What is Yield Management?
Yield management is used to manage demand for services, in order to maximize sales using price adjustments. Closely related to revenue management – and often used synonymously – yield management plays a crucial role, especially in the hotel industry. In the following, you will read what yield management exactly means, how it differs from revenue management, and what you should know about it in the hotel industry.
Table of Contents:
- Yield management = Measures for revenue optimization by means of demand management and price differentiation → What is the definition of yield management?
- A component of revenue management → What is the difference between yield and revenue management?
- Yield management works with demand forecasts in order to utilize availabilities in the best possible way → Why is yield management important?
- Keeping an eye on guest segments and their price sensitivity → How does yield management work in hotels?
- Important indicators include guest segments, their booking behaviour and willingness to pay, factors influencing demand, market prices → What are the key performance indicators for yield management?
What is the definition of yield management?
Yield management is a system for maximizing both revenue and profit through dynamic price adjustments. To do this, it is necessary to understand and ideally anticipate demand in order to take advantage of guests’ varying willingness to pay when pricing an offer.
Yield management is particularly popular in industries with a high proportion of services, as the respective offers have to be sold at certain times because the revenue from them cannot be added later. A hotel room that is empty one night, cannot be sold twice the next night. Alternatively, a seat on an airplane cannot be filled twice after a flight has taken off. The revenue that would have been possible in each case has been lost.
In order to make full use of capacity, yield management is used to differentiate prices in such a way that as much revenue as possible is generated. Supply and demand are matched as closely as possible.
Yield management is closely related to revenue management, but is only part of it. The differences are explained below.
What is the difference between yield and revenue management?
Is there a difference between yield and revenue management? The two terms are often used synonymously, and the distinction is not always clear. In our view of the concepts, revenue management is broader and includes the entire strategy for revenue optimization. Based on various key indicators, forecasts are developed as to how the booking behaviour of guests may develop. From this, a suitable pricing strategy is derived.
The operational implementation of this strategy is yield management – i.e. maximizing revenue by setting different prices for different guests at different times via different channels. Yield management does not include the cost side, but it is a subarea of revenue management and not quite as complex. Read our article on revenue management to find out exactly what is included in revenue management and which key indicators you should collect for this purpose.
Why is yield management important?
The targeted management of revenue can be vital, especially for a company in the service sector. The goal is always to sell the right offer to the right customer or guest at the right price and time through the appropriate distribution channel.
This requires that you know your customer groups and can distinguish between the different booking behaviours. If you are involved in yield management, knowledge of this is indispensable. Based on this, you can then systematically optimize the demand of your customers and set your prices in the optimal ratio.
The benefits of yield management are:
- Utilization is optimized by means of dynamic price adjustments.
- The ranging willingness to pay of your customers is exploited.
- Your prices are adjusted to the respective customer segment.
- Your revenue is maximized.
- You actively control the availability of your offer, which leads to planning reliability and synergy effects.
- You can design price or service packages that match your customers’ willingness to pay.
How does yield management work in hotels?
As in many tourism sectors, yield management is of particular importance in hotels: a fixed number of rooms must be sold to the right guest at the right price and at the right time in order to avoid being vacant. In hotels, it is therefore a matter of optimally matching supply and demand for hotel rooms as well as meeting rooms for conferences. The goal of this is to maximize hotel revenue.
To optimize pricing, there are a number of key questions you should ask yourself:
- Which guest segments am I targeting – e.g., business or leisure travellers, group or individual travellers?
- What is their respective price sensitivity? Business travellers are often less price-sensitive than leisure guests.
- Which distribution channels do I use and what does it cost me to use them? Look at all your online travel agents (OTAs), metasearch engines, proprietary distribution channels such as your website and global distribution systems (GDS).
- What is driving the demand for my rooms? E.g. major events, leisure activities, seasonal travel and weather, business or leisure focus and the like.
- What booking limits do I set up for which guest segments?
Based on this, you can then create demand forecasts and adjust your offer packages. For example, you can use deals, special discounts, or service upgrades to create booking incentives and target demand.
To monitor the success of your measures, you can use a simple yield management formula: Determine the maximum possible revenue you could bring in if each of your rooms were sold at full price, and the realized revenue from the actual average price and occupancy rate for a night. Putting this in relation, you get your yield percentage, which you can now increase by making even small improvements.
What are the key performance indicators for yield management?
In order to manage supply and demand profitably, you need various key performance indicators and information on the basis of which you can make forecasts for future demand. In addition, a sound revenue management strategy should underlie the yield management measures.
To make the right yield decisions, you need, among other things, the following key performance indicators:
- Available capacity of the offer you want to optimize
- The current capacity utilization
- Your prices and price packages per offer assortment / room type
- Market / competitor prices
- Past evolution of demand
- Average length of stay
- Booking behaviour of your customers
- Booking lead time (= pick-up) or time of booking
- Your guest types
Basically, the more information you have available, the better you can adapt your offer to the demand. However, it is also clear that you cannot always reliably determine all of these variables. For example, your customers’ willingness to pay may change over time, or your competitors’ pricing structure may not be as transparent, depending on the industry.
You also need to be careful when interpreting these values, as past data cannot always be used to derive appropriate forecasts and measures for the future due to factors that cannot be influenced. You should therefore constantly review and adjust your yield management when you observe change and rely even more on future data. At HotelPartner, for instance, we include pick-up data in our forecasts for this purpose.
Yield Management at a glance
Yield management uses demand management and price differentiation to implement what has been strategically defined in revenue management for revenue optimization. It is important to keep an eye on all available data and to include future data when making forecasts.
We are happy to help you adjust your prices as dynamically across all distribution channels as demand develops – especially in uncertain times. Let’s talk about your situation without any obligations. Arrange your free consultation here.