Yield Management in Hotels

[Source: https://www.digitalgrg.com/]

Imagine yourself as a hotel owner, how can you maximize your profits through renting out your rooms to guests? Have you ever wondered how a hotel can earn money from their operations?

In order to maximize their profits, the hotel industry started to adopt the yield management in the 1980s and early 1990s. Yield management refers to the idea of providing the right services to the right customers at the right time for the right price. The ultimate goal of yield management is to obtain a profit that is closest to their potential room revenue, in order words, to maximize the revenue.

The Yield Management is the process of understanding, anticipating and influencing consumer behavior in order to maximize yield or profits from a fixed, perishable resource (Netessine and Shumsky, 2002).

1. Understanding refers to the collection and analysis of data on customer behavior and market information, being a crucial starting point of the yield management.

[Source: https://russellaaron.wordpress.com/2015/11/11/do-you-really-understand/]

2. Anticipating is the second step to make prediction in future demand of different types of customers for further planning.

[Source: https://www.coursera.org/learn/anticipate]

3. Influencing consumer behaviour comes last to make adjustments on customer demand so as to help balancing the demand and supply under the given constraint that the supply of room is fixed .

[Source: http://www.personalbrandingblog.com/how-to-increase-your-social-influence/]

There are several strategies for yield management in hotels, they are described as follow:

Trends Identification and Analysis (Understanding)

One of the key successful factors of yield management is to balance the demand and supply. As the supply of room is fixed, hotels have to understand the customers’ preferences before making a demand forecast. Online travel agencies (OTAs) such as trivago, Hotel.com, Expedia and TripAdvisor become prevalent in recent years. Make use of these online platforms, hotels can gather a large amount of useful information. For example, customer segment like leisure and business travellers, information channel, room preference, booking behaviour, length of stay, seasonal change, group booking and more. With the above information, the hotels can therefore prepare for a better forecast.

[Source: https://pinaclsolutions.com/blog/2016/it-trends-2017]

Duration Control (Anticipating)

Some hotels may adopt duration controls by setting a time constraint on a guest’s reservation. There are two types of duration controls, which include the control of the minimum and the maximum length of stay. For the minimum length of stay, when a hotel is facing a high demand period, following by a non-peak period, the hotel may reject a one-night reservation and require the guest to stay longer. The goal is to help regulate the demand and ensure there is sufficient capacity for multi-day stays. Meanwhile, for the maximum length of stay, the hotel may limit the number of nights a guest can stay. This method aims to limit the number of rooms sold at discounts during the higher-rate period and in other words, optimize the room revenues.

[Source: https://www.ccoo-servicios.es/ilunioncontactcenter/pagweb/2874.html]

Overbooking (Anticipating)

It is a common practice for airlines and hotels to sell more than their capacity. It is because an 100% occupancy rate of hotel rooms can definitely help maximize their revenues. However, there are many uncertainties in the market, customers may have no-shows, early departures or last-minute cancellations even when they have made reservations. If the hotel only sells out the available quantity that they can provide, and all customers cancel their reservations on their arrival dates, then all the rooms may become idle while the hotel will earn $0. To minimize the potential losses and prevent any idle capacity, hotels will sell more than their availability.

[Source: https://www.sagenda.com/uses-sagenda/]

Demand based pricing (Influencing customer behaviour)

Demand based pricing refers to the pricing strategy that hotels adjust their room rates depending on the customers’ demand during a certain period. They may anticipate the market demand for their services based on the historical sales record or the recent trends. With the available data, the peak periods may be identified. In order to balance the demand and supply, and capture the highest revenue, hotels may charge higher rates during the peak period and a relatively lower rate for non-peak period. This can on one hand, reduce the impact on the fluctuating demand, and on the other hand, maximize the revenue during the peak period.

[Source:http://larepublica.pe/economia/1065161-alternativas-para-invertir-y-crecer-en-epocas-de-desaceleracion-economica]

Up-selling (Influencing customer behaviour)

Up-selling is a sales strategy that persuading customers to spend more on the same item category through purchasing higher-end items or add-ons, or upgrading with an intention to increase the sales revenue. The most obvious upselling example in hotels is the upgrade in room type from the standard one to the premium or luxury one which has better treats like a sea view or a balcony. In order to facilitate this practice, discretion to personnel is needed. Hotels need to grant their front desk staff the autonomy to adjust rates for empty premium rooms according to customer’s original price offer. This helps to minimize the number of unsalable rooms and therefore secure sale.

[Source: http://www.delphidisplay.com/2014/08/keys-successful-quick-serve-restaurant-upselling/]

Prepaid Booking (Influencing customer behaviour)

Apart from overbooking, prepaid booking is another effective capacity management method to alleviate the impact of no-show. Prepaid booking requires that payment has to be made at the time of booking instead of on departure or arrival. It becomes more and more common under the use of the online travel agencies (OTAs). Although cancellation or refund is possibly allowable, the procedures are inconvenient and time-consuming. As a result, paying upfront lowers the chance of customers’ no-shows and the hotels can make a precise reservation and have a better control on room supply.

[Source: https://aqui-ma.com.br/2017/07/25/governo-do-ma-abre-mais-de-4-mil-vagas-em-cursos/]

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Learning Reflection

Wow! Being a general manage is definitely not easy! The manager has to take care of every guest’s experiences and satisfy them. Meanwhile, he or she has to maintain and maximize their annual revenues in order to satisfy the owners and shareholders. There are so much to learn in this hotel industry. But this week’s topic is so practical! I know that revenue management has been commonly adopted in the airline industry, but I have never thought that it would also be applicable to the lodging industry. It is such a useful and powerful tool for hotels not only to maximize their profits, but also to shape the demand in order to meet their capacity. After knowing and understanding the various methods and strategies in yield management, I think I would be able to adopt it no matter which industry I am going for.

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Reference

[1] Kimes, Sheryl E. “The Evolution of Hotel Revenue Management.” Journal of Revenue and Pricing Management, vol. 15, no. 3-4, Mar. 2016, pp. 247–251., doi:10.1057/rpm.2016.27.

[2] Luciani, Sara. “Implementing Yield Management in Small and Medium Sized Hotels: an Investigation of Obstacles and Success Factors in Florence Hotels.” International Journal of Hospitality Management, vol. 18, no. 2, 1999, pp. 129–142., doi:10.1016/s0278-4319(99)00019-5.

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