Yield management along with Definition, Formula, Example and Importance

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Yield management is a crucial concept in the world of business and finance. It refers to the practice of optimizing revenue by dynamically adjusting prices and inventory levels in response to changes in demand. By using sophisticated algorithms and data analysis techniques, companies and hotel can maximize profits while still meeting customer needs and maintaining competitive pricing.

In this blog post, we’ll explore the definition of yield management, its formula, and an example. We’ll also discuss why yield management is important and how it can benefit hotel for maximize hotel revenue. So whether you’re a manager or just starting out, read on to learn more about this powerful strategy for maximizing your revenue potential.

What is Yield management?

Yield management is a pricing strategy and revenue optimization technique that includes a adjusting prices of a product or service in response to changes in market demand in order to maximize revenue.

Or by another definition Yield management is a technique used to maximize revenue.

Main goal of the yield management is to sell the right product to the right customer at the right time and at the right price. It commonly used in industries such as airlines, hotels, rental car companies, and other businesses where the supply of a product or service is limited and the demand varies over time.

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Formula and Calculation of Yield Management

Formula for Yield management is

Yield = Actual Room Revenue/Potential Room Revenue

This equation is used for a hotel that offers all its rooms at a single rack rate, regardless of occupancy. When (as is far more common) a hotel uses more than one rack rate for different room types and/or occupancies, potential rooms revenue equals total room nights available times the potential average rate.

Another formula for Yield management is

Yield = Occupancy percentage * Achievement Factor

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Yield = Occupancy percentage * Achievement Factor

= 0.7 * 0.75

= 0.525 or 52.5%

Consider another example. Assume that the Cybex Hotel has 150 rooms and a rack rate of $70. On average, the hotel sells 120 rooms per night at an average room rate of $60. What is the yield for this property?

Occupancy percentage= 120 /150 = 0.8

Rate Achievement Factor = 60 /70 = 0.857

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Then

Yield = 0.8 * 0.857 = 0.685

When using this approach to determine the yield statistic, note that complimentary rooms must be treated in the achievement factor the same way that they are treated in the occupancy percentage. That is, if complimentary rooms are included in the occupancy percentage, the actual average room rate used to determine the achievement factor must equal room revenues divided by rooms occupied, not rooms sold.If complimentary rooms are ignored in the occupancy percentage, they should be ignored in calculating the actual average room rate as well.

Importance / Benefits of Yield management in Hotel industry

Front office managers have identified several benefits of revenue/yield management, includes

  • Improved forecasting
  • Improved seasonal pricing and inventory decisions
  • 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
  • Increased business and profits
  • Savings in labor costs and other operating expenses
  • Initiation of consistent guest-contact scripting (that is, planned responses to guest inquiries or requests regarding reservations)

Elements of Yield management

The following elements must be included in the development of a successful Yield management strategy

  • Group room sales
  • Transient room sales
  • Food and beverage activity
  • Local and area-wide activities
  • Special events

Group Room sales

In many hotels, groups form the nucleus of room revenue. It is common for Hotels to receive reservationsfor group sales from three months to two years.

In advance of arrival. Some international business hotels and popular resorts commonly book groups more than two years in advance. Therefore,

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Understanding group booking trends and requirements can be critical to the success of yield management.

Transient Room Sales

Transient rooms are those rooms sold to non-group travelers. Transient business is usually booked closer to the date of arrival than group business. A commercial hotel may book a majority of its group business three to six months before arrival, but transient business only one to three weeks before arrival. At a resort hotel, group bookings may be established one to two years in advance, while transient business may be booked three months in advance. As with group business, management must monitor the booking pace and lead time of transient business to understand how current reservations compare with historical and anticipated rates. This leads to the more complex subject of transient room rate discounting.

Food and beverage Activity

Revenue management decisions for hotels that offer additional revenue outlets (non-room revenues) involve more than what to charge as an appropriate room rate. A hotel that offers meeting and banquet space, Recreational facilities, spas, and other revenue centers gives guests many more opportunities to consider and gives management more revenue opportunities to evaluate. Negotiations with meeting and wedding planners focus on the total package of meeting space, banquet service, audiovisual equipment rentals, and the like, not primarily on guestroom rates.

A revenue management analysis must consider all revenue opportunities affecting potential profitability to determine the economic value of the total business to the hotel. Only after such analysis can management calculate a meaningful room rate.

Local and Area-Wide Activities

Local and area-wide activities can have dramatic effects on a hotel’s revenue management strategies. Evenwhen a hotel is not in the immediate vicinity of convention, transient guests and smaller groups displaced by the convention may be referred to the hotel (as an overflow facility). When this occurs, the front office manager should be aware of the convention and the demand for guestrooms it has created. If the demand is substantial, transient and group rates may need to be adjusted.

Special Events

Quite often, special events such as holiday celebrations, concerts, festivals, and sporting events are held inor near a hotel. The hotel may be able to take Advantage of such demand-enhancing activities by restricting room rate discounts or requiring a minimum length of stay. This is a common practice.

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