Demystifying yield management in the hotel industry

  Posted in Resources

Before we get started, if you’re confused about yield management that’s okay – plenty of others are too, and there’s a very good reason why.

A quick Google search will reveal countless articles about yield management in the hotel industry but it’s very hard to find a source that will give hoteliers the correct information, or the information that they need.

The truth is that yield management probably isn’t what you think it is, or as relevant as you think it is. This article will finally clarify all the questions you have about yield management in one place. You might find that revenue management is the only term you need to worry about moving forward.

Table of contents

What is yield management?

The concept is based on understanding, anticipating and influencing your guests’ behaviour in order to maximise revenue or profits for your hotel. Think of it as the art behind the science of room supply and demand.

Yield management was the catalyst for the evolution of revenue management when it was used by the airline industry to manage supply and demand for flights. For example, different prices may have been charged for the same flight depending on when the ticket was bought or what seat was required. Hotels began utilising the principle in the late 1980s and into the 1990s, with dedicated yield managers who have evolved into the modern revenue or reservations managers. In smaller hotels, the general manager will commonly handle these tasks.

Yield management is how you make more profit from your accommodation and ultimately from your entire property. Revenue managers and general managers of small hotel properties are today looking beyond ADR (Average Daily Rate) and RevPAR (Revenue Per Available Room) to more sophisticated revenue management data points such as GOPPAR (Gross Operating Profit Per Available Room). It’s no longer just about room sales but about packages, amenities and services including upgrades, dining and food & beverage as well as entertainment spend per guest.

Good examples of yield management can also be found in grocery stores, where the most profitable items are placed at eye level. A similar principle can apply to distribution. A lot of ‘products’ are based on the willingness of the customer to pay. This will vary depending on when someone is buying – hotels will often provide discounts for early bookers, offer lower rates on Sundays, enforce minimum stays etc.

Yield management vs revenue management

yield management

The goal of yield management is not merely to increase room rates or occupancy; rather, it’s to maximise your hotel’s revenue by forecasting your room supply and demand across a variety of key factors.

Yield management shares many similarities with the concept of revenue management, but has actually existed for longer. Nevertheless, it is important to note that yield management has a more narrow focus and is concerned only with the selling price and the volume of sales, so that the best possible revenue yield can be achieved. In some respects, early yield management could be seen as tactical, rather than strategic and had a narrower focus – for example selling a plane seat, event ticket, or a hotel room, but not considering ‘secondary’ spend in other areas (food, drink, merchandising, additional baggage allowance), or the costs associated with the sale.

Revenue management is more sophisticated and measures a lot more variables, from metrics to segments, to different departments of the hotel. Revenue management is the focal point for hotels in today’s climate.

To help explain this further, please watch this video explaining yield management’s evolution to revenue management:

There’s also a distinct difference between reservations management and revenue management. Reservations management can be defined as a service role which includes tasks such as assigning room categories, dealing with VIP guests, customer interaction, converting calls to bookings, updating availability, and managing upgrades.

On the other hand revenue management is an analytical, strategic role. There is no customer interaction, rather a day will be spent in spreadsheets looking at revenue and profits, channels and distribution, segments etc. In larger hotels (500+ rooms), there could be a Director of Revenue and a Director of eCommerce, plus a team of people in the reservations department.

What is yield management pricing for hotels?

In theory yield management will allow hotels to maximise the amount of money they can make from a finite number of rooms that need to be sold on a deadline, i.e in one day, week, or month.

When considering that every hotel has a fixed number of rooms (i.e. their inventory) and different customer segments – such as leisure and business travellers, who are willing to pay different prices – hoteliers need to focus on the strategic control of their inventory in order to sell their rooms to the right customer, at the right time and for the right price. The use of yield management should factor in the costs of channels – from GDSs, OTAs, wholesalers, meta search sites and property websites to direct calls – and therefore how to better yield your inventory by channel, customer and more.

Yield management pricing examples

A simple example might be a hotel that is located next to a stadium. On the days around the concert or sporting event, the hotel will charge more for its rooms than it does on the weekends before or after.

The key is to use your data to understand your different customer segments and their sensitivity to pricing, and combine that information with seasonal demand. For example, business travellers tend to be less price-sensitive than leisure travellers.

Using your demand forecasts, you will have information on how to set your booking limits – that is, the number of rooms you wish to sell at a discounted price to leisure customers, and the number of rooms you wish to reserve for full-price business customers.

Understanding your property business mix is critical to better forecasts and more strategic pricing strategies. You can also use seasonality to help drive regional business. Australian tourists, for example, travel at different times of the year to businesses in the U.S., as their Summer is during the Australian Winter.

Seasonality, special events and high demand can allow hotel properties to alter their rates in order to increase revenue. Again, the idea isn’t to simply increase rates or occupancy but, rather, to analyse your different segments so you can attract the right customer at the right time. For example, a business traveller who normally books during the week will likely be indifferent about weekend or holiday discounts. However, conversely, price-sensitive leisure travellers may be lured by multi-night discounts and seasonal promotions.

