Yield Management

YIELD MANAGEMENT - A STRATEGY FOR INCREASING PROFITS
by Pamela Carvell (01)

Yield management has been around since the 1970's, when it was introduced by airlines who realized 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'sonly really started practicing it in the mid-1990's in an attempt to rationalize 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 fullyunderstand the significance of this measurement. Similarly too many people think that REVPAR and yield are the same measurement. Many hotels which claim to practice 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 andthe 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 focused either onoccupancy or average rate and make most decisions on a very short-term basis. Yield management is a systematic approach to simultaneously optimizing both average rate and occupancy, the ultimate aim being 100% yield 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 priceswill 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 offlexibility 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:
* Capacity is relatively fixed
* Demand is derived from distinctmarket segments
* Inventory is perishable ie an unsold room today can not be sold twice tomorrow to make up for lost revenue.
* The product is often sold well in advance of consumption
* Demand fluctuates significantly
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 atypical 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 psychologicaldisadvantage 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...