Also known as “real-time pricing,” Yield Management is a marketing concept that has become indispensable in the hospitality industry.
Yield Management is a marketing concept based on flexible pricing and offers. Also known as “real-time pricing,” this solution is often applied to services that are largely subject to fixed costs. Yield Management long concerned airlines. Indeed, they play on variable ticket prices to maximize their revenue and increase their occupancy rates. Following the success and democratization of this approach, the hospitality industry gradually adopted Yield Management, encouraged by the parallel development of hotel comparison websites.
How Does It Work?
In the transportation industry, when a train or plane departs, every empty seat at the time of departure is a seat that can never be sold and is therefore lost. This lost revenue for carriers can sometimes be very significant. Based on this observation, transportation companies adopted Yield Management to offset this lost revenue and thereby increase their earnings. Today, on an airplane, no one pays the same price for their seat.
Yield Management can be summarized in 4 points:
- It allows prices to evolve constantly;
- A decision-making tool for the company’s commercial strategy;
- A method for revenue optimization;
- It is a management method for selling the RIGHT product, to the RIGHT customer, at the RIGHT time, and at the RIGHT price.
Be careful not to misunderstand this concept — it is not a complex computer system but a service management and marketing technique. It is not a passing trend either, but a proven economic model. Finally, it is not a discounted pricing policy, but a price optimization policy that promotes increased revenue.
Yield Management in the Hospitality Industry
Following the success of Yield Management in transportation, the hospitality industry gradually turned to this solution. In hospitality, numerous variables are cross-referenced to increase revenue and the occupancy rate across all rooms.
Indeed, in the hotel sector, you could say that “a room not sold tonight is lost forever.” It is a perishable product.
In terms of hotel management, today we observe 2 distinct commercial strategies:
- A volume strategy: favoring hotel occupancy, meaning varying room prices downward to ensure selling as many as possible;
- A value strategy: prioritizing the maintenance of the average room rate. By keeping the average price as high as possible, hoteliers ensure better revenue per guest.
Ultimately, Yield Management in the hospitality industry aims to find the right balance between these two commercial strategies. Here, we adopt a technique that enables maximized profit through real-time pricing. Thus, when a guest checks hotel rates in the morning, at noon, or in the evening for a given room, the prices will not be the same.
Guest Behavior in Response to Hotel Prices
There are 2 distinct scenarios with hotel guests:
- If the hotel sets the date, the guest has the power to set the price;
- Conversely, if the hotel sets the price, the guest sets the date.
1. The Hotel Sets the Date & the Guest Sets the Price
For guests who wish to go on vacation for a set duration, they try to save on transportation and accommodation costs so they can spend more on leisure and activities.
Thus, leisure clientele, more than business clientele, has a real price sensitivity and will therefore seek to find the best deal possible. These guests generally book well in advance and sometimes use comparison websites to get the best price.
This scenario corresponds to guests who seek to set the price while the hotel sets the stay dates. This type of guest allows a hotel to secure sales when there is no urgency to sell rooms.
2. The Hotel Sets the Price & the Guest Sets the Date
The second category of clientele is more business-oriented. They do not have the same price sensitivity as leisure guests. Indeed, they are more likely to seek availability on specific dates rather than a specific price. Often, these are last-minute guests. In this case, the guest sets the date and the hotel sets the price.
Thus, as a hotelier and within the framework of Yield Management, you can afford to increase your rates.
The 4 Golden Rules of Hotel Yield Management
1. Booking Limit
The booking limit is an automatic shift to the next price tier after a certain number of bookings at the same hotel. For example, after 30 reservations, rates go from 55 to 70 euros per room.
2. Day Limit
The day limit is the automatic shift to the next price tier from a certain booking date. The closer the stay date gets, the more prices increase. For example, at D-20, rates increase by 15 euros; at D-10, rates increase by 20 euros; and at D-3, rates increase by 30 euros.
3. Close Limit
This is a mix between the day and booking limit, meaning you program your rate grids to combine both automatic price increases in line with demand. If you use both simultaneously without control, you can end up with an excessively high rate — because let’s remember, the hospitality industry is an extremely competitive market.
4. Upselling and Cross-Selling
Two widely used techniques in the marketing of many businesses.
Cross-selling occurs when the guest is making a purchase — the system will then suggest purchasing a superior room for, say, only 20 euros more instead of 30 (with more options, larger room…).
Upselling is offering, for example, a restaurant starter upon arrival for only 12 euros per person. This discount is not mandatory but increases your chances of selling and thus filling your hotel and generating more revenue. What matters is that it’s profitable.
A certain amount of analysis of your history and competitors offering similar services is necessary to define optimal Yield Management.
You can program all of this through your PMS (Property Management System):
- Know your guest segmentation;
- Analyze your sales history;
- Make future projections taking into account upcoming events, such as the Olympics, for example…;
- Define a rate grid following Yield Management principles that you will program into your hotel software.
Yield Management for Your Services
At Utelys, we are committed to providing every hotelier with solutions to showcase their services and leisure activities. By offering guests the ability to find all information about the hotel’s services directly on a touchscreen kiosk in the lobby or from a QR Code placed in the rooms, you can implement a Yield Management strategy. Indeed, depending on the period and the number of bookings, you can easily vary your prices to maximize your booking rates. Utelys therefore allows you to adapt your offer based on demand.
Ultimately, Yield Management is now an essential element for any hotelier who wants to be competitive, optimize their revenue, and operate their hotel at its maximum potential. You need to understand your guests and their expectations in order to anticipate their behavior and influence their purchasing decisions.
