Yield Management
FOCUS POINTS
• Occupancy percentage
• Average daily rate
• RevPAR
• Use of yield management
• Components of yield management
• Applications of yield management
• Occupancy percentage
• Average daily rate
• RevPAR
• Use of yield management
• Components of yield management
• Applications of yield management
RevPAR – RevPAR (revenue per available
room). To understand one of the financial determinants that hoteliers use.
RevPAR is determined y dividing room revenue received for a specific day by the
number of rooms’ available n the hotel for that day.
The formulas for determining RevPAR
are as follows:Room revenue =
Number of available rooms (or) hotel
occupancy – average daily rate
This type of financial insight into a hotel’s ability to produce income allows owners, general managers, and front office managers to question standard indicators of hotel success. RevPAR asks the question “How many dollars is each room producing?” If there re certain rooms that are always occupied because of a lower rate, attractive amenities, r other reasons, then the hotel’s administration may want to duplicate those sales to similar markets. This questioning opens the door for the concept of yield management; hitch turns the passive efforts of hoteliers into aggressive efforts.
Financial strategies
Use of Yield Management – The goal of yield management is twofold: to maximize profit for guest room sales and to maximize profit for hotel services. These goals are important for future hoteliers to understand, because if they set out only to maximize room sales, the “most profitable guest” ay not stays in the guest room. This is the difference between airline yield management and hotel yield management. He follows information shows how yield management is used in the hotel industry. As you read this information, note how the management staff is using technology o make informed decisions, which will reject favorably on the bottom line. The challenge of developing any computer application is to support the goals of the management staff. The following quote from the International Hotel Association summarizes the importance of using yield management as a business tool: “Yield Management is the must have business planning tool for hoteliers in the 1990s and beyond. The computerized functioning [mathematical model] of yield management is complex, but the concept is simple: By using a combination of pricing and inventory control, an hotelier can maximize profits from the sale of rooms and services.”
So how are hotel general managers, directors of marketing, and front office managers applying this new technology to produce more profit for a hotel? Here are some examples:
OPERA — a Revenue Management System (Yield
Management) is one of the smartest and most informed strategies for increasing
sales and raising profits.
Some of the features of this system include the following.
• Forecasting accuracy achieved by incorporating activity related to the initial reservation, denied reservations, cancellations, modifications, no shows, check-ins, and checkouts.
• Identifies the mix and price of bookings that will generate maximum profits for each hotel.
• Accurately determines which customer reservation requests to accept and which to decline.
• Considers competitive pressures and economic cycles with daily analysis and updates.
• Assesses the impact of prospective groups on overall property net revenue and provides guidelines on minimum room rates for groups.
• Tracks planned and actual group block materialization and identifies deviations from forecast.
• Performs a complex optimization of data every night, processing every booking transaction and updating large forecast data sets.
• Forecasts transients up to a year and half into the future.
Some of the features of this system include the following.
• Forecasting accuracy achieved by incorporating activity related to the initial reservation, denied reservations, cancellations, modifications, no shows, check-ins, and checkouts.
• Identifies the mix and price of bookings that will generate maximum profits for each hotel.
• Accurately determines which customer reservation requests to accept and which to decline.
• Considers competitive pressures and economic cycles with daily analysis and updates.
• Assesses the impact of prospective groups on overall property net revenue and provides guidelines on minimum room rates for groups.
• Tracks planned and actual group block materialization and identifies deviations from forecast.
• Performs a complex optimization of data every night, processing every booking transaction and updating large forecast data sets.
• Forecasts transients up to a year and half into the future.
Components of Yield Management – To understand yield management, it is
important that you know its interrelated components. Each part of yield
management feeds into a network, which supports the goal of maximizing profit
for a hotel.
Demand Strategy— High Maximize rates, require minimum stays
Low Maximize room sales, open all rate categories
Optimal Occupancy and Optimal Rate – achieving the best yield involves redefining the use of occupancy percentage and average daily rate. Although these concepts are important to the long-range potential, financial picture, they take on a new meaning with yield management. Optimal occupancy, achieving 100 percent occupancy with room sales, which will yield the highest room rate, and optimal room rate, a room rate that approaches the rack rate, work together to produce the yield.
