Pricing can be a constant source of uncertainty for hoteliers, and many find themselves asking questions like: Should I raise my room rates or lower them? What are my competitors doing? How will my pricing decisions affect bookings?
While there are no set answers to these questions, there are trustedpricingstrategiesyou can use to guide you in the right direction.A great place to start is yield management.
What is yield management?
Yield management is a dynamic hotel pricing strategy designed to produce the maximum revenue, or yield, from a set inventory of rooms.It’s about understanding and influencing traveler booking behavior and finding the optimal balance between occupancy and rate. Yield management is often described as “selling the right room to the right customer (guest) at the right time for the right price.”
Yield management is based on several key assumptions:
- Hotels have a fixed number of rooms to sell.
- Inventory is perishable and time-limited, meaning if a room isn’t sold on a given night, that opportunity is gone forever.
- Different people are willing to pay different prices for the same room under varying conditions.
Where did yield management originate?
Before reaching the hospitality industry, the concept of yield management originated in the U.S. airline industry. Following deregulation in the late 1970s, airlines took greater control over airfares and developed systems and technology to manage inventory and pricing in order to maximize revenue for each flight. Robert Crandall, former chairman and CEO of American Airlines, is credited with giving yield management its name, calling it “the single most important technical development in transportation management since we entered deregulation.”
Tactics employed by the airlines included offering discounted fares for low-demand flights and increasing fares for high-demand flights, as well as implementing purchase restrictions, length-of-stay requirements, fees for changing and canceling tickets, and higher costs for premium airline seats. Other industries quickly followed suit, including rental car providers and the hotel industry, and many of these tactics are still applied today.
Yield management vs. revenue management
The main difference between yield management and revenue management is that yield management has a narrower focus and is generally regarded as the process of maximizing a hotel’s revenue through pricing and inventory controls. Revenue management is a broader term that also encompasses market segmentation, demand forecasting, and more in-depth data analysis. An advanced revenue management strategy goes even further, factoring total revenue, costs, and profits into revenue decisions.
For lodging operators who are new to hotel revenue management or have limited time, yield management is the place to focus efforts. Once you master the basics, you can look at expanding your skillset. Check out our article Revenue Management 101: The ultimate beginner’s guidefor an introduction.
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3 examples of yield management in action
Yield management shapes consumer behavior everywhere. Here are a few examples:
- Dining out. Want to go out for dinner but on a tight budget? Take advantage of “early-bird specials” offered by local restaurants. These specials are designed to boost revenue by attracting different customers who are more price-sensitive outside of peak hours.
- Ordering a ride. If you use Uber, Lyft, or another ridesharing service, you may notice different prices for the same route at different times of the day. To maximize revenue (and encourage more drivers to serve the area), Uber implements “surge pricing” during times of high demand.
- Going to a show. To sell as many tickets as possible at the highest average price for every performance, theaters charge premiums for preferred seats and extend discounts for matinees, advanced purchases, and same-day tickets.
How do hotels calculate yield?
Calculating yield can be helpful in guiding pricing decisions. A simple formula is to divide earned revenue by potential revenue and multiply by 100. For example, if a hotel has ten available rooms to sell and its maximum rate is $299, its potential revenue is $2,999. If the hotel sells nine rooms at $149, its total revenue is $1,331, and its yield is 44%.
However, if demand is strong, a better strategy might be to increase the rate to $249. Even if the hotel sells only six rooms, it will still end up further ahead, with $1,494 in revenue and a 50% yield. Not to mention the cost savings in servicing six rooms instead of nine.
What is a yield management system?
Yield management can be time-consuming and complicated, involving a lot of data, numbers, and calculations. It’s especially difficult to execute well with limited resources. For help, lodging operators turn to tools such as revenue management systems (RMS), rate shoppers, and channel managers.
