Yield Management

Yield management is a strategic pricing method focused on maximizing revenue. It involves analyzing consumer behavior and adjusting prices based on various factors like timing, demand, and inventory availability. This approach is important as it helps businesses, especially in hospitality and travel, optimize income by selling the right product to the right customer at the right time.

Key Takeaways

  • Yield Management Defined: It’s a strategy focusing on selling the right product (like a hotel room) to the right customer at the right time and price, maximizing revenue from finite resources.
  • Importance of Yield Management: This approach helps hotel owners maximize earnings from their limited number of rooms by using past data and industry trends to anticipate demand and set prices.
  • Yield vs. Revenue Management: Although similar, yield management focuses more on sales volume and pricing to achieve the best revenue yield.
  • Factors Affecting Demand: Considers elements like seasonality, local events, and market trends to predict demand and adjust prices accordingly.
  • Dynamic Pricing: Emphasizes flexible pricing strategies that vary based on real-time market conditions and customer demand to optimize revenue.

Introduction

Yield management is a pricing strategy commonly utilized by businesses in hospitality, air travel, and other tourism-related fields to generate maximum revenue from perishable inventory (e.g., hotel rooms or airline seats). Here, we answer the question ‘What is yield management?’ and explain why it is useful for hospitality hotel owners and others.

Defining Yield Management

In simple terms, yield management is a strategy based on selling to the right customer at the right time for the right price. Within the hotel industry, this typically means selling the right room to the right guest(s) at the best possible time for the highest amount to maximize revenue.

Yield management shares many similarities with the revenue management concept, but it has existed for a long time. Nevertheless, it is important to note that yield management has a narrow focus and is concerned only with the selling price and the sales volume to achieve the best possible revenue yield.

The basic concept behind yield management is that certain fixed, time-limited resources, such as hotel rooms, can be sold for different prices based on the time of year, the level of demand, the number of rooms already sold, and a wide range of other external factors.

Because of the number of variables involved in the process, the same product (e.g., a hotel room) can be sold to two customers for different prices. Yield management strategies take a data-driven approach to ensuring pricing is adjusted to maximize business results.

Video: What Is Yield Management?

Why Is Yield Management Important?

Adopting a yield management strategy allows hotel owners to maximize the money they make from a finite number of rooms that need to be sold by specific times. Managers can use past performance data and general industry trends to anticipate demand and respond accordingly.

Yield management also allows hospitality businesses to optimize the pricing and selling strategy of their single most important resource – their available rooms. This allows hotel owners, for example, to get the basics of their business right by maximizing revenue from rooms alone. According to the Hotel Yield Management Practices Across Multiple Electronic Distribution Channels Research by ResearchGate, yield management proves to be profitable as businesses report an immediate 5-10% increase in revenue.

What Is Yield Management - Why Is Yield Management Important

Strategies of Hotel Yield Management

This educational table outlines key strategies for effective yield management in the hotel industry, detailing how each strategy can be implemented and the expected impact on revenue. Understanding these approaches allows hotels to optimize pricing, manage demand, and ultimately enhance profitability, ensuring that they cater efficiently to market dynamics and customer behavior.

Strategy Implementation Approach Expected Outcome for Revenue
Segmenting Market Classify customers based on their value and booking behavior. Maximizes revenue by targeting and tailoring offers to different segments.
Dynamic Pricing Adjust room rates in real-time based on demand, season, and occupancy. Increases revenue by selling rooms at the best possible price at any given time.
Overbooking Management Calculate and apply a certain level of overbooking based on historical data and cancellation rates. Reduces the impact of no-shows and cancellations, optimizing room revenue.
Length of Stay Control Set minimum or maximum stay requirements during high-demand periods. Ensures optimal room availability and pricing during peak times, enhancing revenue.
Package and Bundle Offers Create attractive packages combining rooms with other services (dining, spa, tours). Encourages bookings and increases spend on ancillary services, boosting overall revenue.
Channel Management Optimize distribution across various booking channels based on cost and reach. Balances exposure and lowers commission costs by prioritizing the most profitable channels.
Inventory Control Adjust available inventory on different platforms to match demand forecasts. Prevents underselling or overselling, ensuring maximum revenue from available rooms.
Customer Loyalty Programs Develop and promote loyalty programs to encourage repeat business. Increases direct bookings and customer retention, leading to higher long-term revenue.

Yield Management vs. Revenue Management

Within hotel management, yield and revenue management are two of the most useful tools available to managers. They allow them to maximize the money they make from guests. Although the two concepts are closely linked and share many similarities, they also have some important differences. For more detailed information about revenue management, please also read the article “What is Revenue Management?”.

What Is Yield Management FAQs

Within hospitality, yield management describes the practice of adopting a variable pricing strategy for rooms and services, based on demand. Yield management is underpinned by the idea that assets like hotel rooms can be sold for different prices at different times and in different circumstances. Effective yield management involves selling the right product to the right customer at the right time, to maximize revenue yield.

A good example of yield management in action is adjusting room rates based on demand forecasts and occupancy levels. Many hotels increase room rates in times of high demand, like in peak seasons or around events, to maximize revenue. Conversely, when demand is low, discounts can help to ensure rooms are sold, rather than left empty.

Within business, yield refers to the amount of income being generated, as a percentage of what could be generated. In the context of yield management within hospitality, it refers to the revenue generated per available room or service. Measuring yield allows you to understand how effective your pricing strategy and inventory utilization are.

Yield can be calculated by dividing the actual revenue your rooms and services generate by the potential revenue if all of those rooms and services were sold at full price. The formula for this calculation is:

Yield = (Actual Revenue / Potential Revenue) x 100.

Yield management can cause a certain amount of customer dissatisfaction due to price fluctuations, which brings a risk of alienating loyal customers. Furthermore, accurately forecasting demand is complex and requires sophisticated software and trained staff who know how to use it properly.

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This article is written by:

Martijn Barten
Hi, I am Martijn Barten, founder of Revfine.com. I am specialized in optimizing revenue by combining revenue management with marketing strategies. I have over 15 years of experience developing, implementing, and managing revenue management and marketing strategies and processes for individual properties and multi-properties.