A 300-room hotel has sold 100 rooms at $76.00,
150 rooms at $84.00 and
35 rooms at $95.00 (rack rate).
The yield for this combination is 83
percent.
If yield management were in use and
the daily report revealed
200 rooms sold at $90.00 and
85 rooms at $95.00,
a 91 percent yield could have been
realized.
Not only could an additional eight
percentage points have been achieved, but also an additional $2,550.00 could
have been earned. In both situations, occupancy of 95 percent was achieved, but
the average daily rate in the first case was $82.54, while the optimal room
rate in the second case was $91.49. The $91.49 optimal room rate more closely
approaches the $95.00 rack rate.
Strategies – Orkin offers a simple policy for developing strategies to implement yield management:
Strategies – Orkin offers a simple policy for developing strategies to implement yield management:
when demand is high, maximize rates; when demand is low, maximize room sales.
These concepts are portrayed in Table 6-3. Orkin also offers some specifics on
developing strategies. He says that when demand is high, “restrict or close availability
of low-rate categories and packages to transients [guests], require minimum
length of stays, and commit rooms only to groups willing to pay higher rates.
When demand is low, provide reservation agents with special promotional rates
to offer transients who balk at standard rates, solicit group business from
organizations and segments that are characteristically rate sensitive, and
promote limited-availability low-cost packages to local market.”9 Restricting
or closing availability was indeed a challenge because most front office
managers were familiar with the “sell out the house” operating procedure and
were unsure if this aggressive marketing tactic would work. Some hoteliers were
setting reservation policies that required minimum length of stay during heavy
demand periods.
Forecasting – An important feature of yield management is forecasting room sales. Orkin suggests using a daily-decision orientation rather than a seasonal decision-making scheme in developing a particular strategy, Accurate forecasting of transient demand will assist hoteliers in developing strategies to maximize sales to this group. For example, if a hotel has group business reservations for 95 percent of available rooms, seeking transient business with special promotional packages during that time period would not be advisable.
If the period following the group business is low, then advance knowledge of this information will allow time for marketing and sales to develop special promotional packages aimed at the transient and local markets.
Block-Out Periods – The strategies just discussed for high-demand periods require front office managers to block out certain days when potential guests who seek reservations must commit to a minimum length of stay. If a guest requests a reservation for October 25, but that date falls in a block-out period of October 24, 25, and 26, the reservation agent will have to refuse the request. If the guest is willing to commit to all three days, then the reservation can be processed. This process of establishing block-out periods will allow a hotel to develop standardized reservation operating procedures for a 24-hour-a-day reservation system. Forecasting of these time periods is an essential feature of yield management.
Forecasting – An important feature of yield management is forecasting room sales. Orkin suggests using a daily-decision orientation rather than a seasonal decision-making scheme in developing a particular strategy, Accurate forecasting of transient demand will assist hoteliers in developing strategies to maximize sales to this group. For example, if a hotel has group business reservations for 95 percent of available rooms, seeking transient business with special promotional packages during that time period would not be advisable.
If the period following the group business is low, then advance knowledge of this information will allow time for marketing and sales to develop special promotional packages aimed at the transient and local markets.
Block-Out Periods – The strategies just discussed for high-demand periods require front office managers to block out certain days when potential guests who seek reservations must commit to a minimum length of stay. If a guest requests a reservation for October 25, but that date falls in a block-out period of October 24, 25, and 26, the reservation agent will have to refuse the request. If the guest is willing to commit to all three days, then the reservation can be processed. This process of establishing block-out periods will allow a hotel to develop standardized reservation operating procedures for a 24-hour-a-day reservation system. Forecasting of these time periods is an essential feature of yield management.
