What is Yield Management in Hospitality?
29 Sep, 2021
Airlines and hotels have one single thing in common – they sell a fixed time-limited inventory. One problem associated with fixed resources such as hotels, is that a permanently fixed price all-year-round will not come in handy if your goals are to maximise revenue. Furthermore, the customer landscape of the hospitality industry has drastically changed over the past decade, as seasonal opportunities such as holidays, events, and trends come and go in a flash. So how can you leverage such opportunities? By having a well-defined yield management strategy – a key pricing strategy that will help you maximise revenue.
Here, we explore in-depth what yield management in a hotel is, and the associated benefits. But first, let’s examine the basics!
What exactly is yield management in a hotel?
Put simply, yield management in a hotel is a pricing strategy that entails selling the right room to the right customer at the right time and at the right price. Don’t be overwhelmed by the definition. It simply means that as a hotelier, you can sell a single room to different guests but at different rates depending on demand, season, your occupancy rate, competitor price and a lot of other factors.
Our property management system allows you to allocate rooms and access guest details all from a single dashboard, relieving you of planning-related stress.
Yield management involves predicting consumer behavior based on these factors, and shifting your approach to influence future guests while maximising revenue. To illustrate, picture a scenario where your city is just about to hold a famous festival in a few days. One yield management approach that would maximise revenue is ‘time penalty’ – gradually increasing prices to encourage guests to book with you early and helping you justify higher prices for bookings made the night prior or during the festival.
Calculating yield management
Yield management in hotel is calculated using the following formula :
Yield management = (Achieved Revenue / Maximum Potential Revenue) x 100.
So if you have 10 rooms going for £100 each, your maximum potential revenue is £1,000. If you have 5 rooms going for £150 each on a given night, your achieved revenue would be £700. As such, your yield percentage would be 75%.
What are the benefits of yield management in hotels?
There are multiple benefits of yield management, but let us examine a few major ones.
1) Increased revenue
Perhaps the main advantage of yield management, is that it allows hotels to maximise revenue per available room (known as RevPAR in hospitality), regardless of whether the occupancy rate is at 100% or not. In fact, studies show that an effective revenue management system can lead to sales skyrocketing by up to 10%.
Essentially, as a hotelier, your ultimate goal should be taking advantage of the demand and supply forecast, because guests are willing to pay more if the demand is high.
2) Reducing pricing errors
With an effective and reliable yield management program in place, hoteliers ensure that there is no room for pricing errors because prices are stipulated based on demand and supply forecasting rather than guests’ booking behaviors. You can easily foresee future changes and promptly act on them without making any miscalculated risks. Such risks, common among hoteliers, involve randomly changing prices when the high season is around the corner.
3) Effective customer segmentation
Marketing segmentation, a strategy that entails identifying a particular group of consumers to present them with products that appeal to their interests, is very important in the hospitality industry.
As a hotelier, you’ve interacted with a diverse set of guests, ranging from lone travelers to families or corporate guests. If your hotel’s goal has been to cater to a particular market segment, then you are missing out on segments that may be just as profitable. Yield management helps you identify and tap into segments that you are missing out on.
For instance, with an effective forecast, you can choose to offer low prices to guests who book early and spend more time on the property such as leisure-oriented family groups, and charge high prices to corporate guests who often show up at short notice and only stay for a short period of time.
4) Understanding booking patterns
Different travelers have different preferences and behavior. Some prefer booking earlier and others on short notice. If you are well aware of such consumer behavior, yield management will allow you to be more flexible with your prices.
For instance, and as mentioned, you can adopt the ‘time penalty’ strategy to maximize revenue. This includes offering lower prices to early bookers, and penalizing last minute bookers with higher prices.
Indeed, yield management is an effective pricing strategy whose benefits cannot be overlooked. Throughout the year, you are able to maintain a steady flow of revenue, by establishing higher and appropriate prices that guests are willing to pay based on multiple factors. There are plenty of good reasons why your hotel should embrace this strategy as well!
29 Sep, 2021
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