What is Yield Management?
Yield management is a pricing strategy commonly used in the hospitality industry to generate maximum revenue from a perishable inventory, such as hotel rooms or airline seats.
In simple terms, yield management is a strategy based on the concept of selling a product or a service to the right customer at the right time for the right price. When the yield management concept is applied to the hotel industry, it simply means selling the right room for the right price to the right customer in order to maximize the revenue earned.
The concept of yield management is similar to that of revenue management
. But there exists a thin line of difference between the two. Yield management for hotels focuses on revenue generated through room occupancy or room charges. On the other hand, revenue management is a lot more than just occupancy.
Difference Between Yield Management and Revenue ManagementWithin the hotel industry, both yield management and revenue management are two of the most useful tools that allow hotel managers to maximize the amount of money they make from their guests. Although they share a lot of similarities, there are some important differences too.
As a pricing strategy, yield management is concerned with using data to ensure the right room is sold to the right customer, at the right time, for the highest possible price. Yield management thus has a narrower focus and is concerned only with the selling price and the volume of sales required to achieve the best possible revenue yield.
Revenue management, although a related concept, has a wider focus, more concerned with the bigger picture. It maximizes revenue from hotel rooms similar to yield management but also takes into consideration the cost of selling and revenue generated from other aspects such as laundry services and food.
Benefits of Yield Management
- Lower errors With yield management strategies, the supply and demand forecasting is accurate, thus eliminating miscalculated risks or making mistakes while setting the room prices.
- Higher revenue Yield management strategy helps you make the most of your occupancy, ensuring a higher revenue even when the occupancy is not 100%. Thus, it increases your hotel revenue significantly.
Yield Management Formula
For example, if your hotel has 50 rooms available, with a full rate of Rs. 2,000 per room, the maximum potential revenue is Rs. 100,000. If on a particular night, 30 rooms were sold at a lower average rate of Rs. 1500, the achieved revenue is Rs. 45,000. Therefore the yield percentage is 45,000/100,000 x 100 = 45%.
After calculating the yield percentage, you can break down these metrics to make quick improvements that can create a big impact on the overall revenue.
Yield Management = Revenue achieved/Maximum Potential Revenue
Implementing Yield Management Strategy
To apply the yield management strategy, perform the following steps:
Step 1. Determine the occupancy slabs.
Consider these important factors while deciding the occupancy slabs: Seasons (High Season and Low Season)
All you have to do is find out the maximum occupancy during high season and low season and compare it with your average occupancy all year round. The following days are considered as high season. During these days, you are likely to see a hike in your room bookings.
- Major festivals of your area
- Annual holidays (Diwali, New Year, Christmas, etc.)
- Long weekends
- School summer vacation
- Local events (sporting events, annual festivals, concerts, etc.)
- Public holidays
- After analyzing the occupancy, create the occupancy slabs.
After analyzing the occupancy, create the occupancy slabs.
Location If your hotel is located near a convention center or a stadium, where recurring events take place, you are likely to receive more bookings during such events. Make a list of all the events much in advance. When the event date approaches, apply yield management strategy to create occupancy slabs.
Past occupancy Analyse your hotel’s past occupancy percentage or levels. For example, if last year during high season, your average occupancy was 70%, and during the low season, it was 30%, use this data to implement yield management strategies, and create the slabs wisely.
Step 2. Figure out the room rates based on your occupancy slabs.
After you create the occupancy slabs, you need to decide the room rates for each slab. While setting the room rates for different occupancy slabs, consider these factors.
Type of Guests
What kind of guests does your hotel attract? Corporate, family, solo travellers, backpackers?
Each type of guest has different requirements. For example, business travellers are often last-minute bookings. And corporate guests mostly stay longer, and they look for a budget yet comfortable stay. On the other hand, families are leisure travelers; they want better amenities and are willing to spend more.
Past RevPar, ADR
The Revenue per available room (RevPAR) and Average Daily Rate (ADR) have the potential to impact your hotel’s revenue to a great extent.
Analyse your hotel’s past data to find out which ADRs translated into maximum RevPAR. This will help you figure out the room rates that can drive maximum bookings as well as revenue for your hotel.
Step 3. Applying Yield Management
Now that you know the various factors to consider while forming the yield management strategy for your hotel, you may be wondering about its implementation. The good news is that you can automate this pricing effortlessly into your yield management systems.
Configure the slabs you have created in your booking engine and your channel manager. Whenever you receive bookings, the rates will change according to the configured occupancy slabs.
Step 4. Monitor and Update Constantly
Once you have configured the slabs in the system, don’t make the mistake of sticking with it adamantly. Monitor your competitor’s rates; you should be aware of what your competitors are doing or when they are increasing or decreasing their rates. With a variable pricing strategy, you should monitor and analyze your competitors’ rates to ensure that you are ready with a prototype for your rate prediction.
The key to implementing yield management strategy effectively is using your data to understand your customer segments
and their sensitivity to pricing and combining this information with the seasonal demand. The idea is not only to increase occupancy or room rates but also to understand your customer so that you are able to sell the right room to the right customer at the right time for the right price.