Picture yourself in Cape Cod, Massachusetts, during July. The day is warm and sunny. The sandy beaches are dotted with brightly colored umbrellas, and the briny smell of lobster and steamers wafts through the air outside restaurants bustling with activity. You decide to extend your day trip and stay the night at an exclusive ocean-front hotel. The price? $1,200. The rate for the same room on January 4, when it’s cold and gray and seasonal businesses are shuttered? $350.
That’s yield management in action—the strategy of selling the right hotel room (or conference space, airplane seat, etc.) to the right customer at the right time for the right price, with the goal of maximizing revenue.
What Is Yield Management?
Yield management is a pricing strategy that aims to maximize a business’s revenue and profitability by balancing supply and demand while optimizing resources. A successful yield management strategy employs techniques that consider historical data, demand forecasting, competitive analysis, customer segmentation, and dynamic pricing.
What Is Yield Management in Hospitality?
Yield management in hospitality is the practice of allocating “perishable” resources—resources whose value is wasted if they’re not used or consumed by a certain time—with the goal of bringing in the highest possible revenue. For a hotel, this could mean booking a room that sleeps four (the right product) to a family with two adults and two children (the right customer) during the summer break from school (the right time). The right price would be what the customer is willing to pay based on demand, incentives, and what makes financial sense for the hotel.
Yield management practices began in the airline industry after deregulation in the late 1970s. Many organizations in the hospitality industry—which is generally segmented into hotel accommodations, food and beverage, travel and tourism, and entertainment and recreation—use yield management software and services to automatically determine pricing.
Key Takeaways
- Yield management is an important tool for hospitality businesses that have time-fixed inventory.
- Yield management is a subset of, and complementary to, a broader revenue management strategy.
- Hospitality businesses use a variety of techniques to optimize yield management, including data and competitive analysis, customer segmentation, distribution channel management, and incentives and rewards.
Yield Management in Hospitality Explained
Yield management is an important pricing strategy for many types of organizations, especially those in hospitality. Hotel rooms, for example, generate revenue only when they’re booked and occupied. Further, the rate customers are willing to pay for a hotel room varies depending on factors including seasonality, time-sensitive events, whether they’re traveling for business or pleasure, and whether they’re traveling alone or with a group.
Dynamic pricing, demand forecasting, market segmentation, distribution channel management, and performance analysis are among the strategies hospitality businesses use to optimize yield management and increase revenue. A resort in the mountains, for example, might use demand forecasting and dynamic pricing to charge more for a room in the winter, when demand from people traveling to ski is higher. Likewise, a baseball stadium might sell game tickets for a higher price on weekends or when a longtime rival is playing the home team. (Hello, Red Sox vs. Yankees!)
Many organizations in the hospitality industry use specialized software and revenue management systems to automate and optimize their yield management processes. In fact, the market is poised for growth, from $100 billion in value in 2023 to $221.8 billion in 2030, according to Verified Market Reports. Additional benefits of effective yield management include increased customer satisfaction, better inventory management, and enhanced efficiency and insights that inform and improve budget planning and other business operations.
Yield Management vs. Revenue Management
Yield management and revenue management are similar concepts, but revenue management is a longer-term and broader approach to maximizing revenue. One way to think about it is this: If yield management is focused on the hotel room, revenue management considers the entire hotel. Effective implementation of both requires precise demand forecasting, dynamic pricing, customer segmentation, and ongoing data and competitive analysis. Whereas yield management applies these practices to sell “use it or lose it” inventory for the highest possible revenue, revenue management employs them to earn the highest possible revenue across an organization’s operations. It’s important to note that yield management and revenue management aren’t mutually exclusive; effective yield management practices are core to a successful revenue management program.
Why Is Yield Management Important in the Hospitality Industry?
Many variables impact hospitality organizations, including seasonality, days of the week, competition, and local events. Organizations that don’t take these factors into account when selling inventory that expires will likely leave money on the table. In addition to helping hospitality organizations optimize the sale of time-bound goods, yield management techniques can boost their ability to compete; help ensure more effective forecasting and resource allocation, including staffing; strengthen customer loyalty; and improve broader revenue management efforts.
Elements of Hotel Yield Management
Effective hospitality yield management depends on the strategic combination of human processes and technology. Properly combined, and with buy-in and training of all stakeholders, these elements help ensure hospitality organizations sell the right product to the right customer at the right time for the right price.
