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UNIT - V
REVENUE MANAGEMENT

History of Revenue Management – Origin of RM – Adaptation of RM in the Hotel


Industry.
Role of Revenue Manager- The Concept & importance of Revenue Management.
Hospitality Industry Application - Capacity Management, Discount Allocation,
Duration Control - Measuring Yield. Elements of Revenue Management – Benefits.
Revenue Management - Potential High and Low Demand Tactics. Challenges and
Problems in Revenue Management. Revenue Management Computer Software
System

REVENUE MANAGEMENT

The concept of yield management was initially started by the airlines industry in the early
1960’, over a period they have well tuned to change in the demand and maximize on seat
sharing (with other airlines) & maximum occupied seats. Yield management has proven
successful in the lodging, car rental, cruise line, railroad, and touring industries—
basically, in situations where reservations are taken for a perishable commodity.
The key to successful implementation appears to be an ability to monitor reservations and
to develop reliable forecasts. Revenue management is based on supply and demand.
Prices tend to rise when demand exceeds 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 industry is attempting to develop new forecasting
techniques that will enable it to respond to changes in supply and demand with optimal
room rates. The hotel industry's focus is shifting from high-volume bookings to high-
profit bookings. By increasing bookings on low-demand days and by selling rooms at
higher room rates on high-demand days, the industry improves its profitability. In
general, room rates should be higher (in order to maximize rate) when demand exceeds
supply and lower (in order to increase occupancy) supply exceeds demand.

The Occupancy Crunch of the mid 80’s

To understand why our industry turned to revenue or yield management, we need to


revert back to the good ‘ole days. In the 60’s, the industry consisted primarily of large
city-center hotels and small independent hotels in secondary cities and highways. The
70’s and 80’s saw the growth in the explosive growth of hotel franchising.
In the years following the expansion of new hotel construction in the 70’s and 80’s, our
industry began to feel the effects of overbuilding; consumers had many more choices and
hotel demand rapidly declined. The result was that hotels needed to do more to grow
business in this new competitive environment…a lot more.
With suppressed occupancy demand, it became obvious that hotels could no longer rely
solely on increasing occupancy to improve profits; it became necessary to manage and
control how room revenue was generated.
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Role of Revenue Manager


The primary role of the revenue manager is to maximize the businesses' opportunity for
revenue and profits. In order to do that, the revenue manager is in charge of compiling
and analyzing data to make decisions regarding pricing. The revenue manager compiles
data on the business as well as the competition. They keep up with market changes and
identify trends.

For example, a hotel in a corporate location will see high demand for hotel rooms during
the week versus on the weekend. This is a trend that a revenue manager would be aware
of and take into consideration when setting pricing. The revenue manager is in charge of
setting rate strategies that will help the business capitalize their profits. The revenue
manager will know what the competition is selling and how the competition is fairing.

For hotels there is an STR report that comes out weekly that compares 5-7 hotels in the
area and gives the hotel data on how they are doing compared to their competition when
it comes to revenue. This is a highly used report for revenue managers in the hotel
business. If the hotel is not keeping up with competition, then it lets the revenue manager
know they need to change their strategies. The focus of the revenue manager is knowing
what is going on around them in order to be able to react and price correctly.
Hotel Industry Applications

All hotel companies have a common problem: they produce a fixed inventory of
perishable products that cannot be stored if unsold by a specific time. The commodity
that hotels sell is time in a given space. If a room goes unsold on a given night, there is no
way to recover the time lost and therefore the revenue lost. Therefore, these products are
typically sold for varying, prices that depend on the timing of the transaction and the
proposed date of delivery.
In the hotel industry, revenue 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 maximize
revenue. Front office managers have successfully applied such demand-forecasting
strategies to room reservation systems, management information systems, room and
package pricing, rooms and revenue management, seasonal rate determination, pre-
theater dinner specials, and special, group, tour operator, and travel agent rates. Front
office managers have identified several benefits, including:
 Improved forecasting
 Improved seasonal pricing and inventory decisions
 Identification of new markets segments
 Identification of markets segment demands
 Enhanced coordination between the front office and sales divisions
 Determination of discount policy
 Improved development of business plans
 Establishment of a value-based rate structure
 Planned responses to customer inquiries or requests regarding reservations
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Thus, yield management or revenue management is the process of understanding,


anticipating, and influencing consumer behavior in order to maximize revenue or profits
from a fixed, perishable resource (such as airline seats or hotel rooms). The challenge is
to sell the right resources to the right customer at the right time for the right price.

