YIELD MANAGEMENT

Historically, a hotels daily performance has typically been evaluated on the basis of either occupancy
percentage or Average daily rate (ADR). Unfortunately, such one dimensional analysis failed to capture
the relationship between these two factors and room revenue produced.

Eg. A hotel may decrease its room rate or ADR in an effort to increase occupancy. This strategy, while
helping to improve the occupancy percentage, fails to account for the revenue or loss because of lower
room rates. In addition, it does not take into account the cost for occupied room, which can reduce
overall profitability unless occupancy increases, it can overcome the drop in rate and relatively stable
cost for occupancy room, profits may be actually go down. Similarly increase in room rates or ADR
may be accompanied by a decline in occupancy percentage. This means that same revenue will be lost
because rooms that might have been sold at lower rates will remain in unsold. Same Hotel companies
prefer to fill occupancy percentage using low room rates to attract business. While others prefer to
set a target average room rate and are willing to sacrifice occupancy to active it. Yield management
presents a more precise method of performance because it combines occupancy percentage and ADR
into a single statistic “The Yield Statistics”. Simply stated, Yield management is a technique used to
maximise room revenue. Yield Management sometimes also called as Revenue Management. It takes
into account as many factors influencing business strengths as possible. It is also an evaluated tool
that allows the Front Office Manager to use potential revenue as a standard against with actual
revenue generated.

CONCEPT OF YIELD MANAGEMENT

It is originated in the airlines industry. Most travellers know that passengers on the same flight often
pays different amount, super saver discounts, 3 days advance purchase plan, stay over Saturday night
packages and so far have become the norms of airline prices, what is not as widely known is the
potential application of yield management to other service industries. Yield management has proven
successful in lodging, car rental, cruise lines, rail, road and touring industry, basically in situations or
where reservation are taken for the perishable commodities. The key to success of implementation
appears to be ability to monitor reservations and to develop reliable forecast.

Yield management is based on supply and demand; prices tend to rise when demand exceed supply.
Conversely prices tend to fall when supply exceeds demand. Proper pricing adjustments, which take
existing demand into account and can even influence it, appear to be the key to profitability to
increase revenue, the hotel attempting to develop new forecasting techniques that will enable it to
respond to changes in supply and demands with optimum room rate. The hotel industries focus is
shifting from high volume bookings to high profit booking. By increasing booking on lower demand
days and by selling room at high room rate on high demand days, the industry improves its
profitability. In general room rates would be higher (in order to maximise revenue) when demand
exceeds supply and lower (in order to increase occupancy) when supply exceeds demands.

HOTEL INDUSTRY APPLICATION

All hotel companies have a common problem. They produce fixed inventory of perishable product that
cannot be store if unsold for that specific time and is no way to recover time lost and the revenue
lost. Hence these products are sold for varying prices that depends on timing of transaction and the
proposed date of delivery.

In the Hotel industry, 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 request
should be accepted or rejected in order to maximise revenue. Front office Manager have successfully
applied such demand forecasting strategies to room reservation system, management information
system, room and package pricing, seasonal rate determination, tour operator and travel agent rate.
Front office managers have identified several benefits including: -

 Improved Forecasting
 Improved Seasonal Pricing and inventory decisions
 Identification of Market Segment demands
 Enhance Coordination between Front Office and sales division
 Determination of discounting activity
 Improved development of Business plan
 Establishment of value based rates structure.
 Initiation of customers contacts, scripting (i.e. planned responses to customers, inquires or
request regarding reservation)

Yield management seeks to maximise revenue by controlling forecast information in three ways:-

1. CAPACITY MANAGEMENT
2. DISCOUNT ALLOCATION
3. DURATION CONTROL

CAPACITY MANAGEMENT

Capacity management involves various methods of controlling and limiting room supply. For e.g.
Hotels will typically accept a statistically supported number of reservation in excess of the actual
number of rooms available in an attempt to offset the potential impact of early check outs,
cancellations and no-shows. Capacity management (also called as Selective Overbooking) balances the
risk of overselling guest rooms against the potential loss of revenue arising from room spoilage (rooms
going unoccupied after the hotel stopped taking reservations for a given date).

