If you were to ask a hotel owner how confident they are that they have got their pricing right, you may well hear a pause before they answer. After all, every hotel has a finite number of rooms, and getting the pricing strategy wrong can result in empty rooms and lost revenue. This is where the art of yield management comes in. In this article we will cover everything that you need to know about yield management.
What is yield management?
Yield management is a dynamic pricing strategy that has been implemented to maximise the revenue that a business can yield. It involves adjusting prices based on a range of external factors including predicted demand to maximise the business’s revenue or yield.
The concept of yield management originated in the U.S. airline industry. Following deregulation in the late 1970s, airlines took greater control over airfares and developed systems and technology to manage inventory and pricing to maximise revenue for each flight.
Yield management is believed to have been pioneered by Robert Crandall, former chairman and CEO of American Airlines. He created the yield management concept after airlines were deregulated in the late 1970s. Because of the deregulation, airlines were able to take greater control over airfares.
Over time, and under Crandall’s leadership, they developed systems and technology to manage bookings and pricing in a way that they could maximise the revenue for each flight. Crandall described yield management as “the single most important technical development in transportation management since we entered deregulation.”
Yield management had a huge financial up-side. The yield management systems that Crandall and his team developed at American Airlines were recognised for contributing $1.4 billion in a three-year period at the airline.
The yield management concept can be seen across several sectors including rental car providers, trains, coaches, cruise lines, TV advertising and the hotel industry.
From a hotel’s perspective, the ultimate goal of yield management is to optimise their pricing of a specific asset, such as a room, by understanding and anticipating guest behaviour and market dynamics. In this way they are able to increase revenue by carefully leveraging the balance between the availability of, in this example, hotel rooms and guest demand.
Yield management within the hotel industry is based on a few important assumptions:
- Hotels are restricted by having a fixed number of assets such as rooms or restaurant tables that they can sell.
- Hotel inventory is perishable and time-limited; if a hotel room is empty, the opportunity to sell it for a given night is gone forever. The same is true of a table that lays vacant in a restaurant during a sitting.
- People’s perception of what a hotel room is worth to them will differ depending upon a wide range of circumstances; perceived value can operate like a sliding scale.
Given that a hotel’s primary inventory is its hotel rooms, yield management within the hospitality industry is ultimately about selling the right room to the right customer at the right time for the right price.
Calculating yield can help guide pricing decisions. A simple approach would be to take the price of a hotel room and divide earned revenue by potential revenue, multiplying the answer by 100. For example, the potential revenue of a hotel with ten rooms would be £2,490 if each room sold at a maximum price of £249. If the hotel sold nine rooms at £149, then its total revenue would be £1,341: a yield of 54%.
Now, if you expected demand to be strong, then perhaps a better strategy than selling each room for £149 could be to increase the rate to £249. In this scenario, if the hotel were to sell just six rooms, it would be more profitable with £1,743 in revenue and a 70% yield. Plus, the hotel team would only have six rooms to service, rather than nine.
Yield management can be confused with revenue management. And we’ll explain why now.
Yield management vs revenue management
When it comes to operating a hotel, revenue management is a deliberate strategy to grow a hotel’s total business. This differs from yield management which is a deliberate strategy to maximise their profit by optimising the price that they can obtain for a room by taking into account the market dynamics of, for example, a hotel room during the low season.
Yield management has a narrower focus than revenue management, because it is a tool to help maximise a hotel’s revenue by forecasting supply and demand for a specific inventory e.g., a hotel room over a specific period e.g., the low season. Revenue management goes much further, factoring total revenue against costs and profits into revenue decision making, whilst taking into account factors such as market segmentation, demand forecasting and capacity within each of the hotel’s inventory e.g., its rooms, leisure and hospitality facilities, car park, etc.
To give a specific example within the hotel industry, a yield management strategy may seek to charge more for hotel rooms during local events, or to increase capacity of the restaurant at less popular times. Whereas a revenue management strategy may seek to attract specific types of guests to encourage higher spending within in-room services or via the restaurant’s menu and wine list.
Why is yield management important in hospitality?
Let’s face it, yield management is a simple concept. It is based on the simple fact that a hotel can optimise its pricing by adjusting its rates based on its insight into guest behaviour and market dynamics. It is also a vitally important discipline for a well-run hotel.
After all, every hotel has a finite number of rooms to sell. And each hotel will lose potential income every night a room goes vacant. Seeing an empty room is like watching money slipping through the hoteliers’ hands! Let’s explore why yield management is so important to the hotel industry:
1. Maximising inventory income – Yield management is about maximising the price that a hotel can obtain for key inventory such as their hotel rooms. A well-executed yield management strategy will result in additional revenue.
2. Optimising inventory – We use the example of hotel rooms so much because that’s the key inventory for any hotel. They only have a finite number of rooms. Whilst their revenue would normally rely upon high occupancy rates, yield management helps hotels maintain a happy balance regardless of whether full occupancy is an option.
3. Competitive advantage – Having to think creatively about maximising yield has the added benefit of encouraging hotels to see how they can create an attractive package for customers. It’s thanks to yield management that hotels have created ‘dinner, bed and breakfast’ packages for off-peak stays. And it means that hotels in a saturated market aren’t competing purely on price, because that tends to drive price down to a point where profit is sacrificed, and quality normally decreases too.
4. Data driving decisions – The great benefit of yield management systems is that they operate on data. This data-driven approach allows hoteliers to make informed decisions and smart choices when it comes to essential areas such as pricing, promotions, and packages because they are based on historical data, market insight, and predictive foresight.