One tool that is particularly popular with smaller hotels is a yield management system like Cloudbeds’Pricing Intelligence Engine (PIE). PIE saves time for hotels by using algorithms to automate tasks related to data collection, rate shopping, pricing, inventory management, and reporting. To maximize revenue and take advantage of market demand, hotels can set rules and alerts to adjust pricing and stay restrictions in response to changes in occupancy, competitor activity, and market conditions. All tools and data are displayed on an easy-to-use dashboard that is integrated with your property’s PMS and other core systems.
How LOCAY Group manages yield across its portfolio
Now that newer, easy-to-use solutions are accessible to all types and sizes of lodging businesses, revenue management is no longer limited to large hotel businesses that have the budget to hire a dedicated revenue manager. For example, in 2020, LOCAY Group, a boutique lodging company made up of four hotels in Sydney, Australia, decided it was time to invest in revenue management software after observing that its properties were falling short of market share.
“Cloudbeds’ ability to seamlessly integrate a live online booking widget, a property management system, and a dynamic pricing tool all within the one place ticked every box,” said Larissa Fuller, Creative Director & General Manager. With all its properties connected to the same platform, the company could take advantage of cross-selling opportunities and robust reporting, portfolio-wide.
During the pandemic, LOCAY Group modified its rate plans to target domestic travelers and longer stays. With Cloudbeds’ Pricing Intelligence Engine (PIE), alerts were set to rack adjustments in competitor pricing, availability, and stay restrictions across the portfolio, ensuring the properties were always competitively positioned in the market.
“This has seen a huge benefit in making the most of every booking inquiry and availability,” said Fuller. As a result, in the midst of the pandemic, when many properties were struggling with low occupancy, the company clocked a 61% average in direct bookings, with one property reaching as high as 70% occupancy and 76% in direct bookings. “It has been so rewarding to see the higher nightly rates being purchased as occupancy closes in at our properties,” she said. Read LOCAY’s full story herefor more tips and insights.
7 yield management strategies for boosting revenue
To increaserevenue generated at your hotel, consider implementing the following yieldmanagement techniques:
1. Let data guide your decisions.
Start by setting rates for the coming year. Look at market conditions, historical demand, booking pace, and unconstrained demand – the number of rooms you could sell if you had unlimited inventory. Monitor the impact of your pricing decisions and use them to guide future strategies.
2. Practice dynamic pricing.
Static pricing is old-school. You’ll capture more revenue by using a variable pricing strategy – or increasing rates when demand is high and lowering rates when demand is low. This includes adjusting rates by time of year (season) and day of week, during conferences and events, and in response to changes in occupancy and market conditions.
3. Implement stay restrictions.
Instead of always having higher rates on busy nights, considerimplementing stay restrictions such as closed-to-arrival (CTA) or a minimum length of stay (MinLOS) to boost occupancy on shoulder nights.
4. Track competitors’ rates.
Travel shoppers check out your competitors’ rates, and so should you. Decide how to price your property relative to your top competitors or compset. Use a rate shopping tool for easy comparison and a pricing intelligence tool to ensure you’re always priced where you want to be.
5. Vary your pricing.
Charge a higher price for your in-demand rooms that offer extra space, a nice view, a balcony, or a preferred bed configuration. Offer a variety of rate plansto appeal to a range of traveler types and budgets, including non-refundable rates, packages, weekend rates, and incentives for direct bookings and longer stays.
6. Understand your market mix.
Different market segments will be willing to pay different rates at different times. For example, wholesalers book well in advance and expect discounted rates, whereas OTA distribution channels can be a good source of last-minute bookings. Monitor which market segments are booking which room types and when, and adjust rates accordingly.
7. Don’t let those beautiful hotel rooms sit empty.
Move your perishable inventory and give your average rate a boost by providing guests an opportunity to upgrade their room prior to arrival or at check-in with an irresistible offer.
The benefits of using a yield management system
As effective as these strategies can be, it’s virtually impossible to do them well without the help of revenue software. Here are just a few of the advantages of investing in a yield management system:
- Uncover more opportunities to drive bookings, revenue, and profits
- Monitor competitor rates in real-time to strategically position your pricing
- Set rules and alerts to be notified of important market changes
- Use a single, integrated dashboard to access all data, metrics, and tools
- Take advantage of better reporting, analytics, and visual data
- Integrate seamlessly with your PMS, booking engine, and channel manager
Interested to see how Cloudbeds can supercharge your property?
