Yield Management in Hospitality: A Quick Guide

Are you tired of selling your hotel rooms every day? Just like you, hundreds of other hotelier's tests and try different pricing strategies and make GUESSES to make the most out of each hotel room.

But a trial-and-error pricing approach won't work every time, unless you spend time creating a long-term revenue management strategy that guarantees the sales of your hotel rooms.

You won't have to regret the lost revenue anymore when you adjust the prices based on seasonality of demand.

What if we told you that there's another approach where you can make more money from each hotel room by selling it to the right guest, which ensures that you're neither underselling nor overpricing the room? That's possible when your hotel uses a yield management approach.

What is yield management in hotels?

Generally, hotels use fixed pricing to sell their rooms to customers. Not every day has the same demand, so why set fixed prices for your hotel rooms? But how would you assess whether the future demand for this room is going to increase or decrease?

That's where you need to leverage a dynamic pricing approach which sets the right balance between demand (guest bookings) and supply (number of available rooms). 

Yield management is both an art and a science as it works behind the scenes in forecasting the future demand for your hotel rooms and ensuring that no room remains vacant during low-demand periods.

Consider yield management as a short-term strategy to maximize your hotel's revenue, while revenue management looks at the bigger picture and has a broader scope.

The most popular example of yield management can be seen in grocery stores, and you might've observed that the most in-demand items are placed at the front of the shelf because store owners know that these are the best-selling items.

Similarly, as a hotel owner, you can use yield management strategies such as offering discounts to early bookers, lowering prices on Sundays, or setting a minimum stay length benchmark.

How is yield management different from revenue management?

While both terms, revenue management and yield management, focus on maximizing revenue, they differ from each other.

Yield management focuses on generating revenue from room sales while revenue management measures the total revenue of the hotel. In a nutshell, yield management focuses on adjusting the price of a product/service based on supply/demand in real time.

While revenue management deals with setting prices, demand forecasting, and managing the overall revenue stream.

Let's understand the differences that make yield management different from revenue management -

Why yield management matters for hotels?

Here are the key benefits your hotel will get by leveraging yield management-

1. Earn more revenue for your hotel

One of the main benefits of hotel yield management is that you can increase your room revenue by making the most out of existing data to predict the future demand for rooms.

This involves increasing your room rates during peak season or busy holidays and lowering room prices during the off season.

That's why creating an effective revenue management strategy is a game changer. Instead of using fixed pricing rules, you adjust your prices by analyzing various factors such as competitor rates, market demand, and occupancy levels.

2. Spend some time doing audience research

Yield management becomes successful when you know your customer inside out. Once you understand the ins and outs of the audience, such as:

• Who are your guests (corporate traveler or leisure traveler)?
• Their booking pattern?
• When do they book most?
• How frequently do they travel?
• For how long they stay?
• Are they willing to spend more on the stay?
• Are they price sensitive customers?

By understanding the intricacies of your guests, you can position your property better and set the best possible price for each room.

3. Fill your rooms on the go (known as occupancy)

Hotel yield management allows you to maximize your occupancy because it sets the room prices based on supply and demand forces. This dynamic pricing strategy ensures rooms are sold at the best possible price.

Rather than using a trial and error approach, the strategy relies on historical data, booking patterns, and market demand to determine the right price for each customer.

For example - If you operate a luxury hotel in Goa, you might notice high demand during peak season and lower demand during monsoon months.

In nutshell, you would increase room rates when demand rises and offer discounts and special packages during low-demand periods to attract price-conscious guests. This means during the off season; you can operate at full occupancy and generate a constant stream of revenue.

4. No reliance on GUT to make pricing decisions

The yield management system relies on data rather than intuition for pricing decisions, eliminating guesswork.

Revenue managers make informed decisions based on concrete data and market analysis, allowing them to adapt effectively to changing market conditions.

Trial and error pricing approach won't work in the long term, and if you set wrong prices, then it would limit your revenue. While if you set your prices exponentially high, then it would hurt your revenue and affect your customer satisfaction score.

