What is Yield Management? History, Formulas and More!

Yield management involves the use of dynamic pricing to control profitability around fixed inventory supply. The term was actually pioneered by ... News&Analysis News&analysisdrivenbytheHotelTechReportplatformandglobalcommunity. &ltHotelTechReportBlog Categories All Marketing RevenueManagement Operations GuestExperience Meetings&Events VacationRentals IT&BuildingManagement Food&Beverage HR&Staffing Pressreleases More Meetings&Events VacationRentals IT&BuildingManagement Food&Beverage HR&Staffing Pressreleases Gotoresources RevenueManagementSystems OpinionArticle WhatisYieldManagement?History,FormulasandMore! ByHotelTechReport LastupdatedSeptember09,2020 Yieldmanagementisafundamentalconceptforprofitablehotelmanagement.Youcanthinkofitlikethegrandfatherofmodernrevenuemanagement,asitwasoneoftheearliesttechniquesformaximizingahotel’srevenue.Today,itcontinuestoplayabigroleinhow revenuemanagement systems like InforEzRMS deliverresultsforhotels. Yieldmanagementinvolvestheuseofdynamicpricingtocontrolprofitabilityaroundfixedinventorysupply. Thetermwasactuallypioneeredbytheairlineindustryinthe1980sbeforebeingbroughtintothehotelindustrytopricehotelroomssincehotelroomsaresomewhatmoreofacomplicatedproblemtosolve. Whileflexingsupplyandpricingarestillthefundamentalactivitiesofmodernrevenuemanagement,thefieldhasbecomesignificantlymoresophisticatedinthelastthreedecadesashotels(andallbusinessesforthatmatter)havegainedaccesstonewdatasets.  Forexample,whenyieldmanagementwasfirstpioneered,hotelswerelessfocusedonmaximumguestvalueortRevPAR. tRevPARstandsfor"totalrevenueperavailableroom"whichincludesancillarieslikeF&B,spa,amenities,etc. Modernrevenuemanagementinvolvespricingbasedonthistotalexpectedspendwhichisanillustrationofhowwe'veevolvedfrompurelyyieldmanagementintototalrevenuemanagement. Yieldmanagementisstillhighlyrelevantintoday'shotelmanagementworld;however,it'sjustonepieceofthepuzzleratherthantheentirepuzzlelikeitwasdecadesago. Beforedivingintothecuttingedgetechnicalnewinnovationsinrevenuemanagementit'scriticaltofirstunderstandthebasicsofyieldmanagement. Here’sacrashcourseonwhatitisandwhyitmattersforyourhotel.   WhatisYieldManagement? Inthegeneralbusinesssense,yieldisanotherwordforprofit.It’stheamountofincomeleftoverafterpayingoutalltheexpensesrelatedtorunningyourbusiness.Inthecaseofyieldmanagementforhotels,itreferstostrategicallysettingratestooptimizeroomrevenues(pricing)andoccupancy(bookingsvolume). Inthehospitalityindustry,weultimatelywanttoleverageyield managementsystemsandavariablepricingstrategytodeliverdifferentpricestodifferentcustomersinthepursuitofmaximizing"yield"orrevenue. Hotelrevenuemanagementstrategiesvarydependinguponthenumberofroomsinahotel. Asasubsetofrevenuemanagement,yieldmanagementfocusesexclusivelyonfindingyourhotel’soptimalbalanceofsupplyanddemandforitsrooms,orthepointwherepricesperfectlymatchtravelerdemand.That’sthepointwhereyourrateswill“yield”thehighestnumberofbookingsatthehighestpossibleprice. Beforehotelprofessionalshadaccesstorichconsumerandtraveldata,yieldmanagementwastheindustry’sfirstforayintorevenuemanagement. “Whereasrevenuemanagementinvolvespredictingconsumerbehaviorbysegmentingmarkets,forecastingdemand,andoptimizingpricesforseveraldifferenttypesofproducts,yieldmanagementrefersspecificallytomaximizingrevenuethroughinventorycontrol.”~LivioMoretti, DistributionStrategy Yieldmanagementisatug-of-warofsortsbetweenpriceandquantity.Setyourratestoohigh,demanddrops,bookingsslow,andoccupancysinks.Setyourratestoolowandyousacrificerevenueforvolume,potentiallypushingdemandbeyondyourabilitytosupplyit--that’sabadplacetobe,asitnotonlypushesdemandtoyourcompetitorsbutalsoincreasesthestrainonyourstaff,potentiallyincreasingexpensesandfurtherdepressingprofitability.Ofcourse,supplyanddemandareneverperfectlyaligned.Andit’snotasimpletasktopursuethatbalanceandstayontarget.Buttheupsideofgreaterrevenuesisworthit!   