Other forms of capacity management include determine how many Walk-ins to accept on the day of
arrival, given projected cancellations, no shows and early departures. Capacity management strategies
usually vary by room type. i.e. it might be occasionally advantageous to overbook more rooms in lower
priced categories, because upgrading to higher priced room is an acceptable solution to an overall
problem. The amount of such overbooking depends on the level of demand for higher priced rooms.
In sophisticated computerized yield management system, capacity management may also be
influenced by the availability of rooms as of neighbouring hotels or other competing properties.

DISCOUNT ALLOCATION

Discounting involves restricting the time period and product mix (rooms) available at reduced or
discounted rate. For each discounted rates , room type reservations are requested at various available
rates, each set below rack rate. The theory is that the sale of perishable item ( the guest room) at a
reduced room rates is often better than no sale at all. The primary objective of discount allocation is
to prices enough remaining rooms at higher rates to satisfy the projected demand for rooms at that
rate while at the same time filling rooms that could otherwise have remain unsold.

A second objective of limiting discounts by room type is to encourage upselling. In an upselling

situation a reservation agent or Front desk agent, attempts to place a guest in a higher rated room.
This technique requires a reliable estimate of price elasticity and / or the profitability of upgrading.
(Elasticity refers to the relationship between price and demand. If small increase in price produces a
dramatic drop in demand, the market is said to be Price Elastic. If small increase in price produces little
or no effect on demand the market is said to be Price Inelastic.

DURATION CONTROL

Duration control places time constraints on accepting reservations in order to protect sufficient space
for multi day requests (representing higher levels of revenue). This means that under yield
management, a reservation for a one night stay may be rejected, even though space is available for
that night.

For e.g. If Wednesday is close to selling out but adjacent nights are not available, a hotel may want to
optimize its revenue potential for the last few remaining rooms on Wednesday by requiring multi days
stay even at discounted rates, rather than accepting reservation for Wednesday only. Similarly, if the
hotel is projected to close to capacity on Tuesday, Wednesday & Thursday , then accepting a one night
stay during any of those days may be determined to the hotels overall room revenue since it may
block occupancy on other days. Hotels facing such situation may require that reservation for projected
full occupancy periods must be for more than one night.

These strategies may be combined with discount allocation. A three night stay may be combined
available for discount, while one night stay may require the rack rate. It must be cautioned though
that using those strategies must not be apparent to the guest. It would be difficult to exlain to a guest
why he or she must stay three nights to get discounted rates if he/she wants to stay only one night.
Proper use of yield management relies on selling, it never divulges the yield management strategy
being used.

POTENTIAL HIGH AND LOW TACTICS

Hotels need to determine Yield management strategies for both high and low demand periods.
During times of high demand, the normal technique is to increase room revenue by maximising
average room rate. Transient and group business market segment may each require a unique
specific strategy.

Below are some transient business tactics used during high demand periods:-

 Try to determine the right mix of market segements in order to sell out at the highest possible
room rates. This strategy is highly dependent upon accurate sales mix forecasting.
 Monitor new business bookings and use these changed condition to reassign room inventory.
As occupancy begins to climb, consider closing out low room rates. Management should be
prepared to reopen lower room rates.
 Consider establishing a minimum number of nights per stay. For e.g. a resort that always fills
to capacity on weekend may require a 3 day minimum stay in order to better control
occupancy.

A number of group business tactics may be appropriate during high demand periods. When deciding
between two or more competing groups, select the group that produces the highest total revenue.
Management must rely on its experienced employees to develop sound yield management policies.

