Why Yield Management is Important When it Comes to Staying Competitive in the Hotel Industry

If you are in the hospitality industry then yield management is something you should be aware of. Many hoteliers are confused about yield management and how to use it correctly, so we’re here to break it down so you can understand how to correctly use yield to maximize your hotel’s profits.

yield management

What is yield management?

Yield management is a pricing strategy that businesses use to maximize revenue. The basic idea behind yield management is to charge different prices for the same product or service based on demand, time and other factors. For example, an airline might charge more for a ticket that is bought last minute than one that is bought months in advance.

Yield management In the hotel industry

Yield management is used to optimize room rates based on demand. Hotels use yield management to price rooms in a way that maximizes revenue while also taking into account things like occupancy levels and advance bookings. Hotels can predict demand by understanding historical data and trends to plan for future demand and make smart adjustments based on this strategy.

Hotel revenue management seems similar and is often confused for yield management, however you should not get the two confused. Hotel revenue management takes into account selling price, sales volume, and considers factors like cost of selling and much more. Yield management focuses only on inventory control through room prices and sales volume. In other words, determining room price by measuring demand based on time of year, number of rooms occupied, and other external factors.

How to calculate yield management

yield management formula

There are a few different ways to calculate yield management. The most common method is actually quite simple: Take your hotels’ achieved revenue and divide it by maximum potential revenue.

For example:
You have 40 total rooms in your hotel, and each room is sold for $100 meaning your total potential revenue is $4,000. But let’s say you didn’t sell out all of the rooms and only 36 rooms were sold, then your revenue achieved would be $3,600. Therefore your yield would be 90% ($3,600/$4,000).

A 90% yield is relatively good, but you alway want to aim to increase to meet your maximum potential revenue and increase profits. You can do this by constantly adapting to the current trends and having the room pricing be in-line with demand.

Why yield management is important

Hoteliers can utilize yield management to ensure their hotel is always operating at peak efficiency. Keeping a close eye on yield helps hotels make smart and quick pricing decisions to increase revenue.

How to increase revenue with yield management

benefits of yield management

Boost your hotels revenue by using these yield management approaches:

  • Use historical data. Look at past conditions to set the price for your hotel rooms. By taking into account historical demand and booking peaks you can correctly plan for the future.
  • Be aware of trends. Understand what is going on around you so that you can anticipate demand. For example a sudden popular concert in your hotel’s area can increase demand for booking that was not anticipated in prior years. Another example is COVID-19 which decreased demand for booking. Stay in-line with the current trends so that you can better plan for demand and hotel pricing.
  • Apply dynamic pricing strategies. Not all guests are created equal, and not all days are created equal. Weekends usually have a higher booking demand and therefore should have higher booking rates. In addition, guests who are traveling for business are more likely to return if they are offered competitive rates or points for recurring stays.
  • Know competitors rates. When guests book they are not only looking at your hotel, but other hotels that compare to you in your area, and you should be doing the same. You want to stay competitive when compared to other hotels so that guests are more likely to choose your hotel over your competitors.
  • Offer room upgrades. If you know that your basic rooms are sold out and more likely to book up over your high-priced rooms then offer guests checking-in the option to upgrade at a competitive price. This frees up the higher demanded rooms and increases the overall amount of booked rooms.

You can also use yield management to price rooms differently based on time. For example, hoteliers might charge more for a room that is booked last minute than one that is booked in advance. This is because people who book last minute are more willing to pay a higher rate due to lack of availability compared to those who planned in advance.

Summary

Using yield management is a powerful tool that can help hotels maximize revenue and occupancy levels. Understanding yield management brings you one step closer to increasing hotel revenue and meeting your goals. However, it is important to also utilize other hotel metrics to stay competitive and make the smartest decisions for your hospitality establishment.

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