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The Basics of Yield Management Cornell University School of Hotel Administration The Scholarly Commons Articles and Chapters School of Hotel Administration Collection 11-1989 The aB sics of Yield Management Sheryl E. Kimes Cornell University, [email protected] Follow this and additional works at: http://scholarship.sha.cornell.edu/articles Part of the Hospitality Administration and Management Commons Recommended Citation Kimes, S. E. (1989). The asicb s of yield management [Electronic version]. Cornell Hotel and Restaurant Administration Quarterly, 30(3), 14-19. Retrieved [insert date], from Cornell University, School of Hospitality Administration site: http://scholarship.sha.cornell.edu/articles/456/ This Article or Chapter is brought to you for free and open access by the School of Hotel Administration Collection at The choS larly Commons. It has been accepted for inclusion in Articles and Chapters by an authorized administrator of The choS larly Commons. For more information, please contact [email protected]. The aB sics of Yield Management Abstract Yield-management systems have boosted revenue at many properties, but these electronic tools are not always compatible with the operating atmosphere of a hotel. If you want to introduce yield management at your property, you may need to make some changes first. Keywords hotel industry, yield management, revenue management Disciplines Hospitality Administration and Management Comments Required Publisher Statement © Cornell University. Reprinted with permission. All rights reserved. This article or chapter is available at The choS larly Commons: http://scholarship.sha.cornell.edu/articles/456 The Basics of Yield Management Yield-management systems have boosted revenue at many properties, but these electronic tools are not always compatible with the operating atmosphere of a hotel. If you want to introduce yield management at your property, you may need to make some changes first by Sheryl E. Kimes YIELD MANAGEMENT is be- coming part of the standard oper- ating procedure for many hotels with sophisticated electronic prop- erty-management systems. Appro- priately tailored to the hotels they serve, yield-management systems generally increase revenue and take much of the guesswork out of rooms-management decisions. However, installing a yield-man- agement system can create prob- lems if management does not lay the proper groundwork. This arti- cle addresses the issues operators should consider in determining whether yield management is right for their property and discusses Sheryl E, Kimes is an assistant profes- sor of quantitative methods at the School of Hotel Administration at Cor- nell University. She has a Ph.D. in op- erations management from the Univer- sity of Texas—Austin. 14 THFrORMFII HR A OliARTFRI Y some of the measures managers ment process deals with how differ- should take to pave the way for suc- ent types of rooms are to be allo- cessful adoption of such systems. cated to demand. The pricing procedure is more concerned with What is Yield Management? the best prices to charge in differ- Basically, yield management is the ent situations. In this article, I will For a yield-management process of allocating the right type concentrate primarily on the room- program to be effective, the of capacity to the right kind of cus- inventory component of yield firm must be able to segment tomer at the right price so as to management. its market into different types maximize revenue or yield. In the case of hotels, yield management is Where Does Yield of customers. concerned with the number of Management Work? rooms that should be sold at var- The airline industry is considered ious rate levels. Obviously, a trade- the birthplace of yield manage- off exists. The manager would pre- ment. After deregulation in the late fer to sell all rooms at the highest 1970s, airline competition in- rate possible, but since this rarely is creased, and the airlines tried to feasible, following this policy may operate their planes as efficiently as lead to empty rooms and lost reve- possible. Yield management was nue. Conversely, if a hotel fills its one of the methods developed as a rooms with low-price customers, way of increasing competitive ad- the revenue that could have been vantage and increasing revenue. In obtained from higher rates will be airlines, yield management is con- lost. The objective of yield manage- cerned with selling the right seat to ment, then, is to define what these the right customer at the right trade-offs should be. How many price so as to maximize yield. rooms should be allocated to and The airline and hotel industries protected for each market segment have several characteristics in com- over time? mon that make them ideal candi- Or kin1 defined the yield statistic dates for yield-management sys- as the occupancy rate multiplied by tems. Both have relatively fixed the rate efficiency. The rate