Revenue managers seek to maximize revenue by controlling forecast information with


the help of the three tools.

Tools of Revenue Management

Discount Allocation Or
Differential Pricing
Duration Control Or
Capacity Management Or
Duration Restriction
Selective Over Booking

Capacity Management or Selective Over Booking


Capacity management involves various methods of controlling and limiting room supply.
The availability of rooms plays a vital role in taking advance booking of hotel rooms.
Hotel managers, based on their experience and historical data available, often take
chances to book more rooms than the total inventory of rooms in the hotel. Overbooking
is the practice of intentionally selling more rooms than available, in order to offset the
effect of cancellations, no-shows, and early departures. For example, though the total
numbers of available rooms in a hotel are 200, 220 rooms may be booked on a certain
day. Since the probability of exactly 200 guests turning up is low, the income from the
additional guests generally compensates the loss of revenue. The availability of rooms
increases in the following situations:

Early departure/understay When guests leave the hotel before their expected date of
departure, the number of vacant rooms increases. If a provision is not made, the newly-
vacated room will remain unsold, which would result in the loss of revenue. To avoid this
situation, hotels generally discourage early departure.

Cancellations Cancellation is another major factor that increases the availability of


rooms. The guests are free to cancel a booking made before a stipulated time. There are
times when guests cancel their reservations after the stipulated time, which increases the
number of available rooms. If a provision is not made, this would result in unsold rooms
and loss of revenue.

No shows It is a condition in which guests with confirmed bookings do not turn up at


the hotel on the expected date of arrival, without any prior intimation. This also leads to
the increase in the inventory of rooms. In case of non-guaranteed reservations, if the
guest does not arrive on or before the cancellation hours (generally 6:00 p.m.), the room
is released to waitlisted guests or walk-ins. In case of guaranteed reservations, if the guest
does not arrive, the room is kept vacant and one day charge is levied on the guest and
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adjusted against the advance deposit. However, no-shows result in increasing the room
availability of the hotel, which leads to the loss of revenue in case the room is not sold.

To avoid the loss of revenue from any of the above-mentioned situations, hotels generally
prefer overbooking. Over booking is not done by mere guesswork. Selective overbooking
is done by considering the following factors:

Past history data Related to:


 Cancellation statistics: the number of cancellations received in those dates or that
period (festival time or special events scheduled n the city, etc.) in previous years.
For example, for a reservation for 31 st December, the manager would check the
previous year’s statistics and also keep in mind that the day being New Year’s
Eve, the hotel would be on high occupancy.
 Understay statistics: the number of guests who stayed for less than their reserved
in those dates or period previous years.
 No-show statistics: the number of o shows during those dares or that period in
previous years.
 Turn away statistics: the number of guests who were turned away or were denied
reservations due to non availability of rooms during those dates or that period in
previous years.

Activities in town:
 Sporting events: Events like international cricket, tennis football matches or any
other sports events, which are scheduled to be held on those dates or that period in
around the city.
 Cultural events: Events like art festivals, cultural fairs or festivals, music shows,
etc. which are scheduled to be held on those dates or in that period.
 Business events: Events like trade fairs, business conferences, which are
scheduled to be held on those dates or in that period.
 Protest/unrest/emergency etc.: Events like curfews, bandhs, etc., scheduled to be
held on those dates or in that period.

The experience of the reservation manager:


 The reservation manager can tell from experience how many of the reserved
guests will actually turn up.

Selective overbooking varies slightly with room types. The overbooking of lower priced
rooms is advantageous because in case of oversell (i.e., there are no cancellations or no-
shows, all the confirmed guests arrive at the hotel, and rooms are not available), the
guests can be upgraded to a higher category room. The percentage of overbooking will
depend upon the demand for higher-priced rooms in that duration. Overbooking should
be avoided in cases where the hotel has only one or two rooms of the requested category,
like presidential suites, luxury suites, etc. In case there is a reservation request for a suite,
which has already been confirmed, the second reservation should be put on a waitlist. The
guest should be informed that the confirmation of their waitlisted reservation is subject to
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cancellation. Selective overbooking or capacity management balances the risks of


overbooking against potential loss of revenue from reservation cancellations, early
departures, and no-shows.

