INTRODUCTION TO YIELD MANAGEMENT
DEFINITION OF YIELD MANAGEMENT
Yield management is the technique which is used to increase the room revenue. In hotel industry yield management is also sometimes called revenue management. Hotel’s daily performance like most of other industries is evaluated on the basis of either occupancy percentage or average daily revenue. The tariff may be reduced or discount percentage may be increased to increase the occupancy but it may not increase the revenue in the same proportion. Some hotels prefer to keep the tariff low in order to increase the occupancy percentage and on the contrary some hotels prefer to increase the tariff in spite of low occupancy percentage. The most appropriate room tariff will be which gets the maximum possible revenue and maximum possible occupancy percentage and this is called yield management.
Concept of yield management
Airlines were the first industry where the yield management concept used. In face any industry which deals in perishable product the yield management concept is very useful. Like airlines, this concept is more popular in hotels, restaurants, car rental, bus rental, cruises, railways etc. Yield management is based on supply and demand formula. As and when the demand increases the supply the price increases and on the contrary if demand is less than the supply then the price decreases. During off season low price booking is accepted but during peak season only high price booking are taken. In peak season even up selling is recommended.
The demand forecast assists front office manager whether the price should be lowered or increased, and whether a reservation request should be accepted or refused in order to maximize the revenue. Hotel’s manager biggest problem is that neither they can increases the supply of rooms in case of more demand nor they can store it and sell on the following days in case of rooms left unsold on a particular day.
Yield management control forecast information in three ways to maximize revenue and these are:
- Capacity management
- Discount allocation
- Duration control
Capacity Management:
Cancellation at last moment and no-shows can never be eliminated. Capacity management means over booking. With experience front office decides that how much over booking should be done so that cent percent or more than cent percent booking may be achieved. In case of over booking, it is always safe to request the similar hotels near by to hold few rooms in case of emergency and overflow of guests holding guaranteed/confirmed booking can be diverted to the other hotels and hotel can pay for their cab fare and even difference in room tariff. Capacity management also include determining how many walk-ins should be accepted on the day of arrival based on expected cancellations, no-shows, late arrival and early morning departure.
Discount Allocation:
Discounting means selling rooms at a price lower then rack rates. Room is a perishable product. It is better to sell it at discount then to keep it vacant. Moreover a room sale will also increase the food sale. If possible hotel can offer high value rooms at the single or double room rack rate instead of giving discount on single or double room.
Duration Control:
In case on certain date say 10th October only a few rooms are available but on the dates before say 7th, 8th, 9th and after that date say 11th, 12th, 13th rooms are available then hotel may refuse a booking request for 10th October only. Hotel will prefer to sell rooms for 10th October if there is a demand for some other days as well either before 10th or after 10th October. This will help hotel in optimizing room revenue. But if all the dated from 7th October to 12th October most of the rooms are sold and there is a reservation request for 10th October only then hotel may accept it as other dates are already booked.
MEASURING YIELD
Example :
Objective: Yield Calculation Rooms – 300 ARR – 2000 100 single rooms sold as single @ 3000/- 100 single rooms sold as double @ 4000/- 200 double rooms sold as single @ 3500/- 200 double rooms sold as double @ 4500/-
FORMULA-1
Potential average single rate (PASR) Revenue at 100% single occupancy PASR = ——————————————— Number of room sold as single 3,00,000+7,00,000 PASR = ——————————- 300 PASR = 3,333.33
FORMULA – 2
Potential average double rate (PADR) Revenue of 100% double occupancy PADR = ———————————————– Number of room sold as double 4,00,000+9,00,000 PADR = ——————————— 300 PADR= 4,333.33
FORMULA- 3
Double occupancy percentage/ Multiple occupancy percentage Number of room sold as double Multiple occupancy percentage= —————————————— Number of rooms sold If occupancy is 70 % 105 Multiple occupancy percentage = ———- x 100 210 = 50%
FORMULA- 4
Rate spread Rate spread = potential average double rate – potential average single rate Rate spread = 4,333.33 – 3,333.33 = 1,000
FORMULA- 5
Potential average rate Potential average rate = (multiple occupancy percentage x rate spread) + potential average single rate Potential average rate = (50/100 x 1000) + 3,333.33 = 3,833.33
FORMULA – 6
Room rate achievement factor Average daily rate Achievement factor = —————————– Potential average rate 2,000 Achievement factor = ———– x100 3,833.33 = 52.2%
FORMULA – 7
Yield Yield = occupancy percentage x achievement factor Room night sold actual average room rate Yield = ———————— x ————————– Room night available potential average rate Yield = 70/100 x 52.2/100 = 0.3654 = 36.54%
Benefits or Importance of Yield Management
- Improved forecasting
- Improved seasonal pricing
- Identification of new market segments
- Identification of market segment demands
- Enhanced coordination between the front office and sales divisions
- Determination of discounting activity
- Improved development of short-term and long-term business plans
- Establishment of a value based rate structure.
- Savings in labour costs and other operating expenses
- Planned responses to guest inquiries or requests regarding reservations.