YIELD MANAGEMENT: CHOOSING THE MOST PROFITABLE RESERVATIONS - Hotel Management and Operations

INTRODUCTION

Yield management, as a term, is not very exciting. However, the results of a well-run yield management program are certainly exciting! Properly implemented, it means that a business can make more money. The keys are to sell more and to sell more profitable items.

The first step in a yield management program is to determine who is the best customer. The best customer is the one who can spend the most money at your property purchasing profitable items. The products and services you provide are the best fit for their needs.

The best customers for the property are the ones who receive the greatest benefit from your services. They are willing to pay more, buy more frequently, and remain more loyal because you are satisfying their needs. Many operations do not know who the best customers are. However, the answer is in a property’s data collection system. Guest histories, food and beverage checks, cash register receipts, and the records of strategically allied business partners contain most of the information any property needs to determine the ideal customer base. In order to properly implement a yield management project, the property must be viewed as a collection of profit centers. A profit center is a place where value is created and exchanged.

One of the techniques of yield management is to let the guest in on the secrets of the establishment. Give him or her all the information necessary to truly enjoy the experience. As part of the yield management plan, management must be willing to make experts of the guests by sharing information on how they can utilize all of the profit centers.

An important part of analyzing the potential of each profit center is to identify all the possible sources of revenue. This means analyzing both the revenue-producing outlets and the people who spend the money. Every establishment has a wide variety of revenue outlets. They can range from the sale of rooms to valet service, flower delivery, specialty drinks, cigars, and creative take-out services.

Strategic alliances with car rental agencies, cooperative advertising, couponing, and packaging of all sorts will vastly change the number of channels the guest can use to spend money in the profit centers of the enterprise.

Restaurants can increase revenues by serving take-out food, catering private parties off-premises, adjusting the menu mix, and developing reward systems for servers. Especially during hours of peak demand, restaurants can design product/price combinations that offer incentives to customers to change their demand patterns. Why accept any reservation at any time? Instead, select the most profitable reservations and use incentives to move the other reservations to non-peak or shoulder times.

Profits are the only true measure of business success. The following groups all benefit from enhanced profits:

  1. Guests—They are one of the primary beneficiaries of increased revenues and profits. If revenues are on the rise, it can mean only one thing: You are serving the guest better. Guests are happier, more loyal, and eager to tell others about the great experience they had.
  2. Employees—In order to achieve long term success, employees must be involved in the profit making and the profit taking. Let them earn as much money as they possibly can by making more money for the property.
  3. Management—Structured reward systems are necessary for management. These systems reflect their need for income and achievement and further the profits of the property.
  4. Shareholders and investors—Return on investment, dependable growth, share prices, and so on are all outcomes of increased revenue.

Money attracts money, and the investors will relish the long-term growth potential of their investments. Managers face six major obstacles in their efforts to implement a yield management system. These impediments are:

  1. Lack of creativity—Does your company do things the way they have always been done? There is a need for standardization in recipes and operating procedures; however, this sometimes spills over into other areas. Training sessions in most organizations do not stress the creative side of customer satisfaction.
  2. Lack of attention—It is difficult to stay in focus all the time. The minute you stop paying attention, things go wrong.
  3. Monitoring the wrong signals—We tend to monitor the easy things to measure, such as food cost and inventory. We should be looking for opportunities, not statistics.
  4. Conflict between sales and service— When profits depend on a mutual delivery of both the sale and the service, conflict can arise. Front-of-the-house and back-of-the-house employees must work together for the common cause of serving and satisfying guests.
  5. Targeting the wrong customers—The right customers are those who will purchase the most of your products and services. Look for the customers with the money to spend to give you a reasonable profit. Use the marketing mix variables of product price, promotions, and distribution to attract and hold the right customers.
  6. Rewarding the wrong behavior—Many sales management policies are designed to encourage occupancy and average daily rate. Restaurants, by allowing customers to reward the wait staff, may encourage promotion of higher-priced items. In either case, the sale may not reflect the best interests of the property. Yield management is designed to increase profit, not just gross sales.

BASIC CONCEPTS OF YIELD MANAGEMENT

Yield management requires knowledge of guests’ expected behavior, plus an understanding of which business is most beneficial to a hotel—but it does not necessarily require high-power computers. Three main revenue management concepts allow hotels to pick up relatively easy money, or low-hanging fruit. The three concepts are simplifying the yield management system to make it manageable; examining the rate controls to make certain they allow acceptance of the business that yields the strongest revenue return; and using length-of-stay controls to shift demand from sold-out periods to slack periods.

Group business, as it relates to the above three points, is a special case. The change needed, if any, is to think in terms of which business is best for the property on a given date. By implementing the concepts discussed here, the property should see revenue gains in the next several months.