ImportanceofYieldManagement Thetopadvantageofyieldmanagementisthatitefficientlyharnessesdemand.Itensuresthathoteliersaremakingthemostmoneypossiblefromtheirasset.Withhighfixedcosts,hotelsneedtoyieldthemostrevenuepossiblefromthosefixedcosts.Hotelsalsoneedtoyieldthemostrevenuefromexistingdemandtobeasefficientaspossiblewithrelateddistributionandmarketingexpenses. Yieldmanagementisalsoacriticalpieceofprofitability.Ifrevenuegoesup,andexpensesarefixed,there’sasignificantimpactonprofitability,asthatadditionalrevenueisnearlypureprofit.Ontheflipside,ifrevenuedropsandexpensesstaythesame,there’sadeteriorationinprofit.Inadynamicbusinesslikehotels,suddendipsindemandcanquicklyputhotels(especiallyindependentsandsmallerbrands)intocrisismode.Yieldmanagementshieldssomewhatfromthatdownsideandhelpsmaximizetheupside,allbymoreeffectivelymanagingexistingdemand. Athirdadvantageofyieldmanagementisthatit’satargetedtaskthatdoesn'ttakeavillagetoaccomplish.So,whileyoucouldalsomaximizeyield(ie.profitability)byworkingwithoperationstoreduceexpensesorworkingwithrevenuemanagement,marketing,andsalestoincreaserevenuesfromroomandnon-roomsources,yieldmanagementismorestraightforward.It’sallaboutthedataand,withagreat revenuemanagement systemlikeInforEzRMS,theprocesscanbeputonautopilotwithminimalintervention.Yield managementsoftwareislow-barrierandhigh-impact--itreallydoesn’tgetmuchbetterthanthat!   YieldManagementFormula Thebasicwaytocalculateyieldistoquiteliterallycalculatehowmuchrevenueyouleftonthetable.Asimpleformulatocalculateyieldis: RevenueAchieved/MaximumPotentialRevenue. Let'ssayyourhotelhas50all-suiterooms,witharackrateof$350each.Thatmeansthatyourtotalpotentialrevenueis$17,500($350ratemultipliedby50rooms).Lastnight,yousold25roomsat$200each,grossing$5,000.Youryieldisthen$5,000dividedby$17,500,or28.5%.Thatyieldmaybeconcerning,butitdoesn'ttellthewholepicture.  Eachyieldmustbecomparedtothebiggerpicture,suchasyourcompset’sperformanceforthesamedate.And,yieldmanagementisgenerallydoneinadvance,sothatratescanbeadjustedinreal-timetoaccountforadvancebookingtrends.Forinstance,ifyouseeasustainedspikeinlast-minutebookingsathigherrates,youmaywanttoconsiderincreasingratesforfuturedatestofurthersustainthosehigh-yieldlast-minutebookings. Tocapturethemostbookingspossibleatthebestpossiblerates,you’llneedaclearviewintothefactorsthatimpactdemand(andthusyourhotel’soptimalrates).Someofthefactorsthatinfluenceyieldmanagementinclude: Bookingwindowsaffectdemand,especiallywhenitcomestopricesensitivity.Compressedbookingwindowshave“createdafast-paceddynamicenvironment.” Market-leveldynamics.Isyourmarketlosingouttonearbydestinations?Aretherelargeeventsintowncausingcompression?Islocalhotelsupplyshrinkingorexpanding?Arethereshiftingtravelertrendsaffectingyourmarket?  Compsetpositioning,orthewaypotentialguestsperceiveyourhotelwhencomparedtotheotherhotelsunderconsideration.Perceivedvaluewithinacompsetplaysabigroleinyourhotel’sdemand.  Macroeconomicconditionsshapedemandlocally.Arecessionrequiresdifferentyieldmanagementstrategiesthenperiodsofgrowth.Forhotelswithmanyinternationalguests,conditionselsewherecandampenorboostdemand. Historicalperformanceprovideinsightsintofuturedemandforecastsatthepropertylevel.  Segments,suchasleisure,business,andgroup,eachhavetheirowndemandcurves,andfactorintoyourhotel’soverallbusinessmix. Thetimeofyearisamajorcomponentindemandformosthotels. Thenextstepistotakeallofthisinformationandtranslateintoafullyieldmanagementstrategy.   