Making pricing decisions is never clear-cut in the hotel industry. With so many factors — like seasonality and your competitive set — influencing the market, hoteliers often wonder when and whether to change their pricing.
Fortunately, yield management takes the uncertainty out of these decisions. Read on to discover what yield management is, why it's important, and the tools and technologies you need to execute it well.
What is Hotel Yield Management?
Hotel yield management, also known as revenue management, is a dynamic pricing strategy that aims to optimize revenue and profitability in the hotel industry.
By analyzing traveler behavior and market demand, adjusting room rates, and managing inventory to maximize revenue potential, you can sell the right room, to the right customer, at the right price, at the right time.
This pricing strategy is based on three key assumptions:
- Hotels have a fixed number of rooms to sell
- Inventory is perishable and time-limited
- Different people are willing to pay different prices for a room
Why is Yield Management Important?
There are several reasons why yield management is vital for hotels:
- Maximizes revenue: By analyzing market demand, booking patterns, and other relevant factors, you can adjust your pricing strategies to maximize revenue. You can set different rates for different periods, events, or customer segments to capitalize on high-demand periods and optimize occupancy rates.
- Demand forecasting: By understanding the demand trends, you can make informed decisions about pricing and inventory allocation. This helps you identify periods of high demand and low demand, allowing you to adjust room rates accordingly and optimize occupancy levels.
- Dynamic pricing: Instead of using fixed rates, you can adjust prices in real-time based on factors such as occupancy levels, booking pace, competitor rates, and market conditions. This flexibility allows you to respond quickly to changes in demand and market dynamics, increasing your competitiveness and revenue potential.
- Helps you understand guest profiles: Yield management lets you analyze who your guests are, when they book, how long they stay, and when they are willing to pay more or less.
- Low barrier to entry: It’s not difficult to get started with yield management—even if you’re a smaller hotel.
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How to Calculate Yield at Your Hotel
To calculate yield at your hotel, follow these steps:
- Determine occupancy rate: Divide the total number of occupied rooms by the total number of available rooms. This will give you the occupancy rate as a decimal or percentage.
Occupancy Rate = (Number of Occupied Rooms / Number of Available Rooms) x 100
- Calculate the Average Daily Rate (ADR): Add up the revenue generated from room sales over a specific period (e.g., a day, week, month) and divide it by the total number of occupied rooms during that period.
Average Daily Rate = Total Room Revenue / Number of Occupied Rooms
- Calculate the Revenue per Available Room (RevPAR): Multiply the occupancy rate by the average daily rate to obtain the RevPAR. This metric reflects the revenue generated per available room.
RevPAR = Occupancy Rate x Average Daily Rate
Yield Management vs. Revenue Management
Yield management — in comparison to revenue management — has a narrower focus. However, it is still a subset of revenue management that focuses specifically on optimizing revenue by maximizing the yield from a limited resource, such as hotel rooms.
Revenue management takes a broader approach. It considers revenue optimization across various aspects of the business beyond pricing and inventory to maximize overall revenue and profitability.
Key Components of Hotel Yield Management
There are multiple areas of yield management, including demand forecasting, pricing optimization, inventory control, and market segmentation. All of these components come together to help you maximize revenue.
Demand Forecasting
Demand forecasting means estimating or predicting future customer demand. This will help you understand expected demand patterns like rooms likely to be booked in a given period.
Here, you might analyze historical data, market trends, and other relevant factors. Demand forecasting typically involves the following steps:
- Data collection: You can gather information on room bookings, occupancy rates, customer segments, market trends, and more. Collect this information from hotel management systems, property management systems (PMS), central reservation systems (CRS) and other places.
- Data analysis: Next, analyze the data collected to find patterns, trends, and relationships. You can examine seasonality, day-of-week effects, market events, booking lead times, and other variables.
- Statistical modeling: Use statistical techniques and forecasting models - tailored to your hotel - to quantify and predict future demand. Use time series analysis, regression analysis, forecasting algorithms, or other methods.
- Market intelligence: Your next step is to use market intelligence and industry knowledge to complement your statistical analysis. Look at economic indicators, local events, market dynamics, and competitor behavior.
- Forecasting accuracy evaluation: Finally, assess the accuracy of the demand forecasts by back-testing against actual outcomes.
Demand forecasting lets you make better-informed decisions regarding pricing, marketing campaigns, and staffing levels.
Pricing Optimization
Pricing optimization means determining the optimal prices for your hotel rooms, addons, or services to increase revenue.
It involves analyzing market demand, customer behavior, competition, costs, and other relevant variables, to set prices that attract customers and maximize profits. Pricing optimization often involves the following steps:
- Market analysis: The first step of pricing optimization is to understand your market dynamics, customer preferences, and price elasticity. This might include competitor pricing and market conditions.
- Customer segmentation: Identify different customer segments based on their needs, preferences, and willingness to pay. Tailor prices accordingly when you understand the value perceptions and price sensitivity of each segment.
- Cost analysis: Evaluate the costs associated with doing business. This includes fixed costs, variable costs, and any other overhead expenses. This will ensure you set up your prices to cover costs and generate a profit margin.
- Pricing strategies: Next, develop pricing strategies based on market analysis, customer segmentation, and cost considerations. This could include value-based, penetration, or dynamic pricing, for example, that aligns with your needs.