AN OLD PROFESSION

One may think of yield management as a relatively recent practice, but the lodging industry has applied yield management principles for many years. In one early instance, Marriott Corporation used yield management principles long before it installed its current sophisticated system. Back when young J.W. “Bill” Marriott was working at the family’s first hotel, the Twin Bridges in Washington, D.C., the property sold rooms from a drive-up window. As Bill tells the story, the property had a flat single rate and charged extra for each additional person staying in the room.

When availability got tight on some nights, Bill recalls leaning out the drive-up window to assess the cars waiting in line. If some of the cars were filled with passengers, Bill would turn away the vehicles with just a single passenger to sell his last rooms to fuller cars. That technique demonstrates the core concept of yield management.

From that simple start, yield management mechanisms have become complicated—so complicated that some managers whom we have met seem to think they cannot improve revenue unless they have access to the most sophisticated tools. Worse, the hotel manager may have created an overly complex system of discounts and packages. If the manager then insists on managing every rate or package individually, the result is a sense that the property has too many programs to track and control, and it probably does. For this reason, the first suggestion for a straightforward approach to yield management is to cluster rates into a few groupings of similar programs and then work on controlling these clusters or rate categories.

The goal of yield management is to select which business to accept and which business to turn away (when demand exceeds supply), based on the relative value of each booking. Most properties do not need more than four to six rate buckets for their transient bookings.

As an example, the following gives transient rate categories that combine programs of similar value:

Level 1 Rack (no discount)
Level 2 10 to 20 percent discount
Level 3 25 to 35 percent discount
Level 4 40 to 50 percent discount
Level 5 greater than a 50 percent discount

Each level or bucket in the above hypothetical structure might comprise several room rates. Given such a structure, a manager need not agonize over whether to restrict rooms offered at a rate of $150 in hopes of getting a rate of $155. While it is given that those $5 bills would pile up, the complexity is not worth it, especially when one might be working so hard on the $5 difference that one overlooks the opportunity to earn, say, $50 more by selling at rack rate.

If a given set of discounts isn’t working, the hotel should change the categories. For instance, if a hotel’s business fell entirely in Level 1 and Level 2, with virtually no business in Level 3, a manager should rearrange the rate buckets. The three rate buckets could be discounts from rack rate of 10 to 15 percent, 20 to 40 percent, and greater than 40 percent— or any other arrangement that makes a meaningful division among rate categories.

The following principles apply to setting up categories to manage rates at a hotel:

  1. Segment programs based on clusters of discounts representing similar values. Yield management requires risk and reward management. Rate categories are designed to enable turning down one booking request in favor of a higher-value booking projected to come later. However, risking $150 in certain revenue in hopes of achieving a $155 booking seems to make little sense if the latter is not a sure thing.
  2. In deciding whether to accept a particular customer’s business, take into account both the cost of opening rooms and the offsetting ancillary spending that occurs when a room is sold. To take an extreme example, the most valuable guest for a casino-hotel—the high-stakes gambler— might be paying the lowest room rate.
  3. Limit the total number of transient rate categories to no more than six or so, particularly if there is no automated yield management system. The chief reason for that limit is that yield management requires forecasting demand for each rate category. Not only is it time-consuming to forecast numerous categories (with diminishing returns as the number of categories increases), but the more categories are created, the less accurate the forecasts are for each.
  4. Each rate category should have a reasonable volume of activity to allow monitoring of traffic in that category. If it is found that one of the categories is rarely used, consider redistributing the rate hierarchy.
  5. Group business should have a separate hierarchy of buckets to allow the operator to track pick-ups of room blocks. In addition, mixing group activity with individual booking activity clouds the historical information as you trend data by which rate categories are collected.

RATE CATEGORY CONTROLS

The point of yield management is to use demand forecasts to determine how much to charge for rooms on a given day. When the hotel sells out, the ability to determine which reservations to accept or deny is lost, because all requests for the sold-out date (including those for multiple-night stays that involve the sold-out date) must be rejected. A property’s yield management objective should be to sell out the hotel as close to the arrival date as possible, because the further in advance the hotel is sold out with discounted (or short stay) business, the greater is the likelihood that high-value bookings will be turned away.

This forecasting regime requires a continual process of comparing remaining demand for high-rate stays (and multiple-night stays) against remaining available inventory. Rate category controls help ensure available inventory to accommodate the projected high-rate demand .