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FAQs
What are yield management strategies? ›
Yield management is a dynamic hotel pricing strategy designed to produce the maximum revenue, or yield, from a set inventory of rooms. It's about understanding and influencing traveler booking behavior and finding the optimal balance between occupancy and rate.
What is yield management strategies example? ›For example if your hotel has 100 rooms available, with a full rate of $150 per room, the maximum potential revenue is $15,000. If on a particular night 70 rooms were sold at a lower average rate of $120, the achieved revenue is $8,400. Therefore the yield percentage is 8400/15000 x 100 = 56%.
How does yield management maximize revenue? ›In simple terms, yield management is a strategy based on selling to the right customer, at the right time, for the right price. Within the hotel industry, this typically means selling the right room, to the right guest(s), at the best possible time, for the highest amount, to maximize the revenue earned.
What is yield management also known as revenue management? ›Yield Management Systems (also known as Revenue Management Systems) typically used in service industries that offer perishable goods, such as hotel rooms or airline seats.
What is an example of a yield? ›For example, if there is a Treasury bond with a face value of $1,000 that matures in one year and pays 5% annual interest, its yield is calculated as $50 / $1,000 = 0.05 or 5%.
What is the main goal of yield management? ›The objective of yield management is to maximize the revenue or yield of the firm. A good yield management system will help the firm decide how much of each type of inventory (whether it be seats on an airplane, rooms in a hotel, or cars in a rental car fleet) to allocate to different types of demand.
Where does yield management work best? ›Yield management is important in the hospitality industry because it allows you to increase revenue and accurately forecast demand. Revenue managers can use data and industry trends to predict demand and accurately price their hotel rooms.
What is an example of management strategy? ›Management strategies are techniques used in business control and direction to achieve the set goals. Examples include strategies for leadership, goal-setting, operational activities and business administration. These strategies make it possible for organisations to achieve top performance.
What is yield management and why is it important? ›Yield management focuses on finding the right balance of supply and demand to get the most bookings at the highest prices. It helps you maximize room revenue and profitability.
What is the meaning of yield revenue? ›Yield Revenue means all amounts which are (or would be) payable on account of the Term Loan Commitment Fee paid at the Closing Date, and the Term Loan Interest Rate (as if all interest on the principal being prepaid were paid in cash on the relevant Term Loan Interest Payment Date) with respect to the Term Loan.
What is revenue management strategy? ›
Revenue management is a comprehensive, customer-centric approach that uses analytics to forecast customer behavior trends to improve pricing and grow revenue. In contrast, yield management centers on pricing and inventory and matching the right product to ideal customers at the best price.
What businesses use yield management? ›Yield Management is the practice of pricing, that businesses in air travel, hospitality, and other tourism-based industries utilize to generate maximum profit by providing perishable inventory.
What is a strategy of maximizing revenue? ›Revenue maximization is the theory that if you sell your wares at a low enough price, you will increase the revenue you bring in by selling a higher total volume of goods. However, maximized revenue does not equate with maximized profits, as you may have to sell your goods at a loss to get them off of your shelves.
What is the difference between revenue and yield management? ›Yield management is a strategy used to get the most revenue possible out of a specific revenue stream (e.g. an inventory of rooms). Revenue management is a broader strategy that aims to increase revenue across the whole hotel.
Which is better revenue management or yield management? ›In a nutshell: with the revenue management you get the “big picture”, the overall strategy so to speak. The yield management is, on the other hand, only part of the price optimization and can be seen only as part of the revenue management.
What are the three types of yield? ›There are three main types of yield curves: normal (upward sloping), flat and inverted. In general, economists concur that the slope of the yield curve depends on the investor's expectations on the interest rates and risk premium.
