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YIELD MANAGEMENT
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YIELD MANAGEMENT - A STRATEGY FOR INCREASING PROFITS
Yield management has been around since the 1970's, when it was introduced by airlines who realised that they needed to have a strategy for offering an identical flying experience to different customers for different prices, based solely upon the time at which they booked and the flexibility that they required. Hotel's only really started practicing it in the mid-1990's in an attempt to rationalise the wide variety of rates that they were charging different customers. Revenue per available room (REVPAR) is increasingly used as the definitive measure of a hotel's performance, replacing or complementing the traditional measurements of occupancy and average rate. And yet, too often, too few people in a hotel fully understand the significance of this measurement. Similarly too many people think that REVPAR and yield are the same measurement. Many hotels which claim to practise yield management are simply measuring REVPAR on a daily basis and staff are incapable of explaining to a guest why different rates are charged on different days for the same room. Yield management and revenue management are one and the same thing. Essentially they are an approach to increasing profit by responding to what we know about the past, what we know about the present and what we think will happen in the future. In other words we are trying to sell the right room at the right time, at the right price to the right person. You could say that this is nothing new, but on the other hand many hotels are focussed either on occupancy or average rate and make most decisions on a very short-term basis. Yield management is a systematic approach to simultaneously optimising both average rate and occupancy, the ultimate aim being 100% yield ie 100% occupancy at rack rate. Yield is based on the basic economic theory of supply and demand. In times of high demand high prices can be charged. Conversely when demand is low prices will be lowered. Also, when supply is limited prices rise and when there is an over-supply prices drop. We are trying to match supply and demand by establishing a customer's willingness to pay a certain price. Often the customer with the least flexibility in terms of date and location will be prepared to pay the highest price. But then will expect the hotel or airline to afford him a great deal of flexibility should he wish to change his arrangements. Conversely the customer who is prepared to be flexible with date and location will expect a lower price, but must then appreciate that once booked he no longer has any flexibility! Yield management only really operates in hotels and airlines by virtue of the following: Yield is measured as a percentage, being the actual room revenue as a percentage of total potential room revenue. The closer it is to 100, the better the yield is, but a typical hotel will achieve around 60% yield. A yield measurement enables comparisons between hotels of different standards and in different countries. REVPAR is a monetary amount and is calculated by dividing the total room revenue by the total number of rooms (not just rooms sold). REVPAR enables a comparison between hotels in different cities and with different rate structures. The psychological disadvantage of both these measurements is that they will be lower than the traditional measurements of occupancy and average rate. But, they are a truer reflection of your business's performance. You should want to work with yield management because you don't want to accept low-rate groups at the expense of high-paying individuals, because you want to know what rate to quote before the telephone rings, because booking lead times vary by segment, because demand from different market segments fluctuates and because you need help in deciding which business to convert or accept and at which rate. Yield management consists of taking decisions based upon the actual business that you already have on the books, past business and booking patterns, future trends and most importantly very recent trends. Yield management is about forecasting, discounting, managing inventories, overbooking, evaluating group enquiries, redirecting demand and logical, rational pricing. Essentially the key to successful yield management is the ability to differentiate customers who are prepared to pay high prices from those who are prepared to change their travel plans to secure low prices, or make a commitment well in advance to secure the low price. Customers should segment themselves. It is all about selling the same room at a different price depending upon demand and most critically, all of your staff being able to explain to a guest why they have paid a certain price, without having to fall back on a 'roomtype' argument. This will only happen if clear direction has come from senior management, if everyone has been trained in yield management, if information is up-dated regularly and if weekly yield meetings take place to agree and modify the strategy for the next 18 months. The keys to successful yield management: Knowledge - of what drives demand for your hotel Awareness - of your competitors activities Experience - of what can cause fluctuations in demand Understanding - of what the hotel expects to achieve, be it ARR, Occupancy, REVPAR or yield % Training - of all staff so that yield strategies make sense and can be explained simply to potential customers This article was written by Pamela Carvell and may not be reproduced in part or full without her prior permission. |
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