5. Improves operational efficiency

Nikita Sherbina, Co-Founder & CEO, AIScreen shared her observations on using Yield management strategy to increase hotel revenue and maximize operational efficiency

Result

This increased their RevPAR (revenue per available room) by 20% while maintaining guest satisfaction.

In a nutshell, yield management helps to ensure that there is a right balance between profitability and operational flow.

Formula for calculating yield management

You can calculate yield management to see how well your hotel is performing. By using the below-mentioned formula, you can estimate your maximum revenue potential.

Actual revenue signifies how much revenue a hotel has generated from the sale of rooms. Maximum potential revenue means what's the likelihood that your hotel can generate maximum revenue by selling rooms at the highest price.

Example of yield management

Suppose your hotel has 25 rooms and each room is priced at $120 per night. Your maximum potential revenue in this case would be $3000/night.

However, if you were able to sell 20 rooms at a price of $100 per night, then the total revenue would be $2000 for that night. Then your yield in this case would be:

$2000/$3000 * 100 = 67%

What type of yield management strategy can your hotel adopt?

Here are some popular yield management strategies hoteliers can adopt-

1. Use dynamic pricing strategy

Dynamic pricing is a type of variable pricing approach where hoteliers can change the prices depending on market conditions. If demand for a certain room increases, then you will raise the prices. While if few travelers demand your hotel room, then the prices would be lower.

For family-oriented hotels, this might mean higher rates on weekends and lower rates on weekdays to match typical booking patterns.

That's where you need to invest in revenue management software that adjusts room rates dynamically in real time.

2. Hotel overbooking

Another yield management strategy hotels adopt is overbooking. Hotel overbooking means a hotel accepts more reservations than the number of available rooms. However, overbooking practice is a good way to avoid last-minute cancellations or reduce NO SHOWS.

But at the same time, you need to ensure that if you get a greater number of bookings than available rooms, then you might have to deal with more guests and ensure they’re not dissatisfied.

The key is using historical data to identify how many guests are more likely to cancel their bookings or appear as NO SHOWS this year.

Analysis of past cancellation patterns and no-show rates helps determine safe overbooking limits.

3. Identify competitor prices

Another way to increase your hotel revenue is to identify your competitor's prices so you can get an estimate as to how you can increase your rates, possibly to get more bookings. Analyzing competitor prices is crucial for seeing where you stand out in the industry.

If you observed that competitors have come up with loyalty programs, free add-ons, or giving discounts to guests, then you should also tweak your pricing strategy to attract more guests and regain the market share.

On the contrary, if you set your room rates too high without looking at your competitor's prices, then you can lose guests just because your competitors are offering rooms at affordable prices. 

4. Do more upsells and cross-sells

Upselling and cross-selling is another yield management strategy that hoteliers should adopt to increase their revenue.

Upselling simply refers to offering a room upgrade option to guests which increases your revenue per booking.

While cross-selling is about selling additional or complementary things to guests. It can be a SPA appointment, suggesting your guests for local tours or activities. Such little things add a WOW effect to their stay and generate additional sources of revenue.

5. Setting minimum length of stay restrictions

The other way to maximize your hotel revenue is by setting minimum stay requirements.

It means guests who reserve a spot at property have to stay for minimum xx number of nights such as minimum of 3 nights during peak season.

6. Market segmentation

Doing market segmentation is an effective yield management strategy where you segment customers into different groups based on their booking pattern, type of traveler, travel purpose, price sensitivity, etc.

Develop targeted pricing strategies based on different customer segments, considering:

• Business travelers who value flexible check-in/out times and work facilities
• Leisure travelers looking for experience packages
• Adventure seekers interested in activity bundles
• Budget-conscious guests who prioritize value

How can BOTSHOT help you with yield management?

Yield management is a game changer for the hospitality industry as it not just maximizes your revenue but also enhances guest experience. If you're looking to create an effective pricing strategy that resonates with guests, our solution can help.

Our revenue management software uses AI algorithms to decide the room prices by considering various factors such as market conditions, demand, competitor prices, etc. 

As every guest differs from others, this hotel management software understands guest profiles to create personalized promotions and packages. This helps you attract and retain customers more effectively.