Discount Allocation or Differential Pricing


Price of goods or services may be defined as 'the value of the goods or services
expressed in terms of money'. Price is a major criteria for a guest while choosing a hotel
for stay. The pricing of a hotel's accommodation products is based on its demand in the
market. Yield management attempts to get the right sales mix. It is next to impossible for
a hotel to sell its rooms at rack rate at all times. A hotel must therefore have a sales
strategy that will allow it to sell the maximum number of rooms at the best rates (to
satisfy the projected demand for rooms at that rate), while at the same time filling the
rooms that would have otherwise remained unsold at a discounted rate.

During the lean time or off peak season, when the occupancy is low, the supply of rooms
is more than its demand. In this situation, hotels offer discounted rates to attract more
number of guests who otherwise might not have planned to stay at that hotel or visit that
city. Hotels may offer off-season rates, package plans, special offers, etc. to attract more
business.
A hotel normally offers discounts as under:
Rack rate (no discount) : Offered to walk-ins during peak season.
10% to 20% discount : Offered to travel agents, groups, regular guests.
30% to 40% discount : Offered to large travel agents and major companies.
50%to 60% discount : Offered to very large multinational companies,
holiday planners, conference and convention
planners.

The Primary objective: -

 To protect enough remaining rooms at a higher rate to satisfy the


projected demand for rooms at that rate, while at the same time
filling rooms that would otherwise have remained unsold. The
process is repeated for each rate level from rack rate on down.
 A second objective of limiting discounts by room type is to
encourage up-selling. This technique requires a sound estimate
of price elasticity and the probability of upgrading.

Duration Control or Duration Restrictions


Duration restriction is another tool of yield management. Duration control places time
constraints on accepting reservations, in order to protect sufficient space for multi-day
requests. For example, a hotel may refuse a reservation request for one-night stay, even
though rooms are available for that night, as accepting such a reservation will block
occupancy on adjacent days. Hotels located in a city generally witness lean occupancy
during weekends and high occupancy during week days.
For example, if Wednesday is close to selling out but adjacent nights are not, a hotel may
want to optimize its revenue potential for the last few remaining rooms on Wednesday by
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requiring multi-day stays, even at a discounted rate, rather than accepting reservations for
Wednesday only. Similarly, if the hotel is projected to be close to capacity Tuesday,
Wednesday, and Thursday, then accepting a one-night stay during any of those days may
be detrimental to the hotel's overall room revenue since it may block occupancy on the
other days. Hotels facing such situations may require that reservations for projected full-
occupancy periods must be for more than one night.

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

Measuring Yield

Revenue management is designed to measure revenue achievement. One of the principal


computations involved in revenue management is the hotel's yield statistic. The yield
statistic is the ratio of actual revenue to potential revenue. Actual revenue is the revenue
generated by the number of rooms sold. Potential revenue is the amount of money that
would be received if all rooms were sold at their rack rates (or, as is described below, at
the hotel's potential average rate).

Potential revenue can be determined in more than one way. Some properties calculate
their potential revenue as the amount that would be earned if all rooms were sold at the
double occupancy rate. Other properties calculate their potential revenue by taking into
account the percentage mix of rooms normally sold at both single and double occupancy.
The second method results in a lower total potential revenue figure, since single rooms
are assumed to be sold at less than double rooms. In fact, while it is unlikely that a hotel
will attain a potential that is based on 100 percent double occupancy (first method), a
hotel using the second method may actually be able to exceed its "potential" if demand
for double rooms exceeds sales mix projections.