Given the focus on total revenue, it may be wise to sell block of guestrooms to groups that also book
meeting space, food service and hospitality suites. A group that books ancillary space and services is
likely to spend more time and money in the hotel. Another tactic for handling group business during
high demand periods is to attempt to move price sensitive groups to low demand days. In other words,
if the hotel forecasts high demand for a time when a price sensitive group has already booked space,
management may try to reschedule the group business to a period of lower demand. This tactic, which
is often easier to laid upon allows the hotel to replace the lower rate group with a group willing to pay
at higher rates.

The strategy for transient and group business during low demand periods is to increase revenue by
maximising occupancy. Front office managers may find the following business tactics helpful:-

 Carefully design a flexible rating system that permits sales agents to offer lower rates in
certain situations. Such rates should be determined early in the planning process in
anticipation of lower demand periods.
 Strive to accurately projected expected market mix. The precision at this projection will
influence the eventual Yield statistics.
 Management should closely monitor group bookings and trends in transient business. Do not
close off lower rate categories market segments for the sake of mere occupancy.
 As low occupancy periods become unavailable, open lower rate categories, solicit price
sensitive groups and promote corporate, government and other special discounts. Consider
developing new room rate packages and soliciting business from the local community.
 Consider maintaining high room rates for Walk in guests. Since these guests have not
contacted the hotel prior to arrival, they typically present an opportunity to increase the
average rate through upselling techniques.
 A non-financial tactic involves upgrading guest to nicer accommodation than they are entitled
to, by virtue of room rate. This technique may lead to increased guest satisfaction, enhanced
customer loyalty. The implementation of this policy is strictly a management decision.

YIELD MANAGEMENT COMPUTER SOFTWARE

Although the individual tasks of yield management can be performed manually. The most efficient
means of handling data and generating yield statistics is through a computer sophisticated yield
management software. The software can integrate room demand and room price statistics and can
stimulate high revenue producing product scenarios.

Yield management software does not make decisions for managers. It merely provides information
and support for managerial decisions. Since yield management is often quite complex. Front office
staff will not have time to process the voluminous data manually. Fortunately, a computer can store
retrieve and manipulate large amounts of data on a broad range influencing room revenue. Overall
yield management system can help management create models that produce probable results of
decision. Decision models are based on historical data, forecasts and booked business.
In those industries where computer based yield management has been applied, the following results
have been observed:-

CONTINUOUS MONITORING: - A computer yield management system can track and analyse business
condition 24 X 7.

CONSISTENCY: - A software can be programmed not to respond to specific changes in the market
place with specific corporate or local management rules.

INFORMATION AVAILABILITY: - Yield management system can provide improved management

information which in turn, may help managers to make better decisions more quickly.

PERFORMANCE TRACKING: - A computer based system is capable at analysing sales and revenue
transactions, occurring within business period to determine how well yield management goals are
being achieved. Yield management system is also available to generate an assortment of special
reports. The following are representative of yield management system outputs: -

Market Segment Report: - It provides information regarding customer mix. This information
is important to effective forecasting by market segment.

Calendar/Booking Graph: - Presents room night demands and volumes of reservations on a

daily basis.

Future Arrival Dates Status Report: - It indicates the hotels booking patterns (trends), this
report relates to the booking graph by documenting how a specific day was constructed on the
graph.