Table demonstrates how rate categories are controlled to increase total room revenue. The table assumes a 500-room hotel (or a hotel with 500 rooms remaining to be sold).The objective is to hold rooms open for high-rate demand without leaving a large number of rooms unsold. In this example, although the hotel would prefer to sell all 500 rooms at rack rate, the hotel’s managers project that they can sell 380 (or more) rooms at rack rate. Their inventory plan is set up to maintain room availability for this forecasted high-rate demand. The managers would like to sell the remaining 120 rooms in the next rate category down (Bucket 1), but their demand forecast projects they will not be able to sell all 120 in that rate category. Based on current trends, however, even though they have a total of 500 rooms to sell, they won’t be selling any rooms in the deep-discount category because there is sufficient demand at higher rates.

When evaluating how well a property is managing its inventory, there are two basic indicators:

  1. On dates the property is selling out, it should be observed how far in advance that sellout occurs;
  2. if the property is not selling out, it must be determined whether the property ever turned away business as a result of discount controls or because the property had committed too many rooms to groups— that is, if a group does not pick up its room block, did the hotel, as a result, refuse reservations from transient guests?

Full-occupancy dates frequently receive less attention from property managers than one might expect, given the revenue potential of a sellout. One reason is that some properties are too slow in closing out discounts to restrict room availability to expected high-rate business. Hotels do close the discounts, but not always soon enough. A common practice is to set threshold levels at which discounts are closed at a predetermined level (90 percent occupancy, for example). While this approach is well meant, all it succeeds in doing is preserving the last 10 percent of the hotel’s inventory for high-value guests, when a proactive approach might shut down discounts earlier and gain the hotel even more high-paying guests (and revenue).

Another reason hotels often don’t focus on sold-out dates is that the persons responsible for managing the hotel’s inventory are also usually responsible for high-profile tasks, including forecasting daily occupancy. Thus, a revenue manager may spend more time determining whether a particular date will run an occupancy of 65 percent or 75 percent than determining how to make the most out of excess demand on a projected l00 percent occupancy date. The process of forecasting a date’s occupancy is important, but so is determining how to gain the most revenue from a sold-out date.

For all the time spent in month-end analysis of occupancy levels, average rates, and market comparisons, rarely is conclusive evidence found that properties perform as well as they could. Moreover, the more often those two questions are asked (i.e., did we fill too early? and did we turn away business on days we didn’t fill?), the more employees work to give the desired revenue results. As occurs in many cases, you get what you inspect, not what you expect.

Hypothetical Room Rate Structure

Hypothetical Room Rate Structure

LENGTH-OF-STAY CONTROLS

Implementing length-of-stay controls takes the rate management decision a step further. The essence of rate category control is having one room left to sell and deciding whether to sell it to one guest for $100 today or to wait and sell it to another guest for $150. The essence of length-of-stay controls, on the other hand, is having one room left to sell at $150 and deciding whether to sell it for one night or to wait, with the prospect of selling it to another guest for four nights. In the rate category decision, the hotel can net an additional $50, while the length-of-stay decision can generate as much as $450 in additional revenue.

Managing stay lengths is complex, but mastering length-of-stay patterns may be the most rewarding of yield management functions. The most sophisticated inventory management controls requests down to granular levels of detail: by program or rate category, by length of stay, or by day. This level of control really requires an automated system. As is the case with managing rate discounts, however, measurable revenue improvements connected to length of stay can be achieved without sophisticated automated systems, as long as the application of controls is kept fairly simple.

Just as setting rate control categories requires an understanding of demand by rate category, length-of-stay management requires an understanding of demand by various length-of-stay intervals. To make the call in the above example, the manager needs to know the level of demand for four-night stays before he or she turns away (or accepts) the request for a one-night stay.

The most common length-of-stay statistic used in the hospitality industry is average length of stay, which describes the average duration of a guest’s hotel stay over a range of dates. One needs more effective statistics than simple average length of stay to manage stay patterns. What the revenue manager needs to know is the total number of arrivals on a given date for one night, two nights, three nights, four nights, five nights, and so forth. To illustrate the difference between those two statistics, imagine that a manager was determining whether to apply minimum stay restrictions on a peak night. The manager could know that the average length of stay is 3.6 nights, or the manager could have specific length-of-stay information (e.g., 10 percent of the arrivals on a given date are for one-night stays, 25 percent are for two-night stays, and so on). Naturally, the manager wants to know how much of the demand will be affected if he or she were to reject all one-, two-, and three-night stays with the expectation that the hotel can be filled with people staying four or more nights. Table shows an example of a chart with this type of information.

Most central reservation and property management systems developed in the last few years facilitate stay pattern controls, although at varying levels of sophistication. The ideal system enables a property’s managers to set controls for each arrival date by discrete lengths of stay. Such a system enables the property to close availability to one-, four-, five-, and eight-night stays, for instance, but allow stays of two, three, six, seven, or nine nights (or longer). Most new systems at least allow minimum-stay controls by rate category.

