Front Office Management 6 th SEM, Chapter 1 YIELD MANAGEMENT Includes

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1 Front Office Management 6 th SEM, Chapter 1 YIELD MANAGEMENT Includes Syllabus, Concept and Importance, Applicability, Measuring Yield, Tactics, YM Software and Team THE CONCEPT OF YIELD MANAGEMENT: Yield management, or revenue management, is the process by which sales of a limited quantity of goods, such as hotel rooms, airline seats, apartment leasing, rental cars, or etc. are managed in order to maximize profits. Successful yield management focuses on selling the product in such a manner that is timely, price competitive, and directed towards the right subset of customers An economic concept first posited by Dr. Matt H. Keller, and first used by the airline industries beginning in the 1970s, yield management has evolved in more recent years as an important tool especially for the airline and hotel industries for staying economically competitive in otherwise saturated business playing fields. The basic concept of yield management is based in the economic principle of supply and demand: when supplies are short, prices go up; when supply is high, prices go down. Yield management is a studied, systematic method by which managers can logically place customers within the supply demand spectrum, and thus gain the highest yield for their products. For example, a customer who has very little flexibility in his or her travel plans is the customer who is most likely to pay a higher price for airline tickets and hotel rooms. The customer with a great deal of flexibility is not as inclined to pay a higher price. Yield management is a set of techniques and procedures used to manipulate occupancy and/or ADR in order to maximise the hotel s revenue. It takes into account as many factors influencing business trends as possible. It is also an evaluative tool that allows the FOM to use potential revenue as the standard against which actual revenue can be compared. Yield management or YM can be viewed as the application of tactics that predict or forecast consumer behaviour and effectively price highly perishable products like room nights to maximise RevPAR. The goal of YM is to consistently generate the highest possible revenue from the given number of rooms in a certain period of time. It therefore is a set of demand forecasting techniques used to determine whether room rates should be raised or lowered and when a reservation request should be accepted or rejected in order to maximise revenue. Hotel Chains and Yield Management Many hotels rate their success by their occupancy levels, but this isn't necessarily the best measure of success. Another way to rate a hotel's performance is by determining its REVPAR, or Revenue per Available Room. REVPAR is calculated by dividing the total room revenue by the total number of rooms. For example, a hotel that makes $6,000 one night with a total number of 100 rooms has a REVPAR of $60.

2 The yield manager's job is to maximize the revenue per available room by selling rooms to the right customers, at the right price, at the right time. How does the yield manager accomplish this somewhat nebulous task? Successful yield management arises from several factors: an understanding of what the hotel hopes to achieve (whether that is room occupancy, REVPAR, or some other measurement); a clear understanding of what kind of hotel the manager is working with, which will lead to an understanding of what a customer visiting the hotel wants in his or her hotel experience, and why customers choose their hotel over another hotel; an ability to measure group sales against the overall goals of the hotel (for example, a hotel whose main goal is occupancy will be happy to host a large group at a lowered rate, but a hotel whose main goal is revenue may turn down a larger group in favour of a smaller group who can pay a higher rate); and a knowledge of what will cause the market to fluctuate (such as holidays, regular regional and local events, etc.). The yield manager will ideally consider all these factors when creating different rates for hotel guests. Yield Management (Revenue Management) presents a more Basic Measure of Performance because it combines Occupancy Percentage with Average Daily Rate (ADR) into a Single Statistic called the Yield Statistic Yield Management is an evaluative Tool that allows the Front Office Manager to use Potential Revenue as the Standard against which Actual Revenue can be compared Understanding Revenue Management in detail Perhaps the best definition is Wikipedia s: revenue management is the process of understanding, anticipating and influencing consumer behaviour in order to maximize revenue or profits from a fixed, perishable resource (such as airline seats or hotel room reservations). This encapsulates both the overarching goal of the process, and its crucial relationship to consumer behaviour. What is revenue management except a means to mould consumer behaviour in a way that benefits the hotel? Understanding The first step in this long and on-going process of encouraging consumer behaviour that is beneficial to the hotel is understanding consumer behaviour in the first place. What motivates a potential guest to book a room at one hotel as opposed to another, or at one price and not another is an essential concept to grasp. Though this can be conjecture, the relationship between pricing and booking pace (and that of a hotel s competitors) is easily measured, and elucidates the same set of behaviours. Selling a room to a guest at the right price to both maximize occupancy and the revenue it generates is impossible without first considering what will prompt a consumer to make the purchase. It is very easy to understand the consumers buying habits if you are able to collect a property s purchasing data analyze it and then read and interrupt the data in real time. This is easier said than done, but very possible if you have the right system in place. Anticipating Once an understanding of consumer behaviour is gleaned- both in a general sense and specific to the property and the property s competitors- then management can begin to anticipate that consumer behaviour. This is where the real challenge or revenue management emerges: being as accurate with this anticipation as possible, through forecasting, modelling, and exhaustive research. Only when consumer behaviour is at least partially anticipated can a hotel hope to sell and distribute their room inventory effectively, which is how revenue management leads to higher revenues and profitability. Once all data is collected and analysed a pattern will begin to form. This pattern will constantly change and evolve just like any market. The key is to have a system in place with Artificial Intelligence (AI) that can understand and adapt to these changes in real time.

