Yield Management In The Hotel Industry Tourism Essay

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5/12/16 Tourism Reference this

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Yield management was practice over the last fifteen to twenty years. According to Kimes, the yield management principle was first developed in the airline industry. Yield management systems primarily used in service industries like hotels, restaurants, airlines, train. Generally, companies used yield management systems to maximize their revenue or yield.

Smith, Leimkhuler, Darrow & Samules (1992) defined yield management as “a sophisticated form of managing supply and demand by acting at the same time on price and on available capacity. It is the best way to propose the best service on the best customer with the best price and at the best moment.” According to Kimes (2002), yield management is “methods that can help a firm sell the right inventory to the right customer at the right time for the right price.” So, yield management can be defined as an approach to sell the same product at the same time to the customers by charging different prices.

Yield management in hotel industry was evolved over the last ten years and many authors (Evangelista, 1999; Novelli, Schmitz & Spencer, 2006) confirm that there is a notable tendency to use new technologies in hotel industry. Yield management in hotel industry is concerned about the number of rooms that should be sold and at what price should be charge to customers. The objective of using yield management in hotel industry is to maximizing revenue per every available room. Jaucey, Mitchell & Slamet (1995) stated that yield management is “an integrated, continuous and systematic approach to maximizing room revenue through the manipulation of room rates in response to forecasted patterns of demand.” They suggest that yield management requires a close analysis of historical information to predict customers’ demand.

Yield management is suitable to use in hotel industry because it fulfill some characteristics of these system. According to Kimes (1989), yield management can be used when the following conditions are met. There are fixed capacity; segmentation into different market segment is possible; the inventory of the product is perishable; the products can be sold in advance; fluctuating demand; low marginal sales costs and high marginal production costs.

Once the hotel was built, it is difficult and expensive to increase the capacity. Therefore, the hotel manager must use the existing capacity in the best way in order to maximize room revenue. So, yield management systems can help hotel manager address this problem by predict the customer’s demand.

To make the yield management systems work, the company must be able to segment their market into different types of customers. Hotel manager should have different marketing plans for every market segment. So, every customer’s need can be fulfill.

Customers can be categorized and grouping together with those have similar characteristics, it is called market segment. There are three components of market segmentation. First, the characteristics of each customer group are defining and grouping. Second, implementing a demand model to customers and specify their attitudes about a reference transaction. The third component is their “willingness to pay”.

Of course, hotel rooms are perishable inventory item. When a room is not sold for one night, there is no income for this room at that night. Hotel manager cannot put the room into inventory and use it at other time. Airlines and rental car industry also face the same problem.

Some hotels sell most of their rooms in advance, but in some situation, reservations are made well in advance of the day desired. When the rooms are sold in advance, hotel manager faced with uncertainty. Some questions are appearing like charge a low rate price to the group of customers or wait the customer who willing to pay higher price appear? Are the customers who willing to pay higher price will reserved for the same rooms? So, these questions can be address by using yield management systems.

Hotel industry is the industry which faces fluctuating demand patterns. Customer’s demand are varies in a year. Yield management system helps manager predict the demand fluctuation and manager can plan some strategies to maximize their revenue. For example, higher price can charge to customers during the peak demand like school holidays or public holidays; otherwise, manager can decrease the price during the slow time.

Hotel industry also met the characteristic of low marginal sales costs. When a room was sold, it does not incur much more cost to sell another room. This is because the hotel and staff already at place. On the other hand, hotel industry faces high production costs. When all rooms were sold, and a customer wants a room, additional rooms are cannot simply built because the capacity was fixed.

Yield management systems may result in many advantages to the company and give that company a competitive edge. Many studies have shown the positive effect on the performance of the company by using yield management systems. Esse (2003) shows that yield management allows a company to offer customers high contribution, which develops a much better performance.

Apart from this, yield management systems also may results in some problem to companies. It could result in alienated customers. There are highly competitive in hotel industry, customers may not want to pay different price for the same room. So, they might feel unfair and go to the competitors who charge lower price. According to Kimes (2002), “the customer perceives a product price as fair for the price of a good to increase if the costs increase in order to maintain profit. They however don’t feel that increasing the price in order to increase the profit is a fair practice.”

To address the problem of alienated customers, Kimes (2002) suggest three solutions to it. First, the company giving the customer a higher reference price and then providing them with discounts. Second solution, adding additional services to the product and then increase the price. The third solution is selling the product as part of a package. The final solution is attaching restrictions to the discounts as to make the discounts be perceived as being fair.

Employee morale problems may occur when the company use yield management. Yield management systems are more about guesswork of how many rooms to sell and what price to charge, but it also requires judgment from hotel employees. If the systems are not structure well to allow some latitude into the price setting, the people who will use it may be grow to resent the system.

Besides that, yield management systems also can cause problem on incentive and reward systems. Yield management systems can cause problem for group sales department. Reward or incentive of salespeople in these department are depends on the amount of sales they make. When sales increase, their reward or incentives also increase. But a yield management system might indicate that the low rate price for a group sale is not beneficial. So, the incentive and reward systems must be changed. If not, the salespeople might think that the implementation of yield management is work against them.

To ensure the yield management systems effective, an extensive training of all employees are needed. Every employee must understand the purpose of implementing the yield management, how it works, and what the effect of the system on their jobs. So, it needs a careful planning and training from top management.

Finally, commitments from top management are very important. Without this, yield management systems will fail. So, the hotel manager must strongly commit to it, have the necessary data and have a strong information system. Hotel manager must fully understand the implications of implementing yield management systems on managerial aspect and able to make adjustment.

http://www.turpade.org/docs/articulos/2008_OCT_Yield_Management.pdf

http://www.timsmet.com/literature%20review.pdf

http://www.cheaphosting4you.com/casadana.net/pgdh/CORNELL/Center%20for%20Hospitality%20Research%20-%20Reports/Basics%20of%20Yield%20Management.pdf

http://www.yield4education.com/literature-review

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