Everything you may not yet have known about Yield Management

What is yield management? Why would it be of interest to you? Is there a difference between yield and revenue management?

We decided to write this article to shed light on the subject and explain how yield management can help you grow your hospitality business.

Let's get started.

Yield management is a discipline that, through a series of practices and methodologies, aims to forecast the market and its future demand segments and then decide which part of the demand to accept and which part of the demand to reject in order to maximize revenue.

In a hospitality establishment, yield management is basically the optimization of room distribution and sales based on predictions about the future.

If we think about how this discipline came about, it becomes even easier to frame it.

Yield management originated in the airline industry. Before the advent of the Internet, companies managed ticket prices by taking into consideration:

1. The number of economy class, business class, and first class seats on each flight. Keep in mind that business class and first class yield more than economy, but have low demand and risk remaining empty.
2. Customized contracts with different tour operators and corporate conventions. From these, companies accepted or rejected requests to purchase tickets depending on their demand forecasts.

In the hotel industry, this translated into a whole range of practices of optimizing contracts with travel agents, tour operators, or corporate conventions, and handling their booking requests.

More specifically, into the activities of setting different rates, the amount of rooms for allotments or free sales (if you are not familiar with these expressions, you can always refer to our glossary) to be assigned to each operator and, based on the demand forecast, the approval or rejection of reservation requests.

In the hospitality industry, the terms yield and revenue management are often confused because the boundary between the two is not clear-cut, and it is difficult to determine what belongs to yield management and what belongs to revenue management.

On an everyday basis, there are no operational distinctions or practical consequences in confusing the two disciplines.

If we really want to find a distinction, we could say that revenue management constitutes the part of collecting data, processing it, and determining market potential.

Yield management, on the other hand, constitutes the part of defining the strategies and operational practices that enable this potential to be maximized.

Years ago, the dividing line was sharper because the activities of data collection and day-to-day rate management happened at very distinct times.

Today, with dynamic pricing, these activities are carried out simultaneously, and the distinction has become less clear.

Translating market analysis into practical activities is what enables your hospitality business to maximize revenue and growth.

Without yield management we would go back to the old price list, ignoring the characteristics of different distribution channels, real market potential, shifting seasonality, and different customer segments.

Would you get bad results by doing so?

Not necessarily, but you certainly would not achieve your full potential. 

And at a time like this when, due to a number of external events, profit margins have been sharply reduced, having earnings at the highest possible level is even more imperative.

Not only for the smooth running of a facility, but also for its survival.

Yield management strategies are numerous and align with those that have always been common in revenue management.

First and foremost, it is critical to have quality data.

As computer scientists say, "garbage in, garbage out" − if the data you collect is not of good quality, you cannot expect your forecasts to be.

So pay close attention to accurate and timely data entry of all available data into your management system.

After that, the basic strategies are to define rates and availability for each day of the year, for each booking window, for each intermediary (including direct sales), with associated rate fences or promotions (offers and packages).

Then, depending on the market trends at different times, you can decide how to handle sales differently vis-à-vis groups or the MICE segment, be more or less flexible with your cancellationpolicy, and optimize room availability by making upgrades and upsells.

If you have contracts with tour operators, you can analyze their booking ratio by calculating the percentage of rooms that they have actually sold out of those you have made available to them.

You will then be able to see which tour operators are most effective, which ones work best at different times of the year, which ones are worth confirming, and which ones would be better off not contracting anymore.

According to many experts, this will be the future of hotel room sales: it involves selling a basic room and then letting the customer choose which additional features or services to add. 

Just as airlines allow you to choose to check in extra baggage or have priority boarding, hotels will be able to let you choose the room floor, view, additional amenities, bed size, and more.

My advice is to start implementing this system with little extras like guaranteed parking space, early check-in and late check-out, or a more flexible cancellation policy.

What is that? Are you saying that doing yield management sounds like a complex task?

Indeed it is, and if improvised, it can bring more harm than good.

The good news is that Smartpricing can assist you in your yield management activity and make it much easier.

Try it for free!