By Helena Murphy on March 15, 2016 at 9:00 AM
This month we're dedicating our blog to the various ways you can increase revenue. One way to get there is by getting a handle on Yield Management. Yield management refers to all of the ways you price your products - in our case mostly rooms - so that you can make more money with the same resources, by selling to the right type of guests at the right time.
What is yield management?
In a nutshell, yield management can be defined as selling a product or service to the right customer, at the right time, and at the right price.
With hotels, any room left unsold is lost revenue. Yield management is about making sure those rooms are filled in the most profitable way possible. You will sell the right room to the right market segment at different rates under various circumstances.
Yield management is based on the theory of supply and demand: guests will pay different prices for the same thing, depending on a variety of factors. Therefore, you change your rates accordingly to get more incremental value.
Combined with a smart rate strategy based on seasons and special weekends, and customized for each room type, a yield management tool will ensure you sell all your rooms at the right price.
The Frontdesk Anywhere Yield Manager is a powerful and easy to use revenue tool that can be configured in a matter of minutes. Yield Management allows you to automatically adjust the prices of your rooms depending on your property's occupancy. If you’re operating with just a few rooms left in your inventory, the Yield Manager will increase the price of the remaining rooms. If you have a lot of rooms available and need to sell more quickly, the Yield Manager will automatically decrease the price of your rooms.
Let’s say you offer a two-night deal for two for Valentine’s Day weekend. You decide it applies to all your suites and will cost $500. Although you've analyzed past data and your competitor's strategy, there's always room for unknown. Hence you set yield management rules to adjust pricing (up or down depending on occupancy) 2 months, 1 month and 2 weeks before Valentine's Day weekend.
Another common strategy is to offer a special rate on multi-night stays, but only if the stay includes a Saturday. Or to set minimum stay restrictions when the booking period includes a Saturday - guests will have to stay at least 2 nights for instance. Additionally, your hotel could be hosting a business conference or a wedding and you are offering a special room rate for registered conference attendees / wedding guests - within Frontdesk Anywhere you would use a promo code. Those who book extra nights outside the specified conference dates are charged the regular room rate for those nights.
Why should you bother with yield management?
Without using yield management strategies, you miss out on the opportunity to get more bookings, offer competitve rates and promotions, get more revenue per booking, and forecast the upcoming booking season.
To get more profit, you need to sell enough rooms to cover your fixed operating costs, then sell the remaining rooms at higher rates to maximise revenue and profits.
How can you execute yield management strategies?
Many different pricing strategies are used to manage yield effectively:
This is when you have different rates depending on various factors, like…
- room type (suite vs. standard room, ocean view vs. pool view)
- bedding type (queen bed vs. king bed vs. twin bed vs. extra bed)
- how many guests are booking (minimum number of guests per room, lower rate for large number of rooms per booking)
- packages (whether it’s a special function, etc.)
This is when you have different rates depending on popular and unpopular times, like…
- High vs low season rates
- Day of week rates
There’s a Formula For That
It sounds counterintuitive, but the objective of yield management strategies for a independent hotel is not to simply increase room rates, or only to increase rate of occupancy. It’s to maximize the average revenue per available room, per night.
To put it mathematically:
Revenue per available room = average room rate X occupancy rate
Here's an example:
An average room rate of $100, times an average occupancy rate of 50% means the revenue per available room (RevPAR) is $50. This is a highly simplified demonstration, of course, but you get the general idea.
Obviously, your goal is to increase that dollar amount, but simply increasing the room rate isn’t necessarily going to do it for you. There are a number of forces impacting demand for rooms at any given time, and your goal is to find the balance between room rate, costs, and occupancy that maximizes revenue.
Understanding the four segments of the revenue management cycle will help you reach this goal: forecast demand, optimize demand, control demand, and monitor demand.
The starting point is to forecast demand for your rooms. Every manager knows there’s a pattern with your hotels occupancy, if you're a ski resort it'll be the wintern months. If you're family destination school holidays will be your busy period.
You already know that booking too many one-night stays on a popular night like a Saturday means you’re forced to turn away more customers who want to book multiple night stays that include that hot Saturday and a less-popular Sunday night. The trick is to estimate in advance how many rooms you want to hold back for those more-profitable, multi-night customers.
While you can make some reasonable assumptions based on day of the week, time of year, even current economic conditions, you can never be 100% certain that there will be demand for X number of rooms on this or that specific date.
But with the right data, you can get reasonably close.
- Historical data
While you can’t be sure past ups and downs will be repeated, noting consistent patterns in historical data can be useful in forecasting the future. Examples are the rise and fall of bookings by day of the week and season of the year. You can be reasonably certain that spikes in bookings for special times, like Christmas, will repeat; an unseasonable cold or warm snap that spurred an unanticipated spike in last-minute, impulse bookings should be left out of the equation. “No show” patterns should also be a part of the picture.
Remember that just having mountains of raw data won’t do you much good if you don’t have a way or organizing and interpreting it. This is where knowledge of a good spreadsheet program comes into play.
- Teasing out the details
How detailed do you want this analysis to be? Keeping in mind that more detail isn’t necessarily better when it comes to forecasting, your analysis can be broken down in any number of ways. For example:
– Room type
– Rate range
– Length of stay
– How far in advance the average customer books a stay
– Days when demand outstripped supply, and by how much (and why)
- Setting limits
How often should you perform a forecast, and for how many days? Three-month forecasts the first of every month? Four-week forecasts every other week? Two-week forecasts once a week? If you’re crunching numbers manually, forecasting takes time out of your busy schedule, so you’re more likely to do it less often and peer farther into the future. If you invest in a software program or hire a service to do it for you, you’re more likely to get more involved in detailed, shorter-term forecasting.
We'll be continuing the conversation on how to increase revenue throughout the month. Feel free to post any comments or suggestions below.