Systems and Procedures – Orkin suggests that a front office manager who
implements yield management use an automated system that will process
reservations, track demand, and block out room availability during certain time
periods. The details of operating a reservation system for a 500-room hotel on
a 365-day basis that uses yield management would be overwhelming if left to
manual calculation. He also advises initiating specific rate-setting policies
that will ensure profitability. Establishing block-out periods will require an
ongoing marketing effort by the hotel to ensure sales in projected low-demand
periods. He also urges front office managers to develop a well-trained staff,
who will understand and use yield management procedures. Training is another
key element in making a very complicated system workable. Those of you who have
experience in the hotel industry will appreciate Orkin’s last caution — be
adaptable to changes in demand.
If a four-day convention has booked 90 percent of the rooms for arrival on April 5 and 25 percent of those reservations have canceled by March 30, the front office manager should drop the restrictions for a four-day stay and encourage reservation agents to offer promotional packages to transient guests.
Feedback – Feedback on decisions employed in yield management is essential in any new venture in management. A record of the date and amount of turn away business is vital for hoteliers to assess the viability of yield management and to update yield management and marketing strategies for the future.12 A general manger who reviews the report of a recent five-day block-out period, as depicted in Table 6-4, would find that the period restricted for a five-day minimum length of stay worked well for May 1–3, but 178 room reservations were lost for May 4–5. The director of marketing and sales will have to research the contracts the hotel had with the various groups involved. Also, the front office manager should ask if the front desk clerks, bell staff, or cashiers heard any guest comments on why they checked out earlier than scheduled. The turn away business on May 3–5 might also indicate that the convention events scheduled on these days were more interesting or that the members of this group did not want to commit to a five-day stay and wanted reservations for only the last three days of the convention.
If a four-day convention has booked 90 percent of the rooms for arrival on April 5 and 25 percent of those reservations have canceled by March 30, the front office manager should drop the restrictions for a four-day stay and encourage reservation agents to offer promotional packages to transient guests.
Feedback – Feedback on decisions employed in yield management is essential in any new venture in management. A record of the date and amount of turn away business is vital for hoteliers to assess the viability of yield management and to update yield management and marketing strategies for the future.12 A general manger who reviews the report of a recent five-day block-out period, as depicted in Table 6-4, would find that the period restricted for a five-day minimum length of stay worked well for May 1–3, but 178 room reservations were lost for May 4–5. The director of marketing and sales will have to research the contracts the hotel had with the various groups involved. Also, the front office manager should ask if the front desk clerks, bell staff, or cashiers heard any guest comments on why they checked out earlier than scheduled. The turn away business on May 3–5 might also indicate that the convention events scheduled on these days were more interesting or that the members of this group did not want to commit to a five-day stay and wanted reservations for only the last three days of the convention.
Table – Turn away Business Report
Date Yield % No. Rooms Turned Away DollarsLost[@$95Rack Rate]
May 1 98 35 3,325
May 2 96 20 1,900
May 3 93 60 5,700
May 4 50 90 8,550
May 5 50 88 8,360
CH O
Management Challenges in Using Yield Management
An enormous problem facing hotels that employ yield management is alienation of customers.13 Potential guests who have a reservation refused because they do not want to comply with minimum-stay requirements or who feel they are victims of price gouging may not choose that hotel or any hotel in that chain the next time they are visiting that particular area. It is important that employees be well trained in presenting reservation policies to the public.
Considerations for Food and Beverage Sales
The previous discussion on yield management focused on rates, room
availability, minimum stay, and the like. However, there is another issue that
assists hoteliers in setting yield management policies that cannot be
overlooked—potential food and beverage sales.14 certain market segments have a
tendency to purchase more food and beverages than other segments. This factor
must be taken into consideration to determine the most profitable customer to whom
to offer the reservation. Let’s review Table 6-5 to determine which potential
group would bring in the most income to the hotel. Group B, with projected
income of $92,500 due to projected food and beverage costs (perhaps guests with
larger expense accounts or scheduled banquet meals), will bring more projected
income to the hotel, even though the room rate for group B is lower than for
group A. Some hoteliers will debate the food and beverage issue because the
profit from food and beverage sales is not as great as that from room sales.
Other debates in applying yield management center on the type of guests who
request reservations and the subsequent effects on room furnishings and use of
hotel facilities. For example, group B may be a conference group of high school
students who may damage hotel facilities, while group A may be senior citizens
who are attending a conference. Developing effective yield management policies,
which identify groups who may yield additional income (or expense), is
necessary to make yield management work. This is indeed a challenge to you as
you begin your career as an hotelier.