3 Influencing The last, and most critical aspect of revenue management, is actually influencing consumer behaviour. If a hotel can understand and anticipate a consumer s decision, then the next logical step is to guide that decision in a direction that is beneficial to the property. In terms of selling rooms, exerting influence is largely a function of presentation and sales channel distribution, in an effort to display a room to a customer at the price most likely to incite them to buy (while simultaneously being the price that earns the most revenue for the hotel in that situation). The process of influencing consumer behaviour is the capstone of revenue management; it is supported by understanding and anticipating consumer behaviour, but in the end it is all the only visible result of a revenue management strategy. Once you have collected and analysed all of the data, it will be simple to implement the findings into your revenue management processes. By doing so, it will provide you with a huge competitive advantage in the market, thus helping you capture a bigger share of the market. Of course, being capable of executing the technical aspects of revenue management is crucial to the success of any revenue management strategy. The ability to modify prices in a real time environment, effectively manage inventory, balance and optimize sales channel distribution and facilitate cross-departmental cohesion are important nuts and bolts of the revenue management machine; it won t function without them. But neither will it work without an understanding of the fundamental principles of revenue management. So remember: Understand, anticipate and influence. These are the fundamentals of revenue management and the keys to a hotel s financial success. Hotel Industry Applications or Applicability to Room Division: The Commodity that the Hotel sells is Time in a Given Space, and if it is Unsold, Revenue is lost forever Yield Management is composed of a set of Demand Forecasting Techniques used to determine whether Room Rates should be raised or lowered, and whether a Reservation should be accepted or rejected in order to maximize Revenue In order to maximize Revenue, the Front Office Manager needs to forecast Information concerning Capacity Management, Discount Allocation, and Duration Control Capacity Management tries to solve the following Problems: Controlling and limiting Room Supply Balancing the Risk of Overselling Guest Rooms with the Potential Loss of Rooms arising from Room Spoilage Determining how many Walk-ins to accept during the Day of Arrival Discount Allocation Involves restricting the Time Period and Product Mix Available at reduced or discounted Rates, and limiting Discounts by Room Type through encouraging Upselling Duration Control Places Time Constraints on accepting Reservations in order to protect Sufficient Space for Multi-Day Requests A Reservation for a One-Night Stay might be rejected, even though Space is Available that Night Measuring Yield: The Yield Statistic is the Ratio of the Actual Revenue (Generated by the Number of Rooms Sold) to Potential Revenue (THE Amount of Money that would be received from the Sales of Rooms in the Hotel at a Rack Rate) Formula 1: Potential Average Single Rate: Potential Average Single Rate = (Single Room Revenues at Rack Rate) / (Number of Rooms Sold as Single) Formula 2: Potential Average Double Rate:

