As a hotel owner, you might encounter the term “yield management” at some point. It is a critical concept and one you should understand completely, since you can potentially use it to your advantage. In this article, we’ll talk about what yield management is, how it compares to hotel revenue management, and what the formula is for you to calculate it.
Yield management for hotels is a management strategy that encompasses both revenue and pricing. You can use it to maximize business performance.
Price adjustment is at the heart of yield management. You can adjust your prices based mainly on predicted demand, though there can be some other factors you might factor in as well.
What you are trying to do with yield management is to maximize revenue, also sometimes referred to as yield. Ideally, what you are attempting to do is to sell the right product to the right customer. However, you’re also trying to do so at the right time and at the right price, which can be tricky. Some hotels can succeed or fail based on how well they’re handling their yield management.
If you’re a hotel owner who’s looking at your yield management, the goal associated with it should be increasing the business’s revenue by leveraging the balance between your supply, which means your available rooms, and your demand. Demand, in this instance, means your guest bookings.
You can often do this by anticipating and understanding a guest’s behavior. Market dynamics will also play a part. Once you’re looking at the proper metrics associated with yield management, you can potentially optimize a pricing strategy. That should boost your bottom line and keep you and any investors happy.
To break things down even more succinctly, you can look at yield management as understanding and anticipating a guest’s behavior, and then taking steps to influence it. You can break room supply and demand down to a science if you’re paying attention to yield management and handling it the right way.
Yield management is not just something that’s visible in hotels, though. You can also see it at work in places like grocery stores. There, the most profitable items are right in the sight line of the average customer.
When someone is buying something often makes a difference in how much they are willing to pay. You might enforce minimum stays, offer lower rates on certain days of the week, or provide a discount for individuals who book early. All of these things can enter into your calculation and implementation of yield management.
Those who want to know more about yield management and its history should look no further than the airline industry. Airlines figured out that they could charge different amounts for seats on the same flight, and not just based on who was flying in first class. They also determined that customers might be willing to pay more based on purchase timing.
It was a simple idea, but it worked. Hotels caught on, and owners started doing the same things by the late 1980s or early 90s.
This led to some hotels hiring yield managers. Such individuals would steer a hotel’s pricing strategy. You needn’t necessarily hire such a person, though. If you know the principles behind the practice, there is no reason why you can’t take on such responsibilities yourself.
In the modern world, the roles of yield managers have evolved. A hotel might not necessarily have someone on staff with that job title. Instead, a hotel may have a revenue manager who has a broader focus.
If a hotel is smaller, or it has a bed and breakfast type of business model, yield management tasks are usually handled by a general manager. Such a person might juggle many responsibilities.
The best general managers for hotels, though, know about the yield management concept. They also know the best ways to implement it to generate the most revenue for the rooms in their hotel.
Yield management is related to hotel revenue management, but they are not identical. Remember, with yield management, you’re attempting to sell the right room to the right customer, but you’re also doing so at the right time.
With hotel revenue management in a more general sense, you’re considering broader aspects of your business model. Those include overarching distribution strategies and prices.
You can regard these two concepts as having different focus areas. With revenue management, your scope of interest is broader. Your overall financial strategy would come into play there. With yield management, by contrast, you are targeting maximizing revenue that comes from fixed inventory.
The application across various sectors of these two ideas are another way they differ. Revenue management applies to an extremely wide range of industries. However, yield management can only be applied to very specific niches. Hotels and airlines are the two most commonly associated with it.
Market demand analysis is another area where these two concepts differ. Revenue management, if you’re doing it properly, involves extensive, meticulous market demand analysis. Your strategic decision making requires that. That is not so much the case with yield management.
Also, while both are crucial if you want to maximize your profit, revenue management requires comprehensive financial planning. With yield management, you can use inventory optimization and maximize your profits that way.
At this point, you might be wondering what the formula is for calculating yield management. One exists, and it is relatively easy for hotel owners who are interested in utilizing this metric and seeing what it can do for them.
The simplest way to figure out your yield management is to divide your earned revenue by your potential revenue. Then, you can simply multiply that by 100.