Let us understand this concept with the help of an example. Hotel Sun Star has 600
rooms (200 single rooms and 400 double rooms). The hotel is currently running on 75 per
cent occupancy, with an average room rate of Rs 2,500. The hotel is offering:

 Single room at Rs 3,500 for single occupancy


 Single room at Rs 4,000 for double occupancy
 Double room at Rs 4,500 for single occupancy
 Double room at Rs 5,000 for double occupancy

Potential Average Single Rate


It is the ratio of the single occupancy revenue to the total number of rooms. Hotel Sun
Star, as in the above case, is offering rooms for single occupancy at different rates, based
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on the category of the rooms. If the hotel sells all rooms in single occupancy, the potential
room revenue will be:

Room Category No. of rooms Room Rate (in Rs.) Revenue at 100% single
Occupancy (in Rs.)
Single Room 200 Rs 3,500 7, 00,000
Double Room 400 Rs 4,500 18, 00,000
25, 00,000 (Total)
The potential average single rate can be calculated as under:

Potential average single rate= Single occupancy room revenue


Number of rooms (total)
= Rs 25, 00,000/600
= Rs 4,166.67
Potential Average Double Rate
It is the ratio of the double occupancy revenue to the total number of rooms. Hotel Sun
Star, as in the above case, is charging double occupancy at different rates, based on the
category of the rooms. If the hotel sells all rooms in double occupancy, the potential room
revenue will be:
Room Category No. of rooms Room Rate (in Rs.) Revenue at 100% Double
Occupancy (in Rs.)
Single Room 200 Rs 4,000 8, 00,000
Double Room 400 Rs 5,000 20, 00,000
28, 00,000 (Total)
The potential average double rate can be calculated as under:

Potential average double rate = Double occupancy room revenue


Number of rooms (total)

= Rs 28, 00,000/600
= Rs 4,666.66

Multiple Occupancy Percentage


Multiple occupancy percentage determines the average number of guests per room sold.
It is calculated as the ratio of the number of rooms occupied by more than one guest to
the number of occupied rooms. It represents the sales mix and helps in balancing rates
with future demand for occupancy. Let's suppose in the case of Hotel Sun Star, 270 rooms
are occupied by more than one guest. The multiple occupancy percentage can be
calculated as under:

Multiple occupancy percentage = No. of rooms occupied by more than one guest x 100
No. of occupied rooms
Or
No. of rooms occupied by more than one guest
Total number of rooms x Occupancy ratio
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Total no. of occupied rooms = No. of rooms x occupancy percentage


= 600 x 75%
= 450 rooms
Multiple occupancy percentage = 270/450 = 0.6 or 60%
Rate Spread
The mathematical difference between potential average double rate and potential average
single rate is called rate spread. The determination of a room rate spread among various
room types plays a vital role in the use of yield decisions in targeting specific market
segments for the hotel.

Rate Spread = Potential average double rate - Potential average single rate
= Rs 4,666.66 - 4,166.67
= Rs 50
Potential Average Rate
Potential average rate is a collective statistic that effectively combines the potential
average single rate, multiple occupancy percentage, and rate spread. It is calculated as
under:

Potential average rate = (Multiple occupancy percentage x Rate spread) +


Potential average single rate
=Rs (0.6 x 500) + 4166.67
= Rs 300 + 4166.67
= Rs 4466.57
Room Rate Achiever Factor
The percentage of the rack rate a hotel actually receives is contained in the hotel's
achievement factor, also referred to as the rate potentials percentage. The achievement
factor is generally calculated by dividing the actual average rate the hotel is currently
collecting by the potential average rate.

Achievement factor = Actual average rate/Potential average rate


= Rs 2500/Rs 4466.67
= 0.56

Yield Statistic

An important element in revenue management is the yield statistic. The yield statistic
calculation incorporates several of the previous formulas into a critical index. There are
various ways to express and calculate the yield statistic, all of which are equivalent:

Yield = Actual Rooms Revenue


Potential Rooms Revenue

Or

Yield = Total rooms sold x Actual average room rate


Total available rooms Potential average room rate
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Since, total rooms sold/total available rooms is the occupancy percentage and the actual
average room rate/potential average room rate is the achievement factor, therefore, yield
can also be calculated as:

Yield = Occupancy Percentage x Achievement Factor

In the case of Hotel Sun Star, the yield will be:


Yield = 0.75 x 0.56
= 0.42 or 42%
Instead of computing yield, some lodging operations prefer an alternatives statistic that
focuses on revenue per available room (RevPAR). The RevPAR can be calculated using
either of the following equations:

RevPAR = Actual Room Revenue


Number of Available Rooms

RevPAR = Occupancy Percentage x ADR (average daily rate)