What is yield very short answer? ›It is a financial ratio that indicates how much a company pays in dividend/interest to investors, each year, relative to the security price. Yield is a measure of cash flow that an investor is getting on the money invested in a security.
What is a real life example of yield? ›For example, if one wants to make a sandwich and they have exactly two pieces of bread, three pieces of turkey, and one piece of cheese, a turkey and cheese sandwich is the theoretical result. However, if one wants to make a sandwich and the bread is moldy, the actual yield will not be a sandwich.
What are the core elements of yield management? ›What are the elements of yield management? The elements of yield management include team-based room selling, individualized room selling, food and beverage-based selling, and holding special events. These elements are crucial to the workings of this pricing tactic.
What is the best management strategy? ›The Authoritative Style
The most effective management style, the authoritative leader is a “firm but fair” visionary who gives their employees clear, long-term direction. This approach works in most work environments, especially when the business lacks direction.
What is a strategy and give one example? ›
Strategy is a pattern in actions over time; for example, a company that regularly markets very expensive products is using a “high end” strategy. Strategy is position; that is, it reflects decisions to offer particular products or services in particular markets. Strategy is perspective, that is, vision and direction.
What is good strategic management strategy? ›To be a good strategy, it must precisely diagnose the problem being solved; set a guiding policy that will address that problem; and propose a set of coherent actions which will deliver that policy.
What is the conclusion of yield management? ›Conclusion. Yield management is all about selling products and services at the right price, at the right time, to the right people – and making the most of a limited resource. Sometimes businesses, faced with a lack of pricing power turn to yield management as a last resort but soon discover that it was a wise move.
Is revenue a profit or yield? ›Yield is the income returned on an investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based on the investment's cost, current market value, or face value.
How do you calculate yield revenue? ›The basic way to calculate yield is to quite literally calculate how much revenue you left on the table. A simple formula to calculate yield is: Revenue Achieved / Maximum Potential Revenue.
What is a good income yield? ›A good dividend yield is high enough to meet your current income needs. But low enough to suggest a company's dividend is not at risk. Dividend yields that meet these requirements will typically fall between 2% and 5%. Since a stock with a yield of less than 2% may not provide the investor with enough current income.
What are 3 revenue strategies? ›Many strategies can be employed to achieve the goal of increasing revenue, but three of the most effective and proven strategies are to focus on customer service and satisfaction, to identify new target markets, and to increase the efficiency of existing operations.
What are the 4 stages of revenue management? ›Similar to the concept of the 7Ps of Marketing Mix, there are 4 key elements of revenue management that hotels should adhere to. The 4Ps of revenue management are: Pricing, Positioning, Pace and Performance.
What are the 5 steps of revenue management strategy? ›The stages in this process are Data Collection, Segmentation, Forecasting, Optimization, Dynamic Re Evaluation.
What is a yield management strategy for a hotel? ›Yield management is a pricing strategy used in the hotel industry in order to understand, anticipate and thereby influence consumer behavior with the overall goal of achieving maximum revenue and profit.
What are the parts of yield management? ›
Elements of Yield Management in the Hospitality Industry
By studying group booking data, Hotels can anticipate group behavior and accordingly make provisions for group reservations. The group's booking pace indicates the rate at which group business is being booked as per the historical trends.
Revenue Management = Yield Management refers to selling perishable service products to the most profitable mix of customers to maximise revenue (profit). RM aims to stimulate demand when demand is low and maximise profits when demand is high.
What is the goal of yield management quizlet? ›Yield management is the process of examining and analyzing the actions of consumers in order to set variable prices for a perishable product or service at the maximum amount of profit. Increasing a hotel's room rate will always achieve a higher RevPAR.
What are yield management systems used for quizlet? ›Yield management systems are used to: determine whether it is financially more feasible to buy a new product or repair a broken one.
How many types of yield are there? ›Yield is the measure of the efficiency of a chemical reaction. In chemistry, there are three different types of yield. i.e, theoretical yield, actual yield, and percentage yield. Yield is usually expressed in the term of percentage yield.