Front Office Management 6th SEM, Chapter 1

YIELD MANAGEMENT
Includes
Syllabus, Concept and Importance, Applicability, Measuring Yield, Tactics, YM Software and Team

THE CONCEPT OF YIELD MANAGEMENT:

Yield management, or revenue management, is the process by which sales of a limited quantity of goods,
such as hotel rooms, airline seats, apartment leasing, rental cars, or etc. are managed in order to maximize
profits. Successful yield management focuses on selling the product in such a manner that is timely, price
competitive, and directed towards the right subset of customers
An economic concept first posited by Dr. Matt H. Keller, and first used by the airline industries beginning in
the 1970s, yield management has evolved in more recent years as an important tool especially for the airline
and hotel industries for staying economically competitive in otherwise saturated business playing fields.
The basic concept of yield management is based in the economic principle of supply and demand: when
supplies are short, prices go up; when supply is high, prices go down. Yield management is a studied,
systematic method by which managers can logically place customers within the supply demand spectrum,
and thus gain the highest yield for their products. For example, a customer who has very little flexibility in
his or her travel plans is the customer who is most likely to pay a higher price for airline tickets and hotel
rooms. The customer with a great deal of flexibility is not as inclined to pay a higher price.
Yield management is a set of techniques and procedures used to manipulate occupancy and/or ADR in order
to maximise the hotel’s revenue. It takes into account as many factors influencing business trends as
possible. It is also an evaluative tool that allows the FOM to use potential revenue as the standard against
which actual revenue can be compared. Yield management or YM can be viewed as the application of tactics
that predict or forecast consumer behaviour and effectively price highly perishable products like room nights
to maximise RevPAR. The goal of YM is to consistently generate the highest possible revenue from the
given number of rooms in a certain period of time. It therefore is a set of demand forecasting techniques
used to determine whether room rates should be raised or lowered and when a reservation request should be
accepted or rejected in order to maximise revenue.
Hotel Chains and Yield Management
Many hotels rate their success by their occupancy levels, but this isn't necessarily the best measure of
success. Another way to rate a hotel's performance is by determining its REVPAR, or Revenue per Available
Room. REVPAR is calculated by dividing the total room revenue by the total number of rooms. For
example, a hotel that makes $6,000 one night with a total number of 100 rooms has a REVPAR of $60.
The yield manager's job is to maximize the revenue per available room by selling rooms to the right
customers, at the right price, at the right time. How does the yield manager accomplish this somewhat
nebulous task?
Successful yield management arises from several factors: an understanding of what the hotel hopes to
achieve (whether that is room occupancy, REVPAR, or some other measurement); a clear understanding of
what kind of hotel the manager is working with, which will lead to an understanding of what a customer
visiting the hotel wants in his or her hotel experience, and why customers choose their hotel over another
hotel; an ability to measure group sales against the overall goals of the hotel (for example, a hotel whose
main goal is occupancy will be happy to host a large group at a lowered rate, but a hotel whose main goal is
revenue may turn down a larger group in favour of a smaller group who can pay a higher rate); and a
knowledge of what will cause the market to fluctuate (such as holidays, regular regional and local events,
etc.). The yield manager will ideally consider all these factors when creating different rates for hotel guests.

Yield Management (Revenue Management) presents a more Basic Measure of Performance because it
combines Occupancy Percentage with Average Daily Rate (ADR) into a Single Statistic called the Yield
Statistic

Yield Management is an evaluative Tool that allows the Front Office Manager to use Potential Revenue as
the Standard against which Actual Revenue can be compared

Understanding Revenue Management in detail

Perhaps the best definition is Wikipedia’s: revenue management is the process of understanding, anticipating
and influencing consumer behaviour in order to maximize revenue or profits from a fixed, perishable
resource (such as airline seats or hotel room reservations). This encapsulates both the overarching goal of the
process, and its crucial relationship to consumer behaviour. What is revenue management except a means to
mould consumer behaviour in a way that benefits the hotel?