Hotel Sun Star has 600 and sells 360 rooms for a total of Rs. 15, 00,000

RevPAR = Actual Room Revenue


Number of Available Rooms

= 15, 00,000 = 2500

600

RevPAR = Occupancy Percentage x ADR (average daily rate)

Occupancy Percentage = 360/600 = 0.6 or 60%

ADR = 15, 00,000/360 = 4166.66

RevPAR = 60% x 4166.66 = 2500

Using Revenue Management

All elements of revenue management should be viewed together in order to make an


appropriate decision. While the process is potentially complex, a failure to include
relevant factors may render revenue management efforts less than fully successful.

Yield statistics should be tracked daily. Tracking yield statistics for an extensive period of
time can be helpful to trend recognition. However, to use revenue management properly,
management must track yield statistics for future days. Future period calculations must be
done every business day, depending on how far in advance the hotel books its business. If
a hotel is currently at 50 percent yield for a day three weeks away, there may be plenty of
time to put strategies in place to increase the projected level of yield. Discounts may be
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opened to raise occupancy or closed to raise average rate. If achieving full potential room
revenue is not possible (and it usually is not), the front office manager must decide on the
best combination of rate and occupancy.

Each sales contract for group business should be reviewed individually. Contracts should
be compared with historical trends as well as with budgets. A hotel usually has a group
sales target or budgeted figure for each month. Each group should be examined to see if it
will contribute to meeting the budget. If current transient demand is strong and the group
will produce only minimal revenue, the hotel may consider not booking it. If demand is
weak, the hotel may decide to accept the group simply to create revenue by selling rooms
that would not otherwise be sold. Using group booking pace analyses will help
management determine whether the hotel is on track to reach its target.

Another factor is the actual group booking pattern already on the books. For example, a
hotel may have two days between groups that are not busy. Management may solicit a
lower-revenue-generating group to fill the gap. The opposite may also occur. A group
may desire space during a period when the hotel is close to filling its group rooms goal.
Adding the group may move the hotel group sales above its goal. While this appears to be
favorable, it may displace higher-rated transient business. If the group wants the hotel, it
may need to be quoted a higher than normal group rate to help make up for the revenue
lost through the displacement of transient guests.

The same type of analysis is needed for transient business. For example, due to the
discounts offered by the hotel, corporate and government business may be assigned the
standard category of rooms. As these standard rooms fill, the hotel may only have deluxe
rooms left to sell. If demand is not strong, management may decide to sell the deluxe
rooms at the standard rack rate to remain competitive. It is best to look at a combination
of group and transient business before making firm occupancy and rate decisions.

Since the objective of revenue management is to maximize revenue, tracking business by


revenue source helps determine when to allow discounted room rates. As various sources
of business are identified, each should be analyzed to understand its impact on total
revenue. Quite often, front office managers will authorize discounted room rates for
groups if the group has the potential to generate repeat customers.

A. Potential High and Low Demand Tactics

Revenue management strategies differ during high demand and low demand periods.

High Demand
During high demand periods, as indicated by the forecasts, the management would use
the following tactics:

 Close or restrict discounts to generate more revenue.


 Apply minimum length of stay restrictions carefully.
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 Reduce group room allocations as groups get very low room rates.
 Reduce or eliminate 6 p.m. holds to avoid last moment no-shows or cancellations.
 Tighten guarantee and cancellation policies to avoid last moment no-shows or
cancellations.
 Raise rates as consistent with competitors to generate optimum revenue.
 Consider a rate increase for packages instead of giving more discounts.
 Apply rack rates to higher category of rooms like suites and executive rooms.
 Select dates that are to be closed-to-arrivals.
 Apply deposits and guarantees to the last night of stay.

Low Demand
During low demand periods, as indicated by the forecasts, the management would use the
following tactics:
 Sell value and benefits like spa treatments.
 Offer packages and special offers.
 Keep discount categories like advance purchase rates, corporate rates open.
 Encourage upgrades.
 Offer stay-sensitive price incentives.
 Remove stay restrictions.
 Establish relationships with competitors.
 Lower rates to attract more guests and to generate more revenue for the hotel.