As such, consider review pricing and marketing tactics for products such as:

  • Special rates on multi-night stays
  • More valuable rooms or upgrades for long-stay guests
  • Bundling, package and excursion deals (e.g. Valentine’s Day)
  • Special room rates for members of tour groups, conferences, and recurring airline or business customers

Based on an analysis of your customer segmentation and booking trends, you can create different revenue options for rooms by incentivising your preferred target market with personalised promotions and discounts. Finding the right mix of room rates and incentives as part of an ongoing yield management strategy will, of course, involve doing your market research and testing your hypothesis against your desired metrics.

Importance of yield management in your hotel

All yield management strategies are based, primarily, on forecasts of supply and demand. Through the use of a revenue management system or revenue management disciplines, combined with best-of-breed (real-time) distribution technology, revenue managers can today build reasonably accurate forecasting models for room demand as well as implement these controls in the booking process – many times, at a granular level and by channel.

Depending on how detailed you wish your reports to be, you can break down your analysis by traveller segment, channel, room type, booking behaviour, average length of stay, the willingness to book in advance and the total revenue generated by customer type to name a few options. There are many system providers and consultants capable of developing custom reports to better target and analyse data, but it’s on each hotelier to determine where best to invest their time and money.

Armed with the above data, you can create weekly, monthly and yearly forecasts, which allow you to manage your inventory, forecast demand, set booking limits and room protection levels, and create appropriate pricing and promotional strategies aimed at your different customer segments. This is where thresholding becomes a critical component of your distribution strategy and conversion profitability. Thresholding or basic inventory controls such as Closed to Arrival (CTA), Closed to Departure (CTD), Stop Sell and other simple controls make yielding much simpler than using manual human intervention and enacting changes after the fact, which can cost you both penalties and guest customers.

Yield management formula

A basic yield management formula has traditionally been to compare the revenue achieved with the maximum potential revenue. This allows you to track your yield and review performance.

For example if your hotel has 100 rooms available, with a full rate of $150 per room, the maximum potential revenue is $15,000. If on a particular night 70 rooms were sold at a lower average rate of $120, the achieved revenue is $8,400. Therefore the yield percentage is 8400/15000 x 100 = 56%.

By breaking these metrics down you can quickly realise small improvements will make a big impact on your overall revenue.

There are numerous revenue management metrics however that will give you a good indication of how your hotel is performing and offer many opportunities to make adjustments to your strategy and increase revenue, even from selling the same number of rooms. Increasing occupancy is certainly not the only way, or even the most recommended way of increasing revenue and profit.

Yield management systems

Yield management systems were used as early as the 1980s to boost revenue at many properties. These systems were created to address yield management strategies in a way that saved time and provided more accuracy for hotel managers by using computer algorithms and historical data to predict supply and demand at certain price points in real-time.

They took a lot of guesswork and personal judgement out of the equation.

Reasons for using a yield management system would include:

  • Assess future consumer behaviour under dynamic market conditions
  • Determine the most effective way to price and allocate inventory to reach every future consumer, and make real-time adjustments as market conditions change
  • Communicate this information instantaneously to distribution channels
  • Serve as a resource for marketing and operational functions

An example of a yield management system helping hotel management is if it discovered a trend where travellers were predominantly booking their room 0-6 days before their stay. In this instance it would discourage early bookings at lower rates in favour of keeping more rooms available at higher rates in anticipation of last-minute bookings.

Essentially yield management systems were used to answer questions about how hotel managers could make strategic decisions to increase revenue.

Nowadays if you’re talking about a yield management system for hotels you’re talking about a revenue management system. With so much about hotel management moving online and into cloud-based solutions, revenue management systems are the sophisticated technology systems that have displaced yield management. Hotel revenue management systems are setup to integrate with channel managers, websites, and booking engines.

The top revenue management systems are powerful cloud-based solutions that provide market intelligence and suggestions in one easy view, along with providing real-time updates and alerts based on the dynamic variables of market demand.

Yield management software

There are systems that do still define themselves as yield management solutions. Many of these combine their descriptions to talk about yield management software and revenue management software in the same breath, as interchangeable terms. The offer is always very similar – optimise sales, manage real-time pricing, demand forecasting etc.

When searching for yield management software you’ll notice most results are found under the umbrella of revenue management as this is the commonly used term and practice for hotels and other industries today.

Key takeaways – Importance of yield management in hotels today

  • Yield management is how you make more money from your existing inventory
  • Yield management is an older term with a narrower focus than revenue management
  • The key is to use your data to understand your different customer segments and their sensitivity to pricing, and combine that information with seasonal demand
  • The idea isn’t to simply increase rates or occupancy but, rather, to analyse your different segments so you can attract the right customer at the right time
  • A basic yield management formula has traditionally been to compare the revenue achieved with the maximum potential revenue
  • Yield management systems were used as early as the 1980s
  • Nowadays if you’re talking about a yield management system for hotels you’re talking about a revenue management system

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