What is Yield Management in Hospitality?

Hotel yield management is a powerful tool that helps hotels maximize their revenue. It involves analyzing customer data, predicting customer demand and adjusting prices accordingly. By using this technique, hotels can ensure that they are able to fill up their rooms and make the most out of their occupancy rate.

In this article, we will explore how hotel yield management works and how it can benefit your hotel business. We will also look at some of the best practices for using this tool to increase your hotel’s profitability.

Although we wish it were not so, money is important, especially when running a business. Being able to follow the dynamics of your hotel’s costs, economic components and, in general, yield management strategies in hotels is crucial for the successful management of your hotel. 

Definition: once upon a time in the airline industry…

The Airline industry? Yes. 

In the early 1900s, airlines were not a profitable business. Airlines were struggling to find a way to make money on flights. One of the ways they found was revenue management. This allowed airlines to sell more tickets and make more money in the process. It was Robert Crandall, the former chairman and the CEO of American Airlines, who used this system for the first time at the end of the 70’s.  

Yield management, in fact, is a system that was invented to manage all aspects of revenue for an airline, including ticket sales, reservations, airline seat availability, and pricing. It’s used by airlines to maximize the volumes of sales by selling more seats on planes at higher prices while maintaining a full flight schedule. 

So, Airlines and hotels have one single thing in common – they sell a fixed time-limited inventory. One problem associated with fixed resources, such as hotels, is that a permanently fixed price all year round will not come in handy if your goals are to maximize revenue. Furthermore, the customer landscape of the hospitality industry has drastically changed over the past decade, as seasonal opportunities such as holidays, events, and trends come and go in a flash. So how can you leverage such opportunities to obtain last-minute bookings and take last-minute, efficient strategic decisions? Having a well-defined yield management strategy – a key pricing strategy that will help you maximize revenue.

Here, we explore in-depth what yield management in a hotel is, and the associated benefits. But first, let’s examine the basics!

Put simply, the definition of yield management in a hotel is a pricing strategy that entails selling the right room to the right customer at the right time and at the right price. Don’t be overwhelmed by the definition. It simply means that as a hotelier – essentially a seller – you can sell a single room to different people at the right time. Obviously, at different rates depending on opportunities, demand, season, occupancy rate, competitor price and a lot of other factors, like perishable inventory and a range of external factors linked to your accommodation, that you and only you could know.

Our property management system allows you to allocate rooms and access guest details all from a single dashboard, relieving you of planning-related stress.

Yield management involves predicting consumer behaviour based on these factors, and shifting your approach to influence people while maximizing the amount of money. To illustrate, picture a scenario where your city is just about to hold a famous festival in a few days. One yield management approach that would maximize revenue is ‘time penalty’ – gradually increasing prices to encourage customers to book your hotel rooms early and helping you justify higher prices for bookings made the night prior or during the festival.

Calculating yield management: techniques and ideas

Hotel yield management formulas

Revenue management is the process of forecasting demand and allocating that demand to a particular product or service. There are a number of several types of formulas that businesses can use, depending on the type of business, their needs, and the available data.

One formula is the price elasticity formula. This formula takes historical data on prices and sales volumes to forecast future sales volume at different prices.

Another possible yield management formula is called the “narrow focus” approach. This type of revenue management focuses on one product or service in order to maximize its profitability by increasing its market share and decreasing its competition.

Yield management is an important factor for any company as it can help them increase profits, reduce losses, and plan for future growth. Here, you can consult another article with all the revenue management strategies to become the perfect seller of your rooms. 

Mathematically, yield management is calculated using the following formula:

Yield management = (Achieved Revenue / Maximum Potential Revenue) x 100.

So if you have 10 rooms going for £100 each, your maximum potential revenue is £1,000. If you have 5 rooms going for £150 each on a given night, your achieved revenue would be £700. As such, your yield percentage would be 75%.

To be precise and to have a complete vision of your revenue, you will need some performance indices, and you have 3 options: do it by yourself, hire a yield manager or –  the best one, if I may – it’s using a Yield management software. 

Yield management manager: meaning and functions 

A yield management manager’s job is to analyse the customer’s needs, and then find the best way to meet those needs. They must also be able to predict customer behaviour, thanks to an analysis of the market segment, and take advantage of new opportunities, like changing prices at the right time. 