B. Implementing Yield Strategies

The manager has to determine what is the lowest rate, to be offered on a particular day.
This rate is known as “the Hurdle rate”. Rates below this will not be offered on a
particular day.

Staff may be offered incentives for selling above the hurdle rate. Incentives may be
provided for long-stay guests.

How to communicate Hurdle rates?

1. Post them in reservation and at reception.


2. Computers may automatically display them.

The yield strategies may change several times during a single day & it must be
communicated to the staff.

C. Available Strategies

i. Minimum Length of stay: A reservation must be for at least a specified number of


nights in order to be accepted. It helps a hotel to develop a relatively even occupancy
pattern. Common for resorts during peak periods. May also be used during special events
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or high occupancy period by other hotels. This is intended to keep an occupancy peak on
one day from reducing occupancy on the days before or after the peak.

ii. Closer-to-arrival strategy: This allows reservations to be taken for a certain date
as long as the guest arrives before that date (to avoid strain on that day due to too many
check-ins.)

iii. Sell-Through strategy: Works like a minimum length of stay requirement except
that the length of the required stay can begin before the date, the strategy is applied. This
strategy is effective when one has a peak in occupancy and the management does not
want the peak to adversely affect reservations on other side of the peak days.

Elements of Yield Management

While developing a successful yield strategy, the following elements are very important:

Elements of Yield Management

Group Transient Food & Local & Area- Special


Room Sales Room sales Beverage wide Activities Events
Activities

Group Room Sales By studying group booking data, hotels can anticipate group
behavior and accordingly make provisions (for cancellations, modifications, etc.) in
group reservations

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
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Group Wash  is the process whereby the Revenue Manager looks at the number of
rooms in contracted groups and raises, or usually lowers, that amount based on his
understanding of how the group bookings will eventually materialize. This is an area
where Revenue Managers take a risk to try to increase revenues by keeping inventory
available for more segments and channels to use. Many local markets have similar group
characteristics year round so Revenue managers will often apply a "typical" group wash
to all groups (for example, 15% across the board reduction) as they are booked and adjust
the wash later based on information from the sales force. This is helpful because it is
quick, and, if you almost always use 15%, you can keep track of your overall risks by
exception rather than keep track of various wash percentages for each group. When this
change in the inventory blocked is made without the customer's or meeting planners
knowledge it is called a "blind cut."
Group leads are sources of potential group business. Typically, they may come from
direct phone inquiries into the sales office (passive leads) or are generated from sales
efforts, like previous meetings held at competitive or sister hotels. Group leads are placed
into the group sales data base so that all sales people and the revenue manager know who
is assigned to work with the group.

Transient or Individual Room sales The front office management should monitor the
booking pace and lead-time of individual guests to understand how current reservations
compare with historical and anticipated rates.

Food and Beverage Activities All local food and beverage functions should be viewed in
the light of the potential for booking groups that need a meeting space, food and beverage
service, and guest rooms.

Local and Area-wide Activities Even when a hotel is not in the immediate vicinity of a
convention, individual guests and small groups, who have been displaced by the
convention may be referred to your hotel (as an overflow facility) and this may have a
tremendous impact on the hotel's revenue.

Special Events During special events (like 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.

Benefits of Yield Management

There are a lot of benefits associated with the use of yield management in the hospitality
sector, especially in hotels. These benefits include the following:

 Improved forecasting: Revenue management helps improve forecasting.


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 Improved seasonal pricing and inventory decisions: It helps in deciding the season
and off season pricing for accommodation products and also in making important
inventory decisions like renovation.

 Identification of new market segments: New market segments can be identified on


the basis of yield management.

 Identification of market segment demands: The demands of the targeted market


segments can be identified with yield management.

 Enhanced coordination between the front office and sales divisions: As the two
divisions work together to forecast and manage revenue and yield, it helps
enhance coordination between them.

 Determination of discounting activity: Yield management helps determine the


amount of discounts to be offered, depending on the dates and periods.

 Improved development of short-term and long-term business plans: Revenue


management helps develop business plans as the management can forecast the
revenue that can be generated and take measures to generate those figures.

 Establishment of a value-based rate structure: It helps define rates structures,


based on perceived values.

 Increased business and profits: Good revenue management helps increase revenue
and profits.