Room Statistics Tracking Sheet: - Tracks No-show, guaranteed No-shows, Walk-ins and turn
away. This information can be instrumental in accurate forecasting.
 YIELD STATISTICS
Total no.of Rooms Occupied
1. Occupancy % = Total no.of rooms
𝑋 100
Total Rooms Revenue
2. ARR (Average Room Revenue or Average Room rate) = Total no.of Rooms Sold
𝑇𝑜𝑡𝑎𝑙 𝑅𝑜𝑜𝑚𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
3. RevPAR (Revenue per available room) = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝑅𝑜𝑜𝑚𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑆𝑎𝑙𝑒
𝐻𝑜𝑢𝑠𝑒 𝐶𝑜𝑢𝑛𝑡−𝑅𝑜𝑜𝑚 𝐶𝑜𝑢𝑛𝑡
4. Multiple Occupancy % (Double Occupancy %) = 𝑅𝑜𝑜𝑚 𝐶𝑜𝑢𝑛𝑡
𝑋 100
𝑇𝑜𝑡𝑎𝑙 𝑅𝑜𝑜𝑚𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
5. ARG (Average Revenue per Guest) = 𝐻𝑜𝑢𝑠𝑒 𝐶𝑜𝑢𝑛𝑡
𝐻𝑜𝑢𝑠𝑒 𝑐𝑜𝑢𝑛𝑡
6. AGR (Average Guest per Room) =
𝑅𝑜𝑜𝑚 𝐶𝑜𝑢𝑛𝑡
𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝑅𝑜𝑜𝑚𝑠 𝑁𝑜−𝑠ℎ𝑜𝑤
7. No- Show % = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝑅𝑜𝑜𝑚𝑠 𝑅𝑒𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛 𝑋 100
𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝑅𝑜𝑜𝑚𝑠 𝑊𝑎𝑙𝑘−𝑖𝑛𝑠
8. Walk-in % = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝐴𝑟𝑟𝑖𝑣𝑎𝑙𝑠
𝑋 100
𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝑅𝑜𝑜𝑚𝑠 𝑈𝑛𝑑𝑒𝑟𝑠𝑡𝑎𝑦
9. Understay % = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐶ℎ𝑒𝑐𝑘 𝑜𝑢𝑡𝑠 𝑋 100
𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝑅𝑜𝑜𝑚𝑠 𝑜𝑣𝑒𝑟𝑠𝑡𝑎𝑦
10. Overstay% = 𝑋 100
𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐶ℎ𝑒𝑐𝑘 𝑜𝑢𝑡𝑠

11. House Position = Expected Departures – Expected Arrivals + Vacant Rooms

𝑅𝑜𝑜𝑚𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒−𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑙𝑎𝑏𝑙𝑒 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
12. GoPAR = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝑟𝑜𝑜𝑚𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒 𝑓𝑜𝑟 𝑡ℎ𝑎𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
𝑂𝑐𝑐𝑢𝑝𝑎𝑛𝑐𝑦 % 𝑜𝑓 𝑆𝑒𝑙𝑒𝑐𝑡𝑒𝑑 𝐻𝑜𝑡𝑒𝑙
13. Occupancy Index = 𝑂𝑐𝑐𝑢𝑝𝑎𝑛𝑐𝑦 % 𝑜𝑓 𝑡ℎ𝑎𝑡 𝐻𝑜𝑡𝑒𝑙′ 𝑠𝐶𝑜𝑚𝑝𝑒𝑡𝑖𝑡𝑖𝑣𝑒 𝑠𝑒𝑡
𝐴𝐷𝑅 𝑜𝑓 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑 𝐻𝑜𝑡𝑒𝑙
14. ADR Index (Average Daily Rate Index) = 𝐴𝐷𝑅 𝑜𝑓 𝑡ℎ𝑎𝑡 𝐻𝑜𝑡𝑒𝑙′ 𝑠𝐶𝑜𝑚𝑝𝑒𝑡𝑖𝑡𝑖𝑣𝑒 𝑆𝑒𝑡
𝑇𝑜𝑡𝑎𝑙 𝑟𝑜𝑜𝑚 𝑛𝑖𝑔ℎ𝑡𝑠 𝑠𝑝𝑒𝑛𝑡 𝑏𝑦 𝑐ℎ𝑒𝑐𝑘𝑖𝑛𝑔 𝑜𝑢𝑡 𝑔𝑢𝑒𝑠𝑡 𝑜𝑛 𝑎 𝑑𝑎𝑦
15. Average length of stay per Guest = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝑐ℎ𝑒𝑐𝑘𝑜𝑢𝑡𝑠 𝑜𝑛 𝑡ℎ𝑎𝑡 𝑑𝑎𝑦
𝑆𝑖𝑛𝑔𝑙𝑒 𝑅𝑜𝑜𝑚 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑎𝑡 𝑅𝑎𝑐𝑘 𝑅𝑎𝑡𝑒
16. Potential Average Single Rate = 𝑁𝑜.𝑜𝑓 𝑟𝑜𝑜𝑚𝑠 𝑠𝑜𝑙𝑑 𝑎𝑠 𝑠𝑖𝑛𝑔𝑙𝑒𝑠
𝐷𝑜𝑢𝑏𝑙𝑒 𝑅𝑜𝑜𝑚 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑎𝑡 𝑅𝑎𝑐𝑘 𝑅𝑎𝑡𝑒
17. Potential Average Double Rate = 𝑁𝑜.𝑜𝑓 𝑅𝑜𝑜𝑚𝑠 𝑠𝑜𝑙𝑑 𝑎𝑠 𝐷𝑜𝑢𝑏𝑙𝑒𝑠