Let’s say that your hotel has a total of 50 rentable rooms. The maximum rate of those rooms is $199. You rent out 48 of the 50 rooms at $199 each. 48 x $199 = $9,552. The potential revenue of the hotel can be calculated like so: 50 rooms x $199 = $9,950.
Now, you would divide the total revenue, $9,552, by the potential revenue, $9,950. 9,552 divided by 9,950 = 0.96. Multiply that by 100 and you get 96. Your total yield is 96%.
96% is great for hotels. If you can always get that, you know you’re doing quite well. A rule of thumb is that if you are getting a yield rate for your hotel of at least 90%, that’s relatively good when you look at the industry standard.
You should always be trying to increase your hotel’s yield. By doing so, you’re increasing your maximum potential revenue. It follows that your profits should increase.
If you constantly adapt to current trends, that can help. If your room pricing is also in line with customer demand, that is a winning strategy that should keep your hotel profitable and you and any investors happy.
The formula we gave can help you to figure out your hotel’s yield with relatively little difficulty. However, keep in mind that in the example we just gave you, you were renting out your rooms at the maximum rate for each room, $199 each.
If it’s the height of the tourist season and rooms are in high demand, then hopefully, you will not have much trouble filling up those rooms at that price point. If room rentals are down, though, because it’s the offseason or there’s some other reason why you’re not getting as many guests, you may be forced to discount some of your rooms to generate more customer interest.
If that happens, maybe you’re renting out your rooms at only $150 each. For simplicity’s sake, let’s use that same formula to calculate what your yield would be in that scenario.
You have 50 rooms, and let’s say you rented out 48 of them again. This time, though, you only got $150 from each guest. 48 x $150 = $7,200. The potential revenue of your hotel with its 50 rooms is still 50 rooms x $199 = $9,950.
Now, you can calculate the yield like so: $7,200 divided by $9,950 is about 0.723. 0.72 x 100 = 72, meaning your yield is now about 72%.
In most instances, you will not have to discount all of your rooms that much. If business is going well, then you may be able to continue renting out most of your rooms at the maximum for each one, $199. If your business is ever suffering for any reason, though, expect the percentage of your yield to drop.
Just like many of the other metrics in hotel management, you can expect your numbers to fluctuate depending on a number of factors. However, you can use various strategies to try to improve your yield if you see the number dropping or it is lower than you’d like it to be.
One thing you can do is to use advanced purchase pricing. You can discount a room’s rate for a guest who plans far enough in advance.
It might sound counterproductive to discount a room’s rate. If you offer this deal, though, you can reduce any uncertainty associated with last-minute booking. You can also benefit from bringing in some revenue early if a guest paid part or all of their room’s costs in advance.
You might also look into seasonal pricing. This kind of pricing looks at the natural ebb and flow of guests and what times of the year they most like to rent rooms in your hotel.
You can adjust your room rates at different times of year. You might focus on the summer, holidays, or other times when it is not as difficult to find guests willing to pay a higher price tag to secure a room in your city, town, or part of the country.
You might also charge more per room if there is an event going on nearby that draws a lot of people. That could be a one-time event or a yearly activity, like a festival or recurring concert series.
If you’re looking at yield management for non-peak times, you will need to do the opposite, dropping the price of rooms to try to stay afloat until things pick up again. You will likely need to look at historical data you’ve gathered from previous years.
Setting price tiers according to previous peak and off-peak periods is one of the responsibilities of the hotel owner, general manager, or whoever it is who’s focused on yield management.
Calculating your hotel’s yield many times throughout the year to keep up with the fluctuation of your profit is something responsible hotel owners should know how to do. This metric is just one of several that can tell a lot about your hotel’s health.
Figure out who you’re going to put in charge of yield management. It could be you if you run a small hotel and have the time and inclination.
If you run a larger hotel, and you don’t have the time or energy to dedicate to this task, you can also consider allocating it. Bringing in someone who knows about this metric and how to impact it can be a boon to your hotel.
You should never ignore yield management, though. It’s a modern hotel metric that provides reliable and usable market intelligence.
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