 Savings in labour costs and other operating expenses: As most of the revenue
management tools are computerized, it helps in saving labour costs and other
operating expenses.
 Initiation of consistent guest-contact scripting: Revenue management helps
initiate consistent contact with guests.

Challenges or Problems in Yield Management

The yield management techniques and the models of overbooking, if applied aptly ~
would definitely maximize the revenue of the hospitality industry. But there are some
challenges or problems in this, which include:

 Measuring performance of a yield management system: Occupancy rates and


yield are measures that are affected by external competition. Therefore, an ideal
measurement can be done using the opportunity model, i.e., if the hotel segments
the market and fixes different rates for different guests, then it has to see that the
revenue is generated from those rooms and it has to be utilized ideally.
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 Guest satisfaction: Some guests do not like the practice of differential pricing. In
evaluating the efficiency of yield management system, the tradeoff between
generating short-term profits and creating long-term guest loyalty needs to be
studied carefully.

 Employee malpractice: Revenue management may influence the employees to


follow wrong practices. For example, hotels might offer incentives to the staff for
selling higher category rooms and this might motivate the reservation agents to up
sell while making reservations. So the agents might not sell the basic category
rooms and offend certain guests.

Top Ten Revenue Management Mistakes Hotels Can Make


1. To recognize Revenue Management as a job done only by the Front Office of
a hotel.
2. To allow an internet discounting agency to sell our rooms at prices of their
choosing, then complain about the erosion of rate integrity.
3. As a revenue maximization strategy, to claim differentiating our hotel on
service excellence and then promote discounts, "value package" offerings, free
frequent guest points and other freebies.
4. To think that weekday strategy and weekend strategy can be the same.
5. To expect that the "flag" (brand) will fill the hotel without us lifting a finger.
6. To count revenue dollars as equal, regardless of the distribution channel they
came through.
7. To think that short term goals must always have priority over long term goals.
8. To be convinced that artificial intelligence (our RM software) is superior to
human intelligence.
9. To believe that the right price to charge for a room night is established on our
costs and ROI expectations.
10. To believe that discounting is an effective way of increasing revenue.

Yield Management Computer Software


Although the individual tasks of revenue management can be performed manually, the
most efficient means of handling data and generating yield statistics is through a
computer. Sophisticated revenue management software is available that can integrate
room demand and room price statistics and can simulate high revenue-producing product
scenarios.

Revenue management software does not make decisions for managers. It merely provides
information and support for managerial decisions. Since revenue management is often
quite complex, front office staff will not have the time to process the voluminous data
manually. Fortunately, a computer can store, retrieve, and manipulate large amounts of
data on a broad range of factors influencing room revenue. Over time, revenue
management software can help management create models that produce probable results
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of decisions. Decision models are based on historical data, forecasts, and booked
business.

In those industries where computer-based revenue management has been applied, the
following results have been observed:

 Continuous monitoring: a computerized revenue management system can track


and analyze business conditions 24 hours a day, seven days a week.

 Consistency: software can be programmed to respond to specific changes in the


marketplace with specific corporate or local management rules resident in the
software.

 Information availability: revenue management software can provide improved


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

 Performance tracking: a computer-based system is capable of analyzing sales and


revenue transactions occurring within a business period to determine how well
revenue management goals are being achieved.

Revenue management software is also able to generate an assortment of special reports.


The following are representative of revenue software output:

 Market segment report: provides information regarding customer mix. This


information is important for effective forecasting by market segment.

 Calendar/booking graph: presents room-night demands and volume of


reservations on a daily basis.

 Future arrival dates status report: furnishes demand data for each day of the week.
This report contains a variety of forecasting information that enables the
discovery of occupancy trends by comparative analysis of weekdays. It can be
designed to cover several future periods.

 Single arrival date history report: indicates the hotel's booking patterns (trends in
reservations). This report relates to the booking graph by documenting how a
specific day was constructed on the graph.

 Weekly recap report: contains the sell rates for rooms and the number of rooms
authorized and sold in marketing programs with special and/or discounted rates.

 Room statistics tracking sheet: tracks no-shows, guaranteed no-shows, walk-ins,


and turn-aways. This information can be instrumental in accurate forecasting.
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Since management is interested in revenue enhancement, computer-based revenue


management has become a popular hospitality industry software application.