18. Rate Spread = Potential Average Double Rate – Potential Average Single Rate
19. Potential Average Rate = (Multiple Occupancy % X Rate Spread) + Potential Average
Single Rate.
𝐴𝑐𝑡𝑢𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑜𝑜𝑚 𝑅𝑎𝑡𝑒
20. Room Rate Achievement Factor = 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑜𝑜𝑚 𝑅𝑎𝑡𝑒
𝐴𝑐𝑡𝑢𝑎𝑙 𝑅𝑜𝑜𝑚 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
21. Yield = 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑅𝑜𝑜𝑚 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

𝑜𝑟
𝑅𝑜𝑜𝑚𝑠 𝑁𝑖𝑔ℎ𝑡 𝑆𝑜𝑙𝑑 𝐴𝑐𝑡𝑢𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑜𝑜𝑚 𝑅𝑎𝑡𝑒
𝑌𝑖𝑒𝑙𝑑 = 𝑋
𝑅𝑜𝑜𝑚𝑠 𝑁𝑖𝑔ℎ𝑡 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑜𝑜𝑚 𝑅𝑎𝑡𝑒
𝑜𝑟
𝑌𝑖𝑒𝑙𝑑 = 𝑂𝑐𝑐𝑢𝑝𝑎𝑛𝑐𝑦 % 𝑋 𝑅𝑜𝑜𝑚 𝑅𝑎𝑡𝑒 𝐴𝑐ℎ𝑖𝑒𝑣𝑒𝑚𝑒𝑛𝑡 𝐹𝑎𝑐𝑡𝑜𝑟
 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑜𝑜𝑚 𝑅𝑎𝑡𝑒
22. Identical Yield = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑂𝑐𝑐𝑢𝑝𝑎𝑛𝑐𝑦 % 𝑋 𝑃𝑟𝑜𝑝𝑜𝑠𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑜𝑜𝑚 𝑅𝑎𝑡𝑒
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛
23. Equivalent Occupancy = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑂𝑐𝑐𝑢𝑝𝑎𝑛𝑐𝑦 % 𝑋 𝑃𝑟𝑜𝑝𝑜𝑠𝑒𝑑 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛

or
(𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑂𝑐𝑐𝑢𝑝𝑎𝑛𝑐𝑦 % 𝑋 𝑅𝑎𝑐𝑘 𝑅𝑎𝑡𝑒)−𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡
Equivalent Occupancy =
𝑟𝑜𝑜𝑚 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 −(1−𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡%)−𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡

or
Equivalent Occupancy =
𝐴𝑐𝑡𝑢𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑜𝑜𝑚 𝑅𝑎𝑡𝑒−𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑂𝑐𝑐𝑢𝑝𝑎𝑛𝑐𝑦 % 𝑋 𝑃𝑟𝑜𝑝𝑜𝑠𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑜𝑜𝑚 𝑅𝑎𝑡𝑒−𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 (𝑅𝑂𝐼)+𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠−𝑁𝑜𝑛 𝑅𝑜𝑜𝑚 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

24. Hubbart’s Formulae = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝑅𝑜𝑜𝑚𝑠 𝑇𝑜 𝑏𝑒 𝑆𝑜𝑙𝑑 𝑑𝑎𝑖𝑙𝑦 𝑋 365