Understanding
The first step in this long and on-going process of encouraging consumer behaviour that is beneficial to the
hotel is understanding consumer behaviour in the first place. What motivates a potential guest to book a
room at one hotel as opposed to another, or at one price and not another is an essential concept to grasp.
Though this can be conjecture, the relationship between pricing and booking pace (and that of a hotel’s
competitors) is easily measured, and elucidates the same set of behaviours. Selling a room to a guest at the
right price to both maximize occupancy and the revenue it generates is impossible without first considering
what will prompt a consumer to make the purchase. It is very easy to understand the consumers buying
habits if you are able to collect a property’s purchasing data analyze it and then read and interrupt the data in
real time. This is easier said than done, but very possible if you have the right system in place.
Anticipating
Once an understanding of consumer behaviour is gleaned- both in a general sense and specific to the
property and the property’s competitors- then management can begin to anticipate that consumer behaviour.
This is where the real challenge or revenue management emerges: being as accurate with this anticipation as
possible, through forecasting, modelling, and exhaustive research. Only when consumer behaviour is at least
partially anticipated can a hotel hope to sell and distribute their room inventory effectively, which is how
revenue management leads to higher revenues and profitability. Once all data is collected and analysed a
pattern will begin to form. This pattern will constantly change and evolve just like any market. The key is to
have a system in place with Artificial Intelligence (AI) that can understand and adapt to these changes in real
time.
Influencing
The last, and most critical aspect of revenue management, is actually influencing consumer behaviour. If a
hotel can understand and anticipate a consumer’s decision, then the next logical step is to guide that decision
in a direction that is beneficial to the property. In terms of selling rooms, exerting influence is largely a
function of presentation and sales channel distribution, in an effort to display a room to a customer at the
price most likely to incite them to buy (while simultaneously being the price that earns the most revenue for
the hotel in that situation). The process of influencing consumer behaviour is the capstone of revenue
management; it is supported by understanding and anticipating consumer behaviour, but in the end it is all
the only visible result of a revenue management strategy. Once you have collected and analysed all of the
data, it will be simple to implement the findings into your revenue management processes. By doing so, it
will provide you with a huge competitive advantage in the market, thus helping you capture a bigger share of
the market.
Of course, being capable of executing the technical aspects of revenue management is crucial to the success
of any revenue management strategy. The ability to modify prices in a real time environment, effectively
manage inventory, balance and optimize sales channel distribution and facilitate cross-departmental
cohesion are important nuts and bolts of the revenue management machine; it won’t function without them.
But neither will it work without an understanding of the fundamental principles of revenue management.
So remember: Understand, anticipate and influence. These are the fundamentals of revenue management and
the keys to a hotel’s financial success.

Hotel Industry Applications or Applicability to Room Division:

The Commodity that the Hotel sells is Time in a Given Space, and if it is Unsold, Revenue is lost forever

Yield Management is composed of a set of Demand Forecasting Techniques used to determine whether
Room Rates should be raised or lowered, and whether a Reservation should be accepted or rejected in order
to maximize Revenue
In order to maximize Revenue, the Front Office Manager needs to forecast Information concerning Capacity
Management, Discount Allocation, and Duration Control

Capacity Management  tries to solve the following Problems:

 Controlling and limiting Room Supply
 Balancing the Risk of Overselling Guest Rooms with the Potential Loss of Rooms arising from Room
Spoilage
 Determining how many Walk-ins to accept during the Day of Arrival

Discount Allocation  Involves restricting the Time Period and Product Mix Available at reduced or
discounted Rates, and limiting Discounts by Room Type through encouraging Upselling

Duration Control  Places Time Constraints on accepting Reservations in order to protect Sufficient Space
for Multi-Day Requests  “A Reservation for a One-Night Stay might be rejected, even though Space is
Available that Night”

Measuring Yield:

The Yield Statistic is the Ratio of the Actual Revenue (Generated by the Number of Rooms Sold) to
Potential Revenue (THE Amount of Money that would be received from the Sales of Rooms in the Hotel at a
Rack Rate)

Formula 1: Potential Average Single Rate:

Potential Average Single Rate = (Single Room Revenues at Rack Rate) / (Number of Rooms Sold as Single)
Formula 2: Potential Average Double Rate:
Potential Average Double Rate = (Double Room Revenue at Rack Rate) / (Number of Rooms Sold as
Double)
Formula 3: Multiple Occupancy Percentage:
Multiple Occupancy Percentage = (Number of Rooms Occupied by more than 1 Person) / (Total Number of
Rooms Sold)
Formula 4: Rate Spread:
Rate Spread = (Potential Average Double Rate) – (Potential Average Single Rate)
Formula 5: Potential Average Rate:
Potential Average Rate = (Multiple Occupancy Percentage * Rate Spread) + (Potential Average Single Rate)
Formula 6: Room Rate Achievement Factor:
Room Rate Achievement Factor = (Actual Average Rate) / (Potential Average Rate)
Formula 7: Yield Statistic:
1. Yield Statistic = (Actual Rooms Revenue) / (Potential Rooms Revenue)
2. Yield Statistic = ((Rooms Nights Sold) / (Rooms Nights Available)) * ((Actual Average Room Rate) /
(Potential Average Rate))
3. Yield Statistic = Occupancy Percentage * Achievement Factor
Formula 8: Identical Yields Occupancy:
Identical Yields Occupancy = (Current Occupancy Percentage) * (Current Rate / Proposed Rate)
Formula 9: Equivalent Occupancy:
1. Equivalent Occupancy = (Current Occupancy Percentage) * ((Rack Rate – Marginal Cost) / (Rack Rate *
((1 – Discount Percentage)) – Marginal Cost)
2. Equivalent Occupancy = (Current Occupancy Percentage) * ((Contribution Margin) / (New Contribution
Margin))

ELEMENTS OF YIELD MANAGEMENT

While developing a successful Yield Strategy, the following Elements are very important:
 Group Room Sales
 Transient (FIT) Room Sales
 Food and Beverage Activity
 Local and Area-wide Conventions
 Special Events

1. Group Room Sales:

Group Booking Data  Determines whether the Group blocks already recorded in the Reservation File
should be modified or not and adjusts expectations by reviewing the Group’s Booking History

Group Booking Pace  Watches out for the Rate at which Group Business is being booked (Consider
Historical Trends)

Anticipated Group Business  Watches out for repetitive Group Patterns and act accordingly in order to
forecast the Pressure on the Market, and hence adjust Selling Strategies

Group Booking Lead-Time  Measures how far in advance of a stay Bookings are made. This is very
important in determining whether to accept an Additional Group and at what Room Rate to book the New
Group

Displacement or Transient Business  Occurs when a Hotel accepts Group Business at the Expense of
Transient Guest. This might engender Profitability Problems and Bad Reputation

2. Transient Room Sales:

The Front Office Management shall monitor the Booking Pace and Lead-Time of Transient Guests in order
to understand how Current Reservations compare with Historical and Anticipated Rates
3. Food and Beverage Activities:
All local Food and Beverage Functions should be viewed in light of the Potential for Booking Groups that
need Meeting Space, Food and Beverage Service, and Guest Rooms

4. Local and Area-wide Activities:

Even when a Hotel is not in the immediate Vicinity of a Convention, Transient Guests and Smaller Groups
displaced by the Convention may be referred to the Hotel (as an Overflow Facility) and this may have a
tremendous Impact on Hotel’s Revenue

5. Special Events:
In Special Events (Concerts, Festivals, and Sporting Events), Hotels might decide to benefit from High
Demand by restricting Room Rate Discounts or requiring a Minimum Length of Stay

USING YIELD MANAGEMENT:

1. Potential High Demand Techniques:

 Try to define the Right Mix of Market Segments in order to sell out the Highest Possible Room Rates
 Monitor New Business Bookings and use these changed Conditions to reassign Room Inventory (As
Occupancy increases, consider closing out Low Room Rates and open them Only when Demand
decreases)
 Consider establishing a Minimum Number of Nights per Stay
 Select the Group that offers the Highest Total Revenue
 Try to displace Price-sensitive Groups to Low Demand Days

2. Potential Low Demand Techniques:

 Carefully design a flexible Rating System that permits Sales Agents to offer lower Rates under Certain
Situations
 Strive to accurately project expected Market Mix
 Management shall closely monitor Group Bookings and Trends in Transient Business  Do Not close
off lower Rate and Market Segments arbitrarily
 As Low Occupancy Periods become inevitable, open Lower Rate Categories, solicit Price Sensitive
Groups, promote Corporate, Government, and other Special Discounts, and Develop New Rate Packages
 Consider maintaining High Room Rates for Walk-in Guests
 A Non-Financial Technique involves upgrading Guests to nicer Accommodations than they are entitled
to by virtue of their Room Rate

