Management in the hotel industry

Introduction

The aim of this paper is to present my findings and acquired knowledge about the yield & revenue management through describing its business practices in the travel and tourism industry.

I have decided to produce this essay about yield & revenue management in the hospitality industry, because my placement in a five star business hotel in Budapest provided many insights on this particular area.

During my placement I realised how interesting and challenging the day-to-day job of a yield manager could be.

At first let me start with clearing the mist about the term itself. It is often argued whether yield management and revenue management are separate or identical terms. According to my experiences and my research there is no difference between revenue and yield management apart from different industries using different terms to define the same things.

Yield management in hotels should rather be called revenue management since revenue and not (airline) yield is to be maximized.

What is yield management then?

“A revenue maximization technique which aims to increase net yield through the predicted allocation of available room capacity to predetermined market segments at optimal price” (Donaghy et al., 1997)

Or in layman’s terms we can say, selling the right product to the right customer at the right time at a right price thereby maximizing the overall revenue.

History

The brief history of yield management dates back to the 1970s, when following the deregulation of US airlines a severe competition began where a new and more professional method was needed to increase revenue. Airline companies wanted to fill their planes as optimally as possible to defeat the perishable nature of its services. Because in case a plane departs with only the half of the seats occupied it cannot be filled on the way and it cannot be stocked for later sale. In similar highly competitive circumstances, yield management began to be used in the hotel industry around the middle of the 1980s. At this time the industry was being confronted with excess capacity, severe short-term liquidity problems, and increasing business failure rates. Major hotel chains such as Hyatt, Marriott, Quality Inn, and Radisson decided to solve these difficulties by adopting yield management.

Preconditions of Yield Management

In order to be able to yield a hotel the following preconditions should be met:

Fixed capacity: Hotels usually have a fix number of rooms and venues, although, in some special cases new wings can be built or internal re-constructing can be implemented. Generally it is very unlikely that the capacity will increase. It also involves the fact that the product needs to be perishable to be yielded. “A room on Monday does not equal with that room on Tuesday”

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High fix costs: This factor is connected to the fixed capacity because the major characteristic of hotels is that they need huge capital to be built. Furthermore, building and planning new rooms costs a lot and takes a lot of time.

Low variable costs: Selling a room that was not occupied before comes with relatively low service costs.

Time-varied demand: To be able to yield it is necessary to have seasons to be able to distinguish between different rate periods easily.

Similarity of inventory units: The nature of the products needs to be somewhat similar to be able to use the same channels of communication and management.

Market segmentation: The market has to be segmented and clearly fenced to be able to target them with the yield management tools. Business or corporate clients who are usually time-sensitive are willing to pay higher rates whilst leisure travellers who tend to book longer in advance are rather price-sensitive. 

Historical demand and booking patterns: To have reliable historical data is crucial to be able to build a picture of the ever changing trends, however, it should not be the sole source of predicting future demand.

Pricing knowledge: Knowledgeable yield managers are needed, not only to understand the nature of services but also to set prices in a professional manner

Overbooking policy: Many hotels still do not allow overbooking and by that they have to face losses in revenue maximization. If overbooking is carefully managed no serious guest complaints will arise.

Information systems: Without the proper systems no hotel can keep up with the current pace of rate changing, and the complex management of the distributional channels.

The Yield Management Control Dimensions

In hotels, yield management is concerned with the market sensitive pricing of fixed room capacity relative to a hotel’s specific market segments. Kimes (1997) states therefore that yield management in hotels consists of two functions: rooms’ inventory management and pricing. However, I experienced that there is rather three major ways how yield management can control the revenue outcome:

Duration control

Room /rate control

Capacity management

From the customers point of view these decision making factors are basically the;

Time

Price

Quality

Duration control could be used by those group travellers that are likely to negotiate on the time of their event and the length of stay of their groups. Whereas, a leisure traveller cannot be asked to come on a different date since they probably took that period off. The situation is however more complex, because leisure travellers for instance will likely to take those time frames where the most cost efficient promotions, packages, offers or discounts are. And by that their timing can be also managed. On the other hand, seasons and high bargaining power of customers can influence the level of duration control as well.

Room/ Rate control is especially important by OTAs, online travel agencies, because according to Mourier (2010) just over 27% of the hotels worldwide have reported that most of their incomes are from OTAs or through online channels. The optimal management of finding the balance between the amounts of rooms sold through OTAs or through the hotels own website and sales team is alone a very challenging exercise. Due to the limits of this essay this time I won’t go into details about pricing strategies.

Capacity management should allocate the available inventory of the various room categories to the potential segments in a way that their demands, cancellations, no-shows are taken into consideration.

Finally, as I experienced the guests usually are in a high bargaining position and therefore they simply let the management decide whether to accept their request or reject it. Therefore, the most common type of control dimension is usually the Room/Rate control.

