a high number of clients booked at your hotel. Once you find this optimal price zone, you are already working at maximum efficiency.
If you want to learn more about yield management, we strongly recommend you match the following video from ResNexus:
Have a look at the supply and demand curve below. What does it tell you about how to run a hotel successfully?
As explained in the video, yield management is strongly correlated to the demand and supply curves: the higher your prices are, the less likely potential customers will be buying from you:
Of course when prices go up, sellers increase their supply so as to maximize revenue. The point where the supply and the demand curves meet is called the equilibrium.
That point gets reached when you trade at maximum profitability.
Even with a stable price or quantity being offered, your equilibrium point will eventually move to another level after some time.
That’s because the demand and supply curves are constantly impacted by a plethora of parameters such as current weather conditions, competition, seasonality, economic context etc.
If you are looking for the optimal price zone for your hotel, simply keep track of parameters such as the weather forecast, coming up bank holidays, competition prices, to pull up a list of relevant factors that will have an impact on it.
These cloud platforms let you centrally monitor all of your hotel's relevant market conditions at any time.
With the Hotel Price Reporter solution for instance, you can keep track of a wide range of parameters, such as your competitive set prices, the weather forecast, coming up bank holidays as well as the local demand forecast for your city:
If you want to learn more how to build a yield management strategy that works, we recommend you read our previous post about revenue management. That will give you lots of tips on the topic.
Why is yield management important?
Revenue management helps hotels attract valuable customers
Is a higher occupancy rate really the only result you want for your hotel?
Sometimes we get so focused on vanity metrics such as occupancy rate, that we fail to think about what will truly matter to our hotel: profitability. That's where yield management comes into play.
Indeed, you could have a very high occupancy rate at your hotel and yet missing out on profitability because you undersell your rooms.
The most impactful thing you can do to keep your hotel profitable is to use fine-tuned revenue management strategies to filter clients consistently and maximize profitability;
Let's take a simple example:
If you try to achieve maximum occupancy at your hotel, you would think accepting guest 2 and guest 4 bookings is the best way to go for. This would give you a 100% occupancy rate along with a total revenue of 750.
Is it the best revenue you can make though? Probably not.
If you pick guest 1 and guest 4 reservations instead, you will have a total income of 770, while registering a global occupancy rate of 75% over this 2 days period:
By allocating higher priority to more financially rewarding reservations, you’ll generate more income for your hotel and ensure better allocation of your resources.
Yield management helps hotels reduce their costs
If you pay attention to the reservation choice made in the previous paragraph, you’ll see that there are additional advantages in accepting guests 1 and 4 at your hotel over guests 2 and 4.
Given that rejecting guest 2 reservation can free one of your room for one night, you would be able to save on some core running costs such as electricity, heating and water supply during this time.
Engaging into revenue management strategies can also help you anticipate off-peak periods and save costs during that time.
For example, you could be using revenue management softwares that warn you about an expected low demand for your locality in a few months time, and decide to reduce manpower accordingly.
What is the purpose of a revenue management policy?
The way yield management works is that it helps hotels better allocate their stock and resources to generate more revenue.
Any revenue manager can double-check the benefits achieved out of an accurate yield management strategy by simply keeping track of key metrics such as its RevPAR.
As you implement a rational yield management strategy, you should be able to achieve an increased RevPAR performance.
In the example mentioned above, a hotel managed to generate an additional incremental revenue of $5,000, which compounded into an additional $20 RevPAR, by simply increasing its average daily rate.
What are the essential elements of yield management?
If you’re ever in doubt about how to implement a revenue management strategy, start with this list of essential yield management elements:
As an experimented revenue manager, you will quickly find out that implementing an overbooking strategy at your hotel is essential to boost your occupancy rate and potential revenue.
If you don't anticipate on potential cancellations and no shows, you will inevitably end up with empty rooms you can't resell, leaving you with an unsold inventory that negatively impacts your hotel revenue.
In the hospitality industry, it's totally ok to sell more rooms than you actually have in stock. That's a common practice as it is expected that some people will drop their stay and never show up at your hotel.
Despite being mainstream, an overbooking policy isn’t something you can implement in a aleatory way.
You won’t get good results if you just reject booked clients with no apology, no ready-made plans for their hotel replacement and reimbursement of their transportation costs.
That could destroy your business reputation permanently and your on-line profile on the Internet.
Most of all, you need to rely on previous performance and solid forecast data about potential no shows, cancellations and potential stays extension to decide on the acceptable level of risk you are welling to take.
2. Minimum length of stay restrictions
The good news for hotels is that all of the major booking engines and OTAs on the market let you freely decide on potential minimum length of stay you want to implement at your place.
For most hotel businesses, setting up a minimum length of stay (MinLOS) is an essential part of a successful revenue management strategy.
Setting up a minimum length of stay at your hotel helps you regulate your reservation profiles by rejecting short stay requests.
Hotels that implement such a strategy are able to durably improve their occupancy rate, especially during low-demand periods that immediately follow busy ones.
Overall, that lets you anticipate lower demand periods and make the most out of your busier periods.
3. Market segmentation
A few weeks back in our previous blog post about hotel room pricing methods, we learned that yield managers usually bundle prices and products differently to satisfy distinct market segments and optimise revenue.
As a hotel manager, you need to identify different groups of potential customers that share similar characteristics, needs and interests to market them efficiently.
There are business travellers out there for instance who are not very price sensitive and love being offered specific packages that let them book refundable stays.
Those clients need to be sold special bundles that are not available to other customers, because they don't have the same needs and expectations.
To learn more about hotel market segmentation, you can read our previous article about how to determine hotel room rates.
How to calculate yield management?
How do you identify the yield achieved at your hotel?
By simply comparing your actual revenue with your maximum potential income. Here is the formula you should apply:
For example, if your hotel has 80 bedrooms and you offer a maximum rate of £100 per room, your maximum potential income is £8000,00 for one night.
But if you only sold 50 rooms that particular night at a rate of 90£, your actual revenue is only 4500,00£.
This indicates that the yield management rate you achieved that particular night is of 56.25%.
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