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Demand Forecasting
Demand forecasting is the process of determining what customers will want to buy in the future by analyzing what they’ve purchased or how they’ve behaved in the past. Demand forecasting can be very specific, such as determining how many people will book suites at a hotel on a weekday in August, or more general, such as predicting how often large groups travel together. Demand forecasting is based on a combination of factors, including a company’s historical data, general industry data, short- and long-term economic data, data on forthcoming local events, and data relating to potential business disruptions, such as bad weather or planned construction.
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Pricing Strategy
No one expects to go to a grocery store and pay $5 for cereal on Wednesday but $10 on Saturday. With conventional pricing, the price of an item may increase or decrease over time, but it isn’t dependent on when you buy the item. With yield management techniques, pricing is adjusted based on many different factors to optimize revenue and other business outcomes. This kind of pricing is used when an organization, such as an airline, has a fixed amount of inventory (seats) that can be priced depending on factors including demand, season, and how close to the inventory’s expiration a purchase is made.
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Inventory Control
Inventory in the hospitality industry refers not only to tangible items, such as toilet paper, towels, and bottled water, but also to the fixed, perishable goods at the core of yield management, such as spa appointments and golf tee times. Effective inventory management in the hospitality industry requires accurate forecasting, deep data analysis, dynamic pricing, and strategic resource allocation.
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Market Segmentation
Market segmentation divides a customer base into smaller groups based on similar characteristics and needs. Common categories include leisure travelers and business travelers, but organizations can also segment customers much more granularly. For example, an all-inclusive resort might further segment leisure travelers into families with children under the age of 10, and then develop programs that include activities and amenities that would appeal to that group.
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Distribution Channel Management
In hospitality, the distribution channel refers to the places customers reach out to procure an organization’s goods and services. For example, a hotel’s distribution channel typically includes direct booking methods (calling the hotel or using its website or app) and indirect booking, such as through an online travel agency or tour operator.
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Competitive Analysis
A hospitality company’s ability to implement a successful yield management strategy depends in large part on the competition’s yield management implementation. For example, charging top dollar for a hotel room is one way to maximize revenue, but it won’t work if that room costs significantly more than competing accommodations. That’s a simple example, but it’s a powerful reminder that any yield management effort must consider what the competition is up to, regarding everything from pricing and amenities to booking restrictions, discounts, and more.
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Technology and Tools
Hospitality organizations have many choices when it comes to technologies and tools that can help them implement and maintain a yield management strategy. Options include dedicated yield management software, revenue management software that integrates yield management capabilities, and customer relationship management (CRM) software used in tandem with revenue/yield management platforms.
Hospitality companies already are using artificial intelligence (AI) to automate routine tasks and analyze large volumes of data to, for example, forecast demand. Use of predictive and generative AI will expand in many ways that could also benefit yield management efforts, including ongoing customer interaction and engagement.
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Performance Metrics
Key metrics most closely aligned with measuring yield management in the hospitality industry—and followed carefully by financial and accounting teams—include:
- Occupancy rate, which reflects the number of rooms that have been booked as a percentage of total rooms available during a certain period. It’s calculated by dividing the number of rooms sold by the total number of rooms available, then multiplied by 100.
- Revenue per available room (RevPAR), which measures how effectively the business is generating revenue from its rooms. RevPAR is calculated by multiplying the average daily rate for a room by the occupancy rate, or by dividing total room revenue by the number of available rooms.
- Average daily rate (ADR), which measures revenue per occupied room. ADR is calculated by dividing the total amount of room revenue by the number of rooms sold.
- Average length of stay (ALOS), which indicates how long guests typically stay in a room. ALOS is calculated by dividing the total number of occupied room nights by the number of bookings.
- Revenue per available seat hour (RevPASH), which is used by restaurants to measure the revenue generated per each available seat per hour. It’s calculated by dividing total revenue by the number of “seat hours” available during a given period.
- Conversion rate, which measures the percentage of inquiries or reservations that result in a desired action: an actual booking. It’s calculated by dividing the number of inquiries by the number of resulting visitors.
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Customer Relationship Management
While yield management focuses on optimizing revenue, CRM focuses on improving a company’s relationship with customers by monitoring and managing interactions throughout the customer life cycle. Both practices result in customer retention and sales growth when performed effectively over time, and they should work hand-in-hand. CRM strategies are typically implemented using software that compiles and synthesizes data across all customer-facing channels and points of contact.
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Strategic Promotions and Packages
Strategic promotions and packages can help hospitality organizations optimize bookings and thus improve yield management. Commonly used promotions and packages include rewards-based customer loyalty programs, special rates for corporate customers, and packages for special occasions, such as birthday celebrations and holiday gatherings.