Measures of Yield Management’s Success

If we would like to get a real picture whether the yielding efforts are fruitful it is important to not only measure the occupancy, the average daily rate (ADR) and the volume, but to calculate the revenue per available room as well. Furthermore, all of these data should be viewed together. If we take for example a high occupancy it is not necessarily positive if it is reached with a very low rate.

Revpar can be calculated as follows:

REVPAR = AVERAGE RATE x OCCUPANCY

REVPAR allows us to measure the success of balancing occupancy and ADR resulting in maximized revenue.

Orkin (1988) defined revenue realized as ‘actual sales receipts’ and potential revenue as ‘the income secured if 100% of available room are sold at full rack rates.’ This indicates the following formula for calculating yield efficiency:

Note: The nearer the percentage to 100 the better the yield.

Limitations of Yield Management

First of all, education or the lack of it results in waste of time with the management heads and the GM if they have deeply rooted perceptions, such as, the more volume, occupancy, ADR the better.

Secondly, if it is over used, for instance, cancelling the booking made by travel agents during high occupancy periods in order to save travel agents commission. This will, however, result in loss to future business.

Thirdly, if the necessary IT infrastructure, or its further development and the reliable performance data is missing than really effective yield management is nearly impossible.

Finally, very often even major hotel chains employ only one yield manager per hotel, which given the complexity and the importance of this job makes hotels very vulnerable. For example, if the yield manager decides to leave or gets seriously sick than for an invaluable time (one or even two month) nobody will be able to effectively monitor the third party rates, set new rate codes for corporate clients and nobody will be there to act if there is a tax change and the whole rate structure needs to be modified.

Yield Management Supporting Tools

Yield management solutions are often a result of the following approaches:

EMRR (Expected Marginal Room Revenue)

Expert systems

Booking curves

Operations research models

Neural networks (in experimental phase only)

Here I would like to go into more detail in the Expert systems I worked with, such as, the Travelclick and the IDeaS. Both are ecommerce and revenue management solution provider companies. To be able to work with them a usually very high annual fee should be paid, and it is very difficult to measure whether how much did they contribute to the revenue of the hotel. Both system collects first the data of the hotel and provides in case of Travelclick market data of other competitors as well. Of course, the rates there are not always true or the rates of the same distributional channel, and this can mean a huge difference in rates. Some of the most important report that Travelclick provides:

Hotelligence : Benchmark of hotel’s historic GDS performance against the competitive set.

FuturePace: Allows seeing the hotel’s estimated future market share against the competitive set.

RateView: Gives an overview on the hotel’s and its competitors’ rate within the GDS and Internet channels.

SearchView: Provides the ranking of the hotel and its competitors on search engines and third-party sites, and monitor consumer review sites.

On the other hand, IDeaS tries to provide a Rate Optimization Services which is collecting all the necessary data of the hotel and gives the best rates for the given segments. However, it is more likely that entirely no company would set its rates just according to an algorithm, but as an advisor it is indeed very useful for yield managers. A great advantage is if the hotel has a developed hotel management system, like Opera, Hostware etc. because the necessary data can then be easily extracted for the reports.

Future of Yield Management

In the forthcoming years, the process for booking hotels will continue to change. The booking window will continue to shrink as today’s consumers not only require more flexibility with their vacation time, but they also tend to wait longer in hopes of finding the best deal. As well, new developments in technology are making it easier for the everyday consumer to book their hotel room, anytime and basically anywhere. With the appearance of the new smart-phones, a new dimension of mobile booking applications is going to be introduced, as well as more and more social media sites expected to add booking widgets that will enable customers to reserve room nights from websites like Facebook, or Iwiw. In fact, Priceline’s research shows that 58% of customers with mobile devices were within 20 miles of their hotel when they made the booking and 35% were within just a mile. Additionally, new booking engines will continue to emerge, as will online travel communities with booking capabilities, online tour operators, and even trip building websites that use algorithms. A very important aspect of the new era for the travel industry is that hoteliers aren’t just dealing with making their property seen among more channels but they are also dealing with more well-informed customers who know what they want, where to look for it and more importantly where to compare rates to get the best deals.

Mourier (2010) says that due to this rapidly changing environment, yield management really becomes less about trying to beat the competitor and more about a personal relationship with consumers.

Conclusion

To sum it up, I strongly believe that yield and revenue management makes a huge difference in today’s hotel management and it is great that it started to shift from the pure operation side to a sophisticated way of optimizing revenue. It might seem discriminating to customers but the way they feel about it is highly dependable on the communication channels they receive it, and since today it is so widely spread without any major concerns I do not think that it will cause problems. Especially, because the economy balances itself with occasional downturns when the bargaining power of customers increase tremendously especially in view of the tourism industry.