HowtodoYieldManagement Therearetwowaystomanageahotel’syield:manualorautomated.Tomanageyieldsmanually,thisisgenerallyhowit’sdone: PullratesandavailabilitydatafromyourPMS. PullcompetitordatafromindividualOTAchannelsor rateintelligencetools. Combinethedatasetsintoasinglespreadsheet,aligndates,andsetupcustomformulastocalculatekeyratios. Enableconditionalformattingtohighlighthigh/lowtrendssoyoucanquicklyseeareasofconcern. ManuallyadjustratesinthespreadsheetandthenuploadittoPMS/OTAforonwarddistribution.   Forsome,thishands-onprocessispartofstayingclosetotheproperty.Formost,however,theprocessistoointimidatingand/ortime-intensivetodoregularly.Technologycanhelpreducetheburdenofmanuallyrespondingtofluctuationsindemandbyconstantlyanalyzingdataandadjustingratesaccordingly. Revenuemanagementsoftware,suchasEzRMS,automaticallypullinrelevantdatasourcesanddeploymachinelearningtoforecastfuturedemandbyidentifyingpatternsinhistoricaldemandatboththeproperty-andmarket-level.Theseforecastsbecomethebasisforraterecommendations,whichcanbeautomaticallyappliedinreal-timetokeepinventorypricedoptimally24/7. Whilesomethinkthatautomatedrevenuemanagementsoftwarewillputrevenuemanagersandyieldmanagersoutofwork,mostinthetechnologycommunitybelievethateffectiveyieldmanagementinthefuturewillbepartmanandpartmachine. InotherwordswewillalwaysneedrevenuemanagerstomaximizeADR&RevPARandidentifyattractivemarketsegmentstodrivestrategicdecisions;however,thedailytasksofthoseprofessionalswillcontinuetoevolvewithmoresophisticatedtechnologytools. Acautiontothosethatpreferthehands-onapproach:Asrevenuemanagementtoolshavedroppedinprice,they’vebecomemoreaccessibletohotelsofallsizesandgeographies.It'sharderandhardertocompeteagainstotherhotelsusingmachinestooptimizetheiryields.Thosetoolsarespeedy,accurate,andalways-onwhereasmanualupdatescanlagbehindandputyourhotelatacompetitivedisadvantage.Whenconsideringaddingrevenuemanagementtechnology,knowthatyoucanturnofftotalautomationandreviewallratesuggestionspriortoonwardsdistribution.Thatwayyoucanstillkeepyourpulseontherateswhilestayingcompetitivethankstodata-drivenintelligentpricing.   ExtraCredit:ANoteonPriceElasticityandPerceivedValue Oneofthefeaturesofsupplyanddemandistheconceptofpriceelasticity,ortheideathatdifferentdemographicsmayrespondunexpectedlytoprices.It’stheconsumer’s“willingnesstopay,”whichdoesn'talwayscorrelatenicelywithclassicsupplyanddemandthinking,wherehigherpricesreducedemand. Priceelasticitycaninfluenceroomrates asit’sabouttheperceivedvalueofthegoodsbeingpurchased.That’swhyluxuryhotelscankeepsupplylowandpriceshighwithoutnecessarilydampeningdemand. Evenso,perceivedvalueishardtomeasureandwon'tshowupinthedata(atleastnotinawaythatmakesiteasytoidentifytheroleperceivedvalueplaysinhowaconsumerchoosestobuy).Andtherealityoftoday’sindustryisthattravelershavemorewaystostaythaneverbefore.Withtheriseof alternativelodging,travelerscanconsiderawiderarrayofoptionstofindthepriceandproductthatsuitstheirspecificneeds.Sinceconsumerscaneasilysubstitutesimilarroomtypes,amenities,andproperties,there’sgreaterpriceelasticity.It'seasiertogetwhattheywantwithoutpayingmorethantheywant. Greaterchoicemeansmorecompetitionandpressuretopriceproperly.Moresothanever,hotelsmustputtherightpriceinfrontoftherightcustomerontherightchannelattherighttime--nottomentionmarkettheirpropertywithvisualsandwordsthatconvertslookerstobookers.   HotelTechReportistheworld'slargestonlinecommunityfortechnologyinsightsanddigitaltransformationstrategiesinthemassivehotelindustryservingover166,000hotelierseachmonth.Wearmhotelownersandmanagerswiththetoolstheyneedtoleveragemoderndigitaltechnologiesandsolvereal-worldbusinessproblems. 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