Caution: One aspect of yield management systems’ stay controls can become overused. Most systems allow managers to place a closed-to-arrival restriction on selected dates. This restriction enables a property to sell through stays arriving before the given date— that is, multiple-night stays for which the closed date is a second or subsequent night— but rejects all requests to arrive on that date. The problem hotels create for themselves by using this approach is that they end up saving space for two- and three-night stay-through while rejecting multiple-night stays by guests proposing to arrive on the closed night.

Obviously, the hotel does not want to lose revenue from stay-through guests to those staying for just the closed night, but having the system forbid a multiple-night stay that begins on the peak night may actually be worse than having no controls at all. In such a case, some form of minimum or other discrete length-of-stay controls is appropriate. Any property still using a flat closed-to-arrival restriction should reconsider in light of this problem.

Hypothetical Stay-Length Forecast

Hypothetical Stay-Length Forecast

GROUPS: RATES, DATES, AND SPACE

Yield management is usually thought of in the context of turning away undesirable business during excess demand periods. However, the real art of yield management is learning how to turn undesirable booking requests into desirable ones. Thus, an important element of yield management is teaching all employees the art of saying yes.

The art of saying yes is particularly important in negotiating group business, which generally involves decisions about rates, dates, and space. Rates are how much the group is going to pay; dates are when the group is going to be staying; and space is how many rooms the group will use. Turning an undesirable proposal into a desirable contract involves varying these components until both the hotel’s sales associate and the meeting planners have what they consider a worthwhile package. Too often, hoteliers either deny a group’s request outright or focus on adjusting the group’s proposed room rate to make the request appealing to the hotel. At times, the better response is to give the group the rate it requests but to change the dates of the proposed business to a time when the hotel’s forecast is for empty rooms. Even less obvious is the option to ask the group to change the number of rooms it proposes to block. Committing to more rooms (and thus more overall revenue) or fewer rooms (reducing displacement) leaves the opportunity to sell to a second group interested in your property.

Applying revenue management principles to group business involves more than changing a group’s proposal from undesirable to acceptable. Perhaps even more important is the ability to make a proposal that is merely acceptable into a contract that represents a great piece of business. Working within a hotel’s normal acceptable boundaries, one thing that typically makes a proposed piece of business undesirable is the hotel’s ability to sell that space to others at a better profit margin. That’s why the most common response to an unacceptable proposal is to ask for a higher price.

Turning a mediocre proposal into an excellent piece of business might work as in the following example. Say that one group requests 200 rooms at a 350-room hotel for $80 per room, which is a $16,000 piece of business that was really not expected. The forecast shows that the total revenue without the group for that date would have been $29,000 with 290 rooms booked at an average rate of $100.The group’s business will bring the hotel to 100 percent occupancy and generate a total of $31,000 in revenue (having displaced some of the forecasted transient arrivals). The revenue on the 60 extra rooms gives the hotel more than enough incentive to accept this group, with a $2,000 increase in total revenue. (Assume per-room ancillary pending offsets the variable costs on the extra rooms.)

Any good sales director is going to feel good about the $16,000 in business he or she helped bring to the hotel. Even if someone points out that the business really brought only $2,000 in additional revenue to the hotel, there still is reason to feel good about this arrangement. Another way to look at this group, however, is that it represents $16,000 in unanticipated room revenue from which the hotel is extracting only an additional $2,000 in revenue because the group has displaced higher-rate business. By manipulating the other variables and, in this case, moving this group to a date that will displace little other business, the hotel can extract maximum value from this group. Even if the hotel needed to reduce the room rate to $60 to entice the group to move to other dates, the added value would be $12,000 instead of $2,000, because the group would be displacing less (anticipated) higher-rate business. Note that the calculations for this example are for only one night, but a group would typically stay for multiple nights, thus amplifying both the benefit of moving the group and the penalty for accepting the proposal as offered.

The hotel could also propose that the group’s room block be smaller—for example, in a situation where the group is attending a convention for which the dates are already fixed. This proposal is less effective from both the hotel’s point of view and that of the group, but it still increases the value of the group. Because the forecast is that the group would displace 140 rooms that would have sold to transients at $100 each, the hotel gains back $20 in displaced revenue for every room sold to transients instead of to the group. Cutting the group’s room block in half, for instance, actually nets the hotel another $2,000 in revenue. While the group has little incentive to reduce its request for rooms (unless the market is otherwise sold out), the hotel could insist that the group block fewer rooms if the group’s original offer did not make up for revenues the hotel would have obtained from transients.


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