How to Calculate Yield Management
In simplest terms, yield—the amount of revenue that could be realized if 100% of fixed, perishable inventory were sold—is determined by dividing the amount of revenue realized (earned) by the amount of potential revenue if inventory sold out. Percentage yield is determined using the formula:
Yield = Revenue realized / potential revenue x 100
Yield management techniques are designed to reach the highest yield by optimizing room occupancy and room rate. For example, if a hotel has 100 rooms and a “rack rate” (advertised, full-price rate) of $200, its maximum potential revenue would be $20,000 per day. If the hotel sold 50 rooms at a lower rate of $100 and 20 rooms at the rack rate of $200, its actual revenue would be $9,000. The percentage yield is calculated as:
$9,000/$20,000 x 100 = 45%
To achieve the highest yield, hotels and other hospitality organizations must balance selling the most inventory possible with the highest price that customers are willing to pay at a specific time. The many variables related to a hospitality organization’s yield make it challenging to benchmark it, but for perspective, hotel occupancy in 2023 averaged 62.9%, according to the American Hotel & Lodging Association.
Hospitality Yield Management Strategies
Yield management in the hospitality industry is part art, part science, factoring in human experience and technology-driven insights. Therefore, it depends not solely on a formula, but also on a balance of techniques that’s continuously optimized based on data. Here are 13 key strategies used in hospitality yield management.
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Dynamic Pricing
Rather than selling finite inventory at one rate, hospitality organizations adjust pricing dynamically, based on changes in demand. When demand is at its highest, rates are, too. For example, the rates for lakefront rental cottages are likely to be highest in the summer months and on Saturdays and Sundays.
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Segmentation and Targeting
Like companies in other industries, hospitality businesses segment their customers and prospects based on common characteristics and needs, such as people traveling on business, families with young children, or groups traveling together for a particular purpose, such as to attend a sporting event. Hotels, restaurants, and other organizations in the hospitality industry can target these segments with customized offers, such as advertising to business travelers about fast, unlimited Wi-Fi or use of a dedicated conference space.
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Length-of-Stay Requirements
Hotels and other lodging businesses may require customers to book rooms for a minimum number of nights. Why? To increase occupancy rates, especially during high-demand times, or to cover “shoulder days,” when rooms aren’t expected to sell out yet are close to days that rooms are expected to sell out. For example, a hotel may require that a customer booking a room for Friday and Saturday nights include either Thursday or Sunday night as part of a three-night requirement.
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Overbooking Strategy
It’s no secret: Hospitality organizations often overbook. This strategy protects them against loss of revenue in case a customer cancels. However, it can also lead to extra costs if all customers show up and expect to be compensated with a room or airline seat that has a higher value than the one they originally booked.
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Channel Management
Customers often book travel-related goods and services through third-party online travel agencies (OTAs), such as Expedia, Booking.com, or Tripadvisor. Hotels, airlines, rental-car companies, and other hospitality organizations supply real-time information to OTAs, which typically charge a commission when purchases are made through them. This process is managed through dedicated channel management software or with channel management capabilities built into more comprehensive revenue management platforms.
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Promotional Offers and Packages
Organizations in the hospitality industry can optimize yield through personalized promotional offers and packages. For example, a resort could design a package for families that has a higher room rate but also includes amenities that would appeal to adolescents (and their parents), such as a teen camp and nightly movies with popcorn and soda.
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Advance Purchase Discounts
Advance purchase discounts are another strategy for balancing occupancy and revenue. For example, by offering discounts for purchases made in advance, a hotel may get less than the rack rate for a room, but it’s protected against the chance that the room isn’t filled. Setting purchase windows well before the check-in date (such as 30 days prior) also helps organizations forecast demand.
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Last-Minute Deals
Last-minute deals, such as a discounted rate for a cruise that departs at the end of the week, might mean less than the rack rate for a cabin, but less revenue per cabin may be better than a cabin that generates no income at all.
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Use of Technology
Organizations in the hospitality industry can use a variety of technology tools and platforms to optimize yield management. For example, dedicated yield management software provides features that help organizations optimize their pricing to increase occupancy and drive revenue. More comprehensive revenue management platforms include yield management capabilities but also address other revenue drivers besides occupancy. Partner and channel relationship management capabilities may be built into CRM platforms to establish a real-time information flow that enhances visibility and boosts partner collaboration. Technology that enables organizations to manage, monitor and actively engage on social media platforms is also important to successful yield management.