5. Resource allocation – Because they have used data driven insight, hotels have a much better understanding of the market dynamics that will drive likely demand. This puts them in a much better position to allocate resources and ensure that they will have sufficient staff and inventory to cater for the expected demand.
6. Package management – Yield management and the influx of customer driven data provides hoteliers with the opportunity to create packages that will appeal to their target audience. This can often lead to a richer guest experience, as guests are attracted by the offering and, if it’s delivered in the right way, are more likely to be satisfied with their overall experience.
7. Market adaptation—When it comes to hospitality, nothing is guaranteed. The hotel industry is influenced by a wide range of external factors beyond its control. However, yield management enables it to be on the front foot and capable of responding swiftly to any change in market conditions.
What are the elements of hotel yield management?
The two fundamental elements of hotel yield management are demand forecasting and dynamic pricing. However, in practice, there are a surprising number of elements that come into yield management decision making. We will explore these below.
1. Demand forecasting – This is where the art of predicting the number of guests or bookings for a given period is done on the back of data and insights including past booking data, economic conditions, weather forecasts, market insight, local demand, and local events.
2. Dynamic pricing – Dynamic pricing is the art of pricing in real-time. From a hotel room rate perspective, the types of factors that would be incorporated into a real-time dynamic pricing model would be current demand within the hotel, seasonal patterns, plus external factors such as local demand and competitor pricing.
3. Seasonal pricing - Seasonal pricing is something that the airlines cottoned on to quickly when they created the yield management concept. Seasonal pricing reflects past seasonal patterns of demand to ensure that a hotel’s room rates remain competitive throughout the year. This enables hotels to maximise their revenue during peak times, such as summer, local events, and festive periods. Conversely, it also means that hotels can be more competitive when there is less demand. This strategy involves analysing historical booking data to identify peak and off-peak periods, then setting a series of pricing tiers to reflect these, and then analysing their performance vs previous years and competitor availability.
4. Upselling and cross-selling - Upselling is a tactic to increase a guest's spending by encouraging them to move from, for example, the premium room that they have booked to a premium plus room. Cross-selling encourages customers who have bought one product such as a hotel room, to buy another product, such as a spa treatment or a meal at the restaurant. The beauty of upselling and cross-selling is that they can enhance the guest experience whilst increasing your revenue. Upselling and cross-selling can be done in person at check-in, through well trained front-of-house teams and through digital means such as a booking platform or by phone, email, or text after the booking process.
5. Advanced purchase pricing - Advanced purchase pricing is one of those topics that may come across as a revenue management tactic, but one could argue, is also firmly in the yield management camp. After all, most hotels have a segment of customers who are well organised, plan their stays in advance and expect a discounted rate for doing this; if you don’t offer this, then it’s possible that a competitor will. A typical advanced period would be 30 – 60 days. Advanced pricing is a win–win. The customer gets a price discount for booking in advance. And the hotel receives cashflow in advance, and the uncertainty of lost inventory is reduced.
6. Inventory control – It is important to keep an eye on the number and types of rooms available, the packages on offer and how each of the booking channels perform. Some booking channels favour specific guest profiles, such as those with a preference for ‘bargain’ rates or travellers from a specific destination whose needs or preferences may be different to a hotel’s typical customer. Inventory control also includes overbooking strategies to ensure that no-shows or last-minute cancellations don’t impact your target yield.
7. Segmentation – Segmentation is a marketing tool that segments guests into groups of other like-minded guests. It’s important to think in this way because then you’re able to develop packages for each of your target segments, such as business travellers, leisure travellers, romantic breaks, last minute bookers, price sensitivity, etc.
8. Competitor analysis – Because hotels operate in a competitive environment it is important that they are aware of the yield management strategies of their direct competitors, so that they can be mindful of a competitor strategy when creating their own. Competitor pricing and availability is something that the yield management platforms will also monitor.
9. Distribution management – Hotels will use a variety of channels to promote and sell their rooms. These include direct bookings, online travel agencies (OTAs) and traditional travel agents. No channel is free. They all have their own cost, strengths, and weaknesses. Creating the right distribution mix is important.
10. Performance analysis – This is the discipline of regularly reviewing and analysing your actual performance vs your expected performance and past performance. It is important to identify variances with an understanding of why they may have occurred. That interrogation could lead to other valuable actions such as further market, staff, or customer research to test out a hypothesis. When analysing your yield management performance, you’d expect to examine key performance indicators (KPIs) such as Average Daily Rate (ADR), Revenue Per Available Room (RevPAR), and Gross Operating Profit Per Available Room (GOPPAR).
11. Overbooking strategy – This deliberate strategy is to sell more rooms than you have. It’s popular with large hotels who can balance overbooking by, for example upgrading guests to a more superior room type than the one that they have paid for if their original room type was overbooked. This can be a good strategy to ensure maximum occupancy. However, it is important that you have a well-trained front-of-house team who are skilled at managing any issues during guest check-in. Handled well, guests may experience an enhanced stay whilst the hotel enjoys maximum occupancy.
12. Group management – It is important to approach group bookings in a different way to standard bookings for a few reasons. Firstly, by their nature, unless your hotel is large, then a group booking is likely to be taking a significant portion of your inventory at any given time. Secondly, they are probably receiving discounted rates. Thirdly, the relationship with that group could be important, and finally, any last-minute changes to that booking could have a significant impact on your yield.
13. Terms and conditions – It is important to think about the types of terms and conditions that you may want to apply to some or all of your bookings. For example, minimum stays during peak periods or notice of cancellation.
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