effi- capacities. Once an airplane has ciency is the average room rate di- been purchased or a hotel has been vided by the maximum room rate. built, it is rather difficult and ex- As he points out, hotel managers pensive to increase capacity. The need to be concerned with maxi- idea, then, is to use your capacity in mizing yield, or revenue, rather the best (most profitable) way than focusing only on a high occu- possible. pancy rate or a high average room Yield-management techniques rate. Another definition of yield are appropriate when a firm is op- management, borrowed from the erating with a relatively fixed ca- airline industry, is maximizing rev- pacity, when demand can be seg- enue (or yield) per available room. mented into clearly identified This may be a more appropriate partitions, when inventory is per- definition because of the difficulty ishable, when the product is sold in defining the maximum room well in advance, when demand fluc- rate. tuates substantially, and when mar- Yield management consists of ginal sales costs are low but mar- two separate but related parts: ginal production costs are high. room-inventory management and Ability to segment markets. For pricing. The inventory-manage- a yield-management program to be !Eric B. Orkin, “Boosting Your Bottom Line effective, the firm must be able to with Yield Management ” The Cornell Hotel and Res- segment its market into different taurant Administration Quarterly, 28, No. 4 (Febru- ary 1988), pp. 52-56. types of customers. For example, NOVEMBER 1MQ EXHIBIT 1 Typical individual-sales booking curve Rooms sold Days before This booking pattern is typical of business-class hotels that cater to individual business travelers. Occasionally, business travelers book in advance in anticipation of an upcoming meeting or conference. But it’s more common for business travelers to book a hotel room immediately before a trip, either because the trip itself was scheduled on short notice in response to a specific need or because busy executives hesitate to book ahead, not knowing if something more pressing might interfere with travel plans. When a hotel’s booking pattern approximates this curve, the yield-management system will discourage early bookings at lower rates and advise management to keep rooms available at higher, late- booking rates for the predictable high volume of last-minute reservations. business and pleasure travelers can forever, and the hotel manager can- tomers will appear? How many su- be split easily into separate groups. not put it into inventory for use at per-saver rooms should be sold? The basic idea is that hotel manag- some other time. Airlines and Might someone who would pay a ers will have different marketing rental-car firms face similar higher rate want to reserve those plans for the different types of cus- problems. same rooms? With a good yield- tomers. Hoteliers would like to be Product sold in advance. Some management system, these types of able to sell these segments rooms transient hotels sell most of their questions can be answered. that best fit their needs. In the case rooms a few days in advance, but in Fluctuating demand. Hotels face of pleasure travelers, lower-priced some situations, reservations are widely fluctuating demand pat- rooms that must be booked a cer- made well in advance of the day de- terns. Demand varies by season of tain length of time ahead may be sired. In the case of group sales, the year, by day of the month, and most appropriate. With business reservations may be made several by time of the week. Yield manage- travelers, higher-priced rooms that years in advance. When the prod- ment can be used to help temper have no time penalty may work best. uct is sold in advance, the manager some of the demand fluctuations by Perishable inventory. Clearly, is faced with uncertainty. Should a helping to increase occupancy dur- hotel rooms are a perishable inven- group that wants to pay a low rate ing slow times (by decreasing price) tory item. If the room is not sold be accepted, or should the manager and by increasing revenue during one night, that room-night is lost wait to see if higher-paying cus- busy times (by increasing price). If TH F rO R M F I I H P A OIJARTFRI Y EXHIBIT 2 Typical group-business booking curve Rooms sold Days before Unlike individual business travelers, groups generally make travel plans in advance to ensure that a hotel will have a sufficient number of rooms available to accommodate them. This booking pattern, typical of a hotel that caters to groups, shows that the hotel reserves over 70 percent of its rooms a month or more in advance. By three weeks before a given date, the hotel has generally sold all but a handful of the rooms it will be able to sell for that date. When a hotel’s booking history approximates this curve, the yield-management system will recommend accepting group reservations well in advance at appropriate group rates.
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