What is Yield Management?

Management 10 minute read 02 November 2020

Strip back the fancy terminology, and yield management is simply a way of running a profitable business.

It’s most commonly applied to the hotel sector, but the techniques and tools used for yield management can also be found in restaurants, bars and other hospitality venues.

Just to confuse things, it has other names, too, including ‘revenue management’ and ‘inventory management’. Whatever you decide to call it, yield management will enable you to take advantage of dynamic pricing which controls the profitability of your bed (or table) supply.

Even better, much of this can be automated, and while it’s not strictly a set-and-forget routine, yield management is capable of giving you more time while making the business more profitable.

Sounds like the impossible dream, doesn’t it?

What is yield management?

What is yield management

It was the airline industry which first introduced the term ‘yield management’, back in the 1980s.

The hotel sector soon caught on, and adapted this form of inventory management to deal with an increasingly complex and competitive marketplace. It resulted in rate scheduling becoming just as commonplace as staff scheduling.

Swap the word ‘yield’ for ‘profit’, and you’re pretty much there with the definition for yield management. Modern yield management systems enable hotels to offer different prices to different customers by finding the optimal balance of supply and demand.

Applying the law of supply and demand to a hotel

In every market, there’s a price at which customers are willing to pay for a product or service. However, that price also needs to be right for the business behind the product.

With yield management in hospitality, you can find that ideal price and adjust it depending on how many people are interested in booking a room or table.

Here’s a definition of supply and demand in a hotel:

Supply = the number of rooms you have available to sell This rarely fluctuates, unless you undergo a refurbishment or have periods where sections of the hotel are blocked out for long periods of time.

Demand = the number of potential guests who want to book a room for a specific amount of time.

This fluctuates constantly, every single hour of the day (even if you’re not aware that’s the case).

The rate at which demand fluctuates is largely behind the introduction of seasonal and weekend rates at hotels. That’s yield management at its most basic level, but with demand changing by the hour, modern hoteliers need to get much smarter than that.

The most important yield management metrics

To measure yield management performance in your hotel, there are three metrics you’ll need to start tracking:

Yield metrics

1. Average Price (AP): AP = (monthly revenue) / (rooms sold that month)

2. Occupancy Rate (OC): OC = (room sold in a month) / (rooms available that month)

3. Average Revenue per Available Room (RR): RR = (monthly revenue) / (rooms available that month)

It’s always best to start simple, though. One of the easiest ways to get started with yield management is to compare the revenue you’ve achieved against the maximum potential revenue.

For instance, if you have 100 rooms available and the full rate for each is £200 per room, the maximum potential revenue would be £20,000. If you sell 50 rooms one night at a lower average rate of £160 per room, you’ll have achieved £8,000 total revenue.

To work out the yield percentage for that night, you simply do the following:

8000 / 20000 x 100 = 40%

Easy!

3 data points for every yield management strategy

Some say that yield management is an art rather than a science, but data remains at the heart of every successful inventory management strategy. There are, broadly speaking, three data points every yield management strategy needs.

1. Data from your doorstep

It’s the oldest form of yield management, but still completely relevant today.

What are the competitors charging? Are there any hotels starting up or closing down in your area? What is demand like on OTAs? Will that new airline, attraction or restaurant impact demand?

2. External factors

It’s important to look beyond your sector and into the wider travel industry.

Often referred to as a “macro-economic outlook”, this involves looking at world economic forecasts and keeping a close eye on all travel-related news. It might seem lofty and inconsequential, but small movements in big markets could impact your pricing model.

3. Elasticity of demand

The demand for your rooms will change based on how you price them, but it’s easy to misunderstand what happens when you do that.

For instance, if you lower the price of a room, you may see a growth in demand, but it probably won’t be enough to offset the lower price you’re charging. This may even result in a net negative result for your room revenue.

This is why it’s always important to ask yourself whether or not lowering prices is really going to add to your bottom line. One-night mid-week stays are typically very inelastic, while a two-night weekend stay at the height of summer is likely to be more elastic, due to significant demand. 5 tips for improving your yield management

Yield Management Infographic

Now we have a decent understanding of yield management, let’s look at five quick-fire tips for improving it in your hotel business.

1. Get a handle on your market

You’ll never implement a successful yield management strategy if you don’t understand where demand comes from in your area and the local factors which impact it (that includes competitors, events and building developments).

2. Segment your customer base

In order to sell the right room to the right person, you need to know who that person is. And that means dividing your customer database into chunks of tightly defined audiences.

3. Anticipate future demand

To master yield management, you need to master the art of forecasting. This relies on accurate record keeping for historical data comparisons and yield management tools which give you a broad picture of the entire market.

4. Invest in SEO

Search engine optimisation ensures potential guests can find you on Google and book direct. More direct bookings equals more profit, which is why SEO is such an integral part of inventory management.

5. Find hired help

If you have the budget to invest in the services of a freelance revenue manager - go for it. Yield management is something which requires experience and up-to-date knowledge of the latest strategies. You can do it yourself, but hired help is a great investment.

Why is yield management so important?

If you still need convincing that yield management is worth your time, consider this.

Imagine being able to look around the corner and anticipate demand for your rooms. Even better, imagine being able to accurately prepare for individual subsets of your customers, each of whom have varying requirements and room pricing with which they’re comfortable.

Now, picture being able to adjust your pricing so that it’s the maximum they’re willing to pay while making you a handsome profit.

That’s yield management, and modern hospitality businesses simply can’t survive without it.

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