4 Potential Average Double Rate = (Double Room Revenue at Rack Rate) / (Number of Rooms Sold as Double) Formula 3: Multiple Occupancy Percentage: Multiple Occupancy Percentage = (Number of Rooms Occupied by more than 1 Person) / (Total Number of Rooms Sold) Formula 4: Rate Spread: Rate Spread = (Potential Average Double Rate) (Potential Average Single Rate) Formula 5: Potential Average Rate: Potential Average Rate = (Multiple Occupancy Percentage * Rate Spread) + (Potential Average Single Rate) Formula 6: Room Rate Achievement Factor: Room Rate Achievement Factor = (Actual Average Rate) / (Potential Average Rate) Formula 7: Yield Statistic: 1. Yield Statistic = (Actual Rooms Revenue) / (Potential Rooms Revenue) 2. Yield Statistic = ((Rooms Nights Sold) / (Rooms Nights Available)) * ((Actual Average Room Rate) / (Potential Average Rate)) 3. Yield Statistic = Occupancy Percentage * Achievement Factor Formula 8: Identical Yields Occupancy: Identical Yields Occupancy = (Current Occupancy Percentage) * (Current Rate / Proposed Rate) Formula 9: Equivalent Occupancy: 1. Equivalent Occupancy = (Current Occupancy Percentage) * ((Rack Rate Marginal Cost) / (Rack Rate * ((1 Discount Percentage)) Marginal Cost) 2. Equivalent Occupancy = (Current Occupancy Percentage) * ((Contribution Margin) / (New Contribution Margin)) ELEMENTS OF YIELD MANAGEMENT While developing a successful Yield Strategy, the following Elements are very important: Group Room Sales Transient (FIT) Room Sales Food and Beverage Activity Local and Area-wide Conventions Special Events 1. Group Room Sales: Group Booking Data Determines whether the Group blocks already recorded in the Reservation File should be modified or not and adjusts expectations by reviewing the Group s Booking History Group Booking Pace Watches out for the Rate at which Group Business is being booked (Consider Historical Trends) Anticipated Group Business Watches out for repetitive Group Patterns and act accordingly in order to forecast the Pressure on the Market, and hence adjust Selling Strategies Group Booking Lead-Time Measures how far in advance of a stay Bookings are made. This is very important in determining whether to accept an Additional Group and at what Room Rate to book the New Group Displacement or Transient Business Occurs when a Hotel accepts Group Business at the Expense of Transient Guest. This might engender Profitability Problems and Bad Reputation 2. Transient Room Sales: The Front Office Management shall monitor the Booking Pace and Lead-Time of Transient Guests in order to understand how Current Reservations compare with Historical and Anticipated Rates

5 3. Food and Beverage Activities: All local Food and Beverage Functions should be viewed in light of the Potential for Booking Groups that need Meeting Space, Food and Beverage Service, and Guest Rooms 4. Local and Area-wide Activities: Even when a Hotel is not in the immediate Vicinity of a Convention, Transient Guests and Smaller Groups displaced by the Convention may be referred to the Hotel (as an Overflow Facility) and this may have a tremendous Impact on Hotel s Revenue 5. Special Events: In Special Events (Concerts, Festivals, and Sporting Events), Hotels might decide to benefit from High Demand by restricting Room Rate Discounts or requiring a Minimum Length of Stay USING YIELD MANAGEMENT: 1. Potential High Demand Techniques: Try to define the Right Mix of Market Segments in order to sell out the Highest Possible Room Rates Monitor New Business Bookings and use these changed Conditions to reassign Room Inventory (As Occupancy increases, consider closing out Low Room Rates and open them Only when Demand decreases) Consider establishing a Minimum Number of Nights per Stay Select the Group that offers the Highest Total Revenue Try to displace Price-sensitive Groups to Low Demand Days 2. Potential Low Demand Techniques: Carefully design a flexible Rating System that permits Sales Agents to offer lower Rates under Certain Situations Strive to accurately project expected Market Mix Management shall closely monitor Group Bookings and Trends in Transient Business Do Not close off lower Rate and Market Segments arbitrarily As Low Occupancy Periods become inevitable, open Lower Rate Categories, solicit Price Sensitive Groups, promote Corporate, Government, and other Special Discounts, and Develop New Rate Packages Consider maintaining High Room Rates for Walk-in Guests A Non-Financial Technique involves upgrading Guests to nicer Accommodations than they are entitled to by virtue of their Room Rate In order to implement these Tactics, Management needs to establish the Hurdle Rate (The Lowest Rate for a Given Day) below which it is impossible to sell any Room RM Software The processing of large databases is impossible without appropriate RM software and hotels that employ it gain strategic advantage over those that rely on intuitive RM decisions only. RM software helps RM managers by giving suggestions on price amendments, inventory control and channel management, but it also influences the decision making process of revenue managers. On the one hand, the software analyses enormous data bases and provides useful forecasts based on the optimization models embedded in it. On the other hand, as Schwartz and Cohen (2004) demonstrate, the interface of the software impacts the judgment of revenue managers and their inclination to adjust the computer s forecasts. However, the ultimate decision lies in the hands of the RM manager and his/her team. Review of related literature shows that RM software and human interactions with it have not received enough attention by scholars. RM team Human resource issues are essential in RM system planning and implementation. Authors agree that revenue managers and the revenue management team are vital for the success of any RM system focuses on the specific knowledge and training RM specialists need in order to be effective and efficient. In any case, the introduction and the implementation of RM system within a hotel is a challenging and significant change