 In order to implement these Tactics, Management needs to establish the Hurdle Rate (The Lowest Rate
for a Given Day) below which it is impossible to sell any Room

RM Software
The processing of large databases is impossible without appropriate RM software and hotels that employ it
gain strategic advantage over those that rely on intuitive RM decisions only. RM software helps RM
managers by giving suggestions on price amendments, inventory control and channel management, but it
also influences the decision making process of revenue managers. On the one hand, the software analyses
enormous data bases and provides useful forecasts based on the optimization models embedded in it. On the
other hand, as Schwartz and Cohen (2004) demonstrate, the interface of the software impacts the judgment
of revenue managers and their inclination to adjust the computer’s’ forecasts. However, the ultimate decision
lies in the hands of the RM manager and his/her team. Review of related literature shows that RM software
and human interactions with it have not received enough attention by scholars.

RM team
Human resource issues are essential in RM system planning and implementation. Authors agree that revenue
managers and the revenue management team are vital for the success of any RM system focuses on the
specific knowledge and training RM specialists need in order to be effective and efficient. In any case, the
introduction and the implementation of RM system within a hotel is a challenging and significant change
that might cause resistance among employees and the latter should be addressed and dealt with properly. In
many companies the application of RM techniques is within the responsibilities of the marketing manager or
a person subordinate to him. However, large hotel chains have recognized the importance of RM to their
bottom line and have appointed a separate revenue manager) or even regional revenue management teams to
head and guide company’s efforts in optimal management of its revenues.

Ethical issues in hotel RM

Despite their perceived positive impacts on hotels’ bottom line, RM techniques have received a huge
amount of criticism in terms of grievances and lack of sensible benefits. This is especially valid for price
discrimination and overbooking techniques. Customers feel belied if they find that they have paid higher
price for the same room or if they have to be moved to another hotel. This can be a result of lack of or
incomplete information about booking, cancellation and amendment terms. In general, research in the area
focuses on the perceived fairness of RM from the view point of the customer pinpoints the RM practices that
customers consider acceptable or unacceptable. Obviously, when information about booking, cancellation
and amendment terms is available and understood by the customers or when different prices are charged for
products perceived by them as different, customers are more inclined to accept revenue management
practices. In the other cases, when discounts are insignificant compared to booking amendment/cancellation
restrictions or the latter are changed after the booking has been confirmed customers will be dissatisfied.
Choi and Mattila (2005) furthermore specify that only informing the customers about hotel’s rates is not
enough to improve their perceived fairness of – they have to know the basis for rates variability (day of the
week, duration of stay) and booking conditions.

Legal issues in hotel RM

The legal aspects of hotel RM are a marginal topic in the academic literature, which is yet to expand.
The main focus is the discussion of hotel’s RM system as a source of competitive advantage, know-how
and its subsequent treatment as a trade secret. Kimes and Wagner emphasise that only parts of
RM systems are ascertainable through public sources (e.g. overbookings and forecasting mathematical
models), but how RM systems’ components are integrated is considered proprietary knowledge and
is kept confidential. However, authors call for greater vigilance among hotel managers because high
turnover among hospitality employees might cause RM trade secrets leakages to their new employers.

Hotel revenue management process

Tranter et al. (2008) identify 8 steps in RM process – customer knowledge, market segmentation and
selection, internal assessment, competitive analysis, demand forecasting, channel analysis and selection,
dynamic value-based pricing, and channel and inventory management. It is evident that the authors’
steps are derived from the general marketing management practice, which is understandable, considering
the fact that RM developed into the realm of marketing management. Emeksiz et al. (2006) propose
a more comprehensive hotel RM model that includes fi ve stages, namely: preparation; supply and
demand analysis; implementation of RM strategies; evaluation of RM activities and monitoring and
amendment of the RM strategy. Th e main advantage of Emeksiz et al. (2006) model is the inclusion
of qualitative evaluation and constant monitoring of the RM strategy. In current paper we adopt the
7-stage approach by Ivanov and Zhechev (2011), elaborated in Figure 2.