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Event and Seasonal Pricing
Special events, such as concerts and business conferences, provide an opportunity for hospitality organizations to apply dynamic pricing, either charging a premium based on demand or offering a discount to draw customers during nonpeak days of the week or away from competing organizations. Seasonality is also a trigger for special pricing. A chalet near a popular mountain resort may dynamically price its accommodations during its high and low seasons. The decision of whether to charge more or less for a room depends on the room type, when the room is being booked, prospective customers, and the rate they would be willing or would expect to pay.
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Competitive Analysis
Yield management shouldn’t be performed in a vacuum. What competitors are doing is one of the most important factors to consider when balancing occupancy and revenue. Like any industry, the goal of a competitive analysis in hospitality is to identify the strengths and weaknesses of the organization relative to other players in the market. Competitive analysis requires identifying the characteristics to be compared, developing/choosing a system to rate those characteristics, rating the characteristics, and plotting and evaluating the results.
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Loyalty Programs
Loyalty programs give customers a reason to return, which can contribute to improved occupancy, increased revenue, and other key performance indicators (KPIs). When deciding what to include in a loyalty program, it’s important to assess what customers value. Sites that compare the best hotel loyalty programs, for example, note the importance of free Wi-Fi, complimentary meals, room upgrades, and priority check-in and check-out. Other important factors include the scope of the loyalty program network, such as whether points can be used at the same hotel chain in other locations or at partner organizations. and the ease with which loyalty program points can be applied. Organizations that offer loyalty programs should factor in the time and resources involved in managing it.
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Upselling and Cross-Selling
Optimizing yield in the hospitality industry is tied to occupancy as it relates to revenue. Two strategies for increasing the revenue generated per customer are upselling and cross-selling. With upselling, customers are offered higher-priced or upgraded accommodations, such as a room with a king-sized bed instead of a queen or a suite with a kitchenette. Cross-selling refers to offering supplementary goods and services, such as a city tour or a yoga class. Cross-selling can involve partner organizations.
Improve Your Hospitality Yield Management With NetSuite
NetSuite’s Enterprise Resource Planning (ERP) supports revenue management capabilities, real-time analytics, and reporting on key yield management KPIs, such as RevPAR and ADR. It also performs many time-consuming financial management tasks related to the financial close, planning and budgeting, and regulatory compliance. Additional inventory management capabilities help hospitality companies balance supply and demand and ensure that the right goods are available for the right customers at the right time for the right price. NetSuite’s CRM capabilities help companies improve the customer experience and increase the likelihood of return visits. For organizations with multiple properties, NetSuite OneWorld provides visibility into and synthesizes data across local, regional, and headquarters levels.
Prices rise and fall in most industries, but pricing in the hospitality industry is more complicated than that. The price of a hotel room or baseball stadium ticket, for example, can differ depending on the day of the week or nearby events, among many other factors. Yield management is the process of balancing demand for fixed, perishable goods with what customers are willing to pay. With a strategic yield management program, hospitality organizations can position themselves to compete and profit over time.
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Hospitality Yield Management FAQs
What is an example of yield management in a hotel?
As any traveler knows, rates for the same hotel rooms aren’t the same 365 days a year. This is a product of yield management, which focuses on balancing occupancy and maximizing revenue. For example, a hotel room rate might be $100 on a Wednesday, when people are less likely to begin a stay, and $150 on a Saturday, reflecting higher demand for weekend getaways.
What is the application of yield management in the hotel industry?
Hotels use many strategies to optimize yield management and increase revenue per available room (RevPAR). They include demand forecasting, dynamic pricing, market segmentation, distribution channel management, and competitive and performance analysis.
How do you calculate yield in the hospitality industry?
Yield is the amount of revenue realized from the sale of fixed, perishable inventory. Yield is calculated by dividing the amount of revenue realized by the amount of potential revenue. Percentage yield is calculated by multiplying the resulting quotient by 100.
What is yield in the hospitality industry?
Yield in the hospitality industry is the amount of revenue made from time-sensitive inventory. To achieve the highest yield, hospitality businesses must balance selling the most inventory possible with the highest price customers are willing to pay at a specific time.
What is the main function of a yield manager at a hotel?
A yield manager at a hotel is focused on effectively implementing yield management strategies—such as demand forecasting, data and competitive analysis, dynamic pricing, and customer segmentation—to optimize revenue.
What are the 4 C's of yield management?
The 4 C’s of yield management are calendar, clock, capacity, and cost. These yield management “levers” are focused on providing goods to customers at the right time and for the right (optimal) price.