6 that might cause resistance among employees and the latter should be addressed and dealt with properly. In many companies the application of RM techniques is within the responsibilities of the marketing manager or a person subordinate to him. However, large hotel chains have recognized the importance of RM to their bottom line and have appointed a separate revenue manager) or even regional revenue management teams to head and guide company s efforts in optimal management of its revenues. Ethical issues in hotel RM Despite their perceived positive impacts on hotels bottom line, RM techniques have received a huge amount of criticism in terms of grievances and lack of sensible benefits. This is especially valid for price discrimination and overbooking techniques. Customers feel belied if they find that they have paid higher price for the same room or if they have to be moved to another hotel. This can be a result of lack of or incomplete information about booking, cancellation and amendment terms. In general, research in the area focuses on the perceived fairness of RM from the view point of the customer pinpoints the RM practices that customers consider acceptable or unacceptable. Obviously, when information about booking, cancellation and amendment terms is available and understood by the customers or when different prices are charged for products perceived by them as different, customers are more inclined to accept revenue management practices. In the other cases, when discounts are insignificant compared to booking amendment/cancellation restrictions or the latter are changed after the booking has been confirmed customers will be dissatisfied. Choi and Mattila (2005) furthermore specify that only informing the customers about hotel s rates is not enough to improve their perceived fairness of they have to know the basis for rates variability (day of the week, duration of stay) and booking conditions. Legal issues in hotel RM The legal aspects of hotel RM are a marginal topic in the academic literature, which is yet to expand. The main focus is the discussion of hotel s RM system as a source of competitive advantage, know-how and its subsequent treatment as a trade secret. Kimes and Wagner emphasise that only parts of RM systems are ascertainable through public sources (e.g. overbookings and forecasting mathematical models), but how RM systems components are integrated is considered proprietary knowledge and is kept confidential. However, authors call for greater vigilance among hotel managers because high turnover among hospitality employees might cause RM trade secrets leakages to their new employers. Hotel revenue management process Tranter et al. (2008) identify 8 steps in RM process customer knowledge, market segmentation and selection, internal assessment, competitive analysis, demand forecasting, channel analysis and selection, dynamic value-based pricing, and channel and inventory management. It is evident that the authors steps are derived from the general marketing management practice, which is understandable, considering the fact that RM developed into the realm of marketing management. Emeksiz et al. (2006) propose a more comprehensive hotel RM model that includes fi ve stages, namely: preparation; supply and demand analysis; implementation of RM strategies; evaluation of RM activities and monitoring and amendment of the RM strategy. Th e main advantage of Emeksiz et al. (2006) model is the inclusion of qualitative evaluation and constant monitoring of the RM strategy. In current paper we adopt the 7-stage approach by Ivanov and Zhechev (2011), elaborated in Figure 2.

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