Yield Management / Revenue Management

A silent revolution is taking place in the lodging & travel industry, affecting the way companies are managed and operated in a progressively deregulated economic environment. The concept of the great importance of information management relative to the traditionally leading role of operations management, accepted today in most industry sectors around the globe, is finally beginning to penetrate the lodging and travel industry too.

Information & decision technologies have arrived to assist service and lodging industry decision makers in meeting the challenge to stay competitive, and indeed thrive, in this competitive environment by taking advantage of state-of-the-art developments in new technology, operations research, and management information systems (MIS).

The lodging & travel industry generally and in particular American air carriers, have been motivated by deregulation policies and marketplace pressures to develop new decision support systems and demand driven inventory. Management systems to improve their bottom line.

Four main areas of information management applications, supported by current technology developments and a new, marketing and customer demand driven management culture, have been identified in playing a leading role in growing accommodation booking volume, revenues and an overall improvement of financial results:

• Marketing automation and product distribution through computerised reservation systems (CRS) and communication networks.

• Overall revenue growth and customer service quality improvement through Guest History and Marketing Databases.

• Executive information systems and customer databases to improve customer services, and to enable early problem identification and proactive distribution cost, revenue and targeted marketing management.

• Minimising denials and revenue losses through yield management systems and concepts.

Apart from serving the identical customer groups, lodging and passenger transport providers have on e major problem in common: they produce and offer a fixed inventory of perishable products which cannot be stored, if unsold at a specific point in time, to a variety of customer groups with different purchasing behaviour. These services are typically sold at different rates or tariffs under different booking conditions to different market segments, through a variety of distribution channels, to cope with demand swings and market trends.

A client calls the hotel reservation office, requesting a discount rate single room from next Wednesday night through Friday. The question is: does the reservation office accept that reservation or not?

If it was the last single room available, it would not like to accept this reservation, IF it projected that between now and Wednesday night there was the likelihood of a booking request from a rack rate transient customer for the same arrival day and number of nights.

Neither would the reservation department want to accept that discount reservation, IF it could anticipate a late-booking request from a customer, who would like to stay from Wednesday through Sunday, since this customer also represents a greater revenue. In fact, a discounted rate for a longer stay may be significantly more revenue than a shorter stay at rack rate.

How does the hotel reservations manager know, how many reservations to take for what type of rooms at what rates or for what arrival and departure dates?

The term “Yield Management” has been coined in the airline industry and its objective is to manage the product inventory (seats on a given flight, rooms for a given night) in such a way as to maximise revenue. In the airline context, “Yield” is expressed in cents per passenger mile, which is not a very useful definition to be used for non-airline service providers. Yield Management should actually be called “Revenue Management” or “Inventory Control”, since it is revenue, not (airline) yield to be maximised.

Yield or revenue management is not really new to Hoteliers, since physically identical rooms have been sold for higher prices during high season and for lower prices during low season and weekends for generations. This was done by more or less experienced staff with a varying talent to anticipate overall demand at certain days, weeks or periods of the year for a limited supply of rooms.

Yield management (or revenue management) is an economic discipline appropriate to many service industries in which market segment pricing (price differentiation) is combined with statistical analysis to expand the market for the service and increase the revenue “yield” per unit of capacity.

It is the set of demand forecasting techniques, optimisation models, and implementation procedures which collectively determine which reservation requests to accept and which to reject in order to maximise revenue. The principles of yield management had their origins in the airline industry, but have also taken hold widely throughout the rest of the travel industry.

Almost all major lodging corporations, airlines, cruise lines, car rental and passenger railroad firms are practising more or less sophisticated yield management methods, maintain inventory control systems and have either developed their own software and hardware configurations in conjunction with corporate CRS or are currently developing their own systems or screening the market for available integrated or stand-alone yield management software.

The intelligent use of yield management principles can be used to increase bottom line profitability in any service industry possessing the following characteristics:

• Demand for the service can be divided into distinct market segments and price elasticity varies among the customer segments. The capacity supply is relatively fixed and it is costly or impractical to add or subtract inventory in the short run.

• The inventory is perishable and cannot be stored to be sold at a later date.

• The marginal cost of selling an additional unit of inventory is low.

• The service is ordered in advance of its delivery / consumption.

• Demand for the service fluctuates and cannot be predicted with a high degree of certainty.

• The physically (not commercially) identical product can be sold to different market segments for different prices under different booking conditions.