Applications of Yield Management – The best way to understand yield management is to apply it to various situations. Try your hand at the following scenarios to become familiar with the basics of yield management.
Applications of Yield Management – The best way to understand yield management is to apply it to various situations. Try your hand at the following scenarios to become familiar with the basics of yield management.
Scenario 1 – A front office manager has reviewed the daily report, which
reveals that 240 rooms were sold last night. The hotel has 300 rooms and a rack
rate of $98. Using the following breakdown of room sales, determine the yield
for last night:
85 rooms at $98
65 rooms at $90
90 rooms at $75
Scenario 2 – The general manager has asked you to develop a block-out period for the October Annual Weekend Homecoming event at The Times Hotel. There is a definite possibility of 100 percent occupancy, but the general manager is concerned that several of the alumni will dine off-premises. He would like a package rate, which will include a kickoff breakfast and a dinner after the game. How will you proceed?
65 rooms at $90
90 rooms at $75
Scenario 2 – The general manager has asked you to develop a block-out period for the October Annual Weekend Homecoming event at The Times Hotel. There is a definite possibility of 100 percent occupancy, but the general manager is concerned that several of the alumni will dine off-premises. He would like a package rate, which will include a kickoff breakfast and a dinner after the game. How will you proceed?
Yield percentage
Yield percentage measures a hotel manager’s efforts in achieving
maximum occupancy at the highest room rate possible. It is sufficient to note
that this concept is relatively new in the hotel industry. Prior to the 1990s,
hotel managers relied on occupancy and average daily rate as indicators of
meeting financial goals. Yield percentage forces managers to think in terms
that are more active. RevPAR (Revenue per Available Room) RevPAR is determined
by dividing room revenue received for a specific day by then number of rooms
available in the hotel for that day.
The formulas for determining RevPAR are as follows: room revenue =
Number of available rooms
Or
Hotel occupancy - average daily rate
The formulas for determining RevPAR are as follows: room revenue =
Number of available rooms
Or
Hotel occupancy - average daily rate
Hotel Occupancy
Occupancy percentages measure the
effectiveness of the marketing and sales department as well as the front office
in its external and internal marketing efforts. Investors to determine the
potential gross income, which is the amount of sales a hotel might obtain at a
given level of occupancy, average daily rate, and anticipated yield use
occupancy percentage. However, it is also important not to assume that
occupancy is standard each night. Variations occur on a daily basis and by
season.
Average Daily Rate of Hotel
The average daily rate (sometimes
referred to as average room rate) is also used in projecting room revenues—the
amount of room sales received—for a hotel. Guests expect higher room rates to
correlate with higher levels of service: the hotel with a rate of $150 per
night is expected to offer more services than a hotel in the same geographic
area with a rate of $55 per night. Major hotel chains, have extensively
capitalized upon these expectations by developing different properties to meet
the expectations of various segments of the hotel market.
Hotel sales Indicators
Services include (but are not limited
to) computerized reservation systems, public dining, banquet service, lounge
and entertainment areas, personal services, and shuttle transportation to
airports. They may be located almost anywhere. It is essential to note the very
gray areas in using these two types of categories. Commercial lodging
establishment may have a certain percentage of permanent residents. Likewise, a
residential hotel may have nightly rentals available. Owners and general
managers need to exhibit a great deal of flexibility in meeting the needs of
the available markets.
Hotel Market Orientation
Market orientation in the hotel
industry is categorized into two segments:
(1) Residential hotels, which provide
guest accommodations for the long term; and
(2) commercial hotels, which provide
short-term accommodations for traveling guests. Residential properties include
hotels, all-suites, limited-service, and extended-stay properties. Services may
include (but are not limited to) public dining, recreational facilities, social
activities, and personal services. These hotels are usually located in
center-city and suburban areas where other activities (shopping, arts and
entertainment, business services, public transportation) are available to round
out the living experience. Commercial properties service the transient guest,
whose stay is short.