- Price testing and optimization: Assess customer responses to different price points by conducting price tests and experiments. A/B test, analyze price sensitivity or conduct market research techniques to understand the impact of your price changes on customer behavior.
- Monitoring and adjustment: Finally, continuously monitor market conditions, competitor pricing, and customer feedback and make the relevant adjustments.
Inventory Control
Inventory control means managing the availability of room inventory within your hotel. This means tracking inventory levels, movements, and implementing strategies to optimize inventory management and control.
Inventory control helps you meet customer demand, minimize inventory holding costs, avoid understocking or overstocking, and optimize the use of your resources. Inventory control involves the following steps:
- Availability management: Manage room availability to match demand. You can implement strategies like length-of-stay controls, minimum and maximum stay restrictions, and allocation of rooms to different market segments.
- Overbooking management: Employ overbooking techniques to optimize occupancy rates while minimizing the risk of revenue loss due to cancellations and no-shows. Take into account historical cancellation and no-show patterns and implement policies to handle potential disruptions.
- Channel management: Manage distribution channels and control room inventory across different sales channels. These sales channels could include direct bookings, online travel agencies (OTAs), global distribution systems (GDS), and other platforms.
- Performance monitoring: Finally, continuously monitor your key performance indicators (KPIs) related to inventory control. Look at metrics like occupancy rates, average daily rate (ADR), and revenue per available room (RevPAR).
Market Segmentation
Market segmentation refers to dividing a market into distinct groups or segments. This might be based on similar characteristics, needs, or guest behaviors.
Once you have identified your segments, you can adjust pricing, inventory allocation, and marketing strategies to target and serve each segment. It will also help you optimize revenue by understanding varying demand patterns and booking behaviors. Market segmentation involves the following steps:
- Identify segments: First, analyze customer data, booking patterns, and other information. This will help you carve out market segments. Create these segments based on criteria like traveler type (leisure, group, or business), demographic (age, gender, income), geographic location, loyalty status, and lots more.
- Segment characteristics: Examine demand patterns, length of stay, booking lead times, price sensitivities, and other relevant factors specific to each segment.
- Pricing differentiation: You can tailor pricing strategies to each segment based on their willingness to pay, price sensitivities, and demand patterns. Offer different rate plans, discounts, and promotions to different segments to capture maximum value.
- Performance analysis: Finally, continuously monitor the performance of each segment by analyzing various metrics like occupancy rates, market share, and others.
Tools and Technologies for Hotel Yield Management
Hotels can utilize various tools and technologies to support their yield management efforts and optimize revenue. Here are some commonly used tools and technologies in hotel yield management:
Revenue Management Systems
Revenue management systems (RMSs) allow you to analyze historical data, market trends, and other factors to make data-driven pricing and inventory decisions.
RMS tools often incorporate demand forecasting, pricing optimization algorithms, and performance analytics.
Popular revenue management systems:
- Gamechanger by Duetto: Gamechanger by Duetto is a cloud-based revenue management system. This system is ranked 1 out of 59 on Hotel Tech Report with a rating of 4.6 out of 5.
- IDeaS G3 Revenue Management System: This automated solution is a close second, helping you make pricing and rate availability decisions.
- RoomPriceGenie: This Swiss RMS provider came third in the 2023 HotelTechAwards.
- Atomize: Atomize is a lean Revenue Management Software. This system uses machine learning and a data science algorithm.
Business Intelligence
Business intelligence (BI) and analytics tools provide hotels with advanced data analysis and reporting capabilities.
These tools help hotels gain insights into market trends, competitor performance, customer segmentation, and demand patterns, allowing for more informed decision-making in yield management.
Popular business intelligence tools:
- OTA Insight (Revenue Insight): OTA Insight is ranked first among hotel business intelligence tools. This cloud-based tool allows you to make smarter revenue and distribution decisions.
- ProfitSword Business Intelligence Solution: This tool is “a single source of truth for efficient, real-time decision making.”
- Scoreboard by Duetto: Duetto allows you to forecast, track, and exceed revenue expectations with advanced analytics and machine learning.
- The Hotels Network (Bench Direct): This is a hotel benchmarking platform. It provides you with competitive data through real-time actionable insights.
Channel Managers
Channel managers streamline the distribution of hotel inventory across multiple online sales channels, such as online travel agencies (OTAs), global distribution systems (GDS), and hotel booking engines.
These tools enable hotels to efficiently manage room availability, rates, and restrictions across various channels in real-time, ensuring consistent inventory control and pricing optimization.
Popular channel managers:
- SiteMinder (The Channel Manager): This solution is ranked number one among other channel managers. It describes itself as the “World’s most powerful channel manager."
- Cloudbeds Channel Manager (myallocator): This channel manager came second in the 2023 HotelTechAwards. Myallocator is a channel manager that synchronizes your inventory with hundreds of online marketplaces.
- RateGain (RezGain Channel Manager): This is a smart distribution channel manager, helping you distribute rates and inventory across +1500 globally.
- Profitroom Channel Manager: Profit Room Channel Manager helps you manage cross-channel online sales. It includes tools like flexible occupancy rate management and allows for bulk updates of prices and restrictions.
Conclusion
Yield management is a vital part of revenue management, helping you increase revenue and profitability. Applying this pricing strategy to your hotel isn’t too difficult and involves using strategies like demand forecasting, pricing optimization, inventory control, and market segmentation.
Use tools and technologies like revenue management systems, business intelligence, and channel managers to make these steps easier.
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