“Yield management” for the hotel industry

“Yield management” can be defined as an intelligent approach to the dynamic reservation control and pricing of a perishable asset across customer types. “Reservation control” is the process by which perishable assets are made available or unavailable to customers. For example, a hotel has a fixed set of standard-sized rooms to rent to the various customers. These different customer types (tourists, businesses, VIP, family…) pay different rates, purchase different amenities, stay different lengths of time, and make reservations at different times in advance of the first stay over. The essence of reservation control is to systematically accept-reject reservation requests to maximize benefits to the hotel.

Reservation control becomes necessary when total room utilization in the hotel is high. Reservation control can be broken into 2 categories:

a) Allocation involves the dynamic reservation limits placed on each category of customer. These limits need to be dynamic due to the stochastic nature of customer demand.

b) Overbooking. involves the limit on the total amount of rooms in excess of the physical stock that can be sold across all types of customers at a point in time. For example, hotels might book 10% more rooms than are available on a given night. This is done to offset customers canceling, not showing up without giving notice, or shortening their stay.

Booking hotel reservations online isn’t new, but the industry is betting that the biggest growth is yet to come from that segment. Hotels are also looking at ways to structure their pricing to yield the highest profits.

While Internet sales influence pricing by allowing the guest to more easily shop for better rates, the hotel industry is fighting back by utilizing an idea stolen from the airline industry: yield management.

Before the airlines deregulated in 1978, most offered similar or equal fares. After the industry reacted to People Express’ low fares, American Airlines instituted the first yield management system.

By the early 1990s, several hotel chains copied the principles of yield management and began implementing the idea for their hotels. Using the system for booking groups accelerates the benefits by getting the most return in the time slot available.

Since hotel rooms are perishable items, much like airline seats, it has become necessary for hotels to study how rooms are typically rented to understand the best time to discount a room. If a hotel is usually booked solid in May each year, there is no reason to offer a discount to a group wanting a block of rooms at that time, unless the group is willing to purchase enough additional services to justify the discount.

Hotels have become less flexible on cutoff dates as well, telling meeting planners that reservations placed after the cutoff date won’t qualify for the group rate (as reported by the PCMA report). That gives hoteliers the flexibility to charge rack rates for latecomers and not be stuck with empty rooms reserved for the group.

The idea that the best rates are obtainable far out from the requested dates is no longer true, as more hotels move toward yield management. The hotel starts with high rates and drops the rates for blocks of rooms as needed to keep the occupancy forecast in line with the needed revenue stream.

The closer to the meeting date, the more likely the group can negotiate lower rates or have special amenities tossed into the deal. Of course, the risk to the traveler is that the rooms will no longer be available if the group waits too long and this is exactly what the hotel hopes will happen.

The hotel has to decide if it can afford to turn away business at a discount to hold out for a later group willing to pay its optimum price.

Meanwhile, software developers like REVPARGURU are designing products to make it easier for hotels to manage their room inventories. With it, much of the number crunching is done within the software, allowing managers to increase occupancy rate by 90% to 100% average, increase Revpar by 20% to 40%, update prices 150 times per day, scans hundreds of competitors in real-time and thousands of other calculations.

REVPARGURU recognizes that there is a growing need for a competitive pricing system that updates the rates automatically in real time. It is reacting to the shifting consumer purchasing behavior and delivers results that are based on current supply and demand instead of poor performing forecasts. To maximize occupancy and profits, REVPARGURU automatically sets the rates based on an algorithm model that fight for maximum RevPar at all times.