The yield management manager needs to be skilled in order to make the best decisions for their company: they require excellent communication skills, analytical skills, problem-solving skills, and organization skills. 

What is a yield management system or software?

Yield management: what is the perfect strategy to have the perfect pricing?

A yield management system is a tool that helps sellers to maximize their profits by pricing their products and services optimally.

The Yield management systems are used to analyse the customer’s behaviour, with a deep analysis of the market segment that they want to hit, and then adjust the prices accordingly. The system can be used to optimize the prices for different customers with different needs and budgets.

Amenitiz PriceAdvisor is a perfect solution because it’s a yield Management System that helps hotels to manage their room inventory and price their rooms on a daily basis in a dynamic and coherent way. 

The Amenitiz PriceAdvisor tool offers a suggestion to hotels that are looking for ways to maximize revenue, increase occupancy, and improve customer satisfaction.

Amenitiz is a pricing intelligence platform that helps retailers and brands find the best price for their products. The company’s Amenitiz PriceAdvisor tool lets retailers and brands set the price for their products in real-time, based on the prices of competitors.

The tool also provides data about what prices are most likely to sell out, how much inventory is left, and which products are trending. This data helps retailers and brands make strategic decisions about how much to charge for their products.

What are the benefits of yield management in hotels?

1) Elements

There are multiple benefits of yield management, but let us examine a few major ones.

2) Reducing pricing errors

With an effective and reliable yield management strategy in place, hoteliers ensure that there is no room for pricing errors because prices are stipulated based on demand and supply forecasting rather than guests’ booking behaviours. You can easily foresee future changes and promptly act on them without making any miscalculated risks. Such risks, common among hoteliers, involve randomly changing prices when the high season is around the corner.

3) Effective customer segmentation

Marketing segmentation, a strategy that entails identifying a particular group of consumers to present them with products that appeal to their interests, is very important in the hospitality industry.

As a hotelier, you’ve interacted with a diverse set of guests, ranging from lone travellers to families or corporate guests. If your hotel’s goal has been to cater to a particular market segment, then you are missing out on segments that may be just as profitable. Yield management helps you identify and tap into segments that you are missing out on.

For instance, with an effective forecast, you can choose to offer low prices to guests who book early and spend more time on the property such as leisure-oriented family groups and charge high prices to corporate guests who often show up at short notice and only stay for a short period of time.

4) Understanding booking patterns

Different travellers have different preferences and behaviour. Some prefer booking earlier and others on short notice. If you are well aware of such consumer behaviour, yield management will allow you to be more flexible with your prices.

For instance, and as mentioned, you can adopt the ‘time penalty’ strategy to maximize revenue. This includes offering lower prices to early bookers and penalizing last-minute bookers with higher prices.

Indeed, yield management is an effective pricing strategy whose benefits cannot be overlooked. Throughout the year, you are able to maintain a steady flow of revenue, by establishing higher and appropriate prices that guests are willing to pay based on multiple factors. There are plenty of good reasons why your hotel should embrace this strategy as well!

FAQ: Importance of Yield management

What is the main purpose of yield management, in simple words?

In simple terms, yield management is a strategy that provides the right product to the right customer at the right time. It is a process of managing inventory and maximizing profits by ensuring no empty rooms.

The main purpose of yield management is to maximize profits by making sure that there are no empty rooms, so improving revenues.

What are the principles of yield management?

The goal of yield management is to maximize revenue while maintaining a high level of guest satisfaction. The general idea is that it’s better for a hotel to have some customers who leave happy with a cheaper room than it is for the hotel to have empty rooms that cost more because they are clean, well-maintained and offer more amenities.

What is yield management? Examples to understand better

So if you have 10 rooms going for £100 each, your maximum potential revenue is £1,000. If you have 5 rooms going for £150 each on a given night, your achieved revenue would be £700. As such, your yield percentage would be 75%.

See more about Yield management

For today we’re finished with the yield management topic, but if you find this topic interesting and want to learn more, you can have a look at The hotel club website and our free course about revenue management.

We have also other interesting articles about Revenue Management and about the most important hotel indices to build a Yield management strategy