One of your main objectives as a hotel manager is keeping your guests happy so that they have the best possible stay at your establishment. However, it’s also important to create the right strategies to bring a steady flow of revenue into your business. Otherwise, no matter how happy your guests are, you are unlikely to stay in business for long. And this is the main goal of yield management. The right strategy can help you establish the right prices for your rooms in line with the behaviour and preferences of each of your guest segments so that you can create a profitable long-term revenue strategy.
Let’s take a look at what yield management is and how it can help you optimise your revenue streams.
What is yield management?
Yield management is a dynamic pricing strategy that helps you maximise the revenue that you generate from your rooms. It’s based on the ability to understand and predict the anticipated behaviour of consumers in order to create appealing rates that align with the expectations of each guest segment. You do this by applying a series of filters to your demand in order to optimise your occupancy levels and your revenue per available room (RevPAR). This differs from revenue management which is a wider strategy that impacts the entire culture of your organisation.
The ultimate aim of a yield management strategy is to sell as many rooms as possible at the highest possible price. However, if you set your rates too high then demand is likely to drop. The key is finding the right balance between incoming bookings and ideal pricing. It’s also important to ensure your yield management rates are fluid and that you adjust them regularly in line with fluctuating demand. It’s about selling the right room, to the right guest, for the right price, at the right time.
So how do you determine what the right price is?
The right price will depend on your current level of demand. If you have low demand, it will depend on your low-demand volume strategy and the positioning of your rates in line with your competitors. If you have excess demand, then the right price will depend on your market segmentation, the positioning of your prices, and, most importantly, your yield controls. And this is what we are going to focus on today.
How can yield management controls help you optimise your revenue?
Yield management controls enable you to filter your demand so that you can attract the most profitable market segments to your hotel. The aim is to use yield controls to identify higher-paying segments so that you can increase the prices you offer them during certain periods.
Essentially, any booking condition that differentiates a rate and benefits both guests and hotels can be used as a yield control. However, the most commonly used types of yield controls are rate fences. This is where you create different guest segments and justify why they might pay different prices.
When you create rate fences, you establish a series of rules that you apply to your room rates in order to “fence” them off from guests who are willing to pay more. Rate fences can be physical or non-physical (demand-based). For example, you might offer a higher rate for rooms with a view (physical characteristic), and lower rates for bookings with a minimum stay requirement (non-physical characteristic). By offering a selection of rates based on different booking conditions and restrictions, guests can segment themselves based on their personal preferences and how much they are willing to pay.
Let’s take a look at how these rate fences can help you control your excess demand yield so that you can optimise your hotel’s total revenue.
Physical fences are when you adjust certain rates in line with the physical characteristics of a booking, such as room types, location, furnishings, and whether or not a room has a view. For example, you might sell larger rooms on quieter floors at a higher rate than single-occupancy rooms located near high-traffic areas such as lifts or stairwells.
By selling rooms with more redeeming characteristics at higher prices during periods of excess demand, you can prevent your inventory from selling out too fast. Plus, by controlling your inventory with these yield controls you can segment your demand more effectively and identify which segments are willing to pay more (then target them with additional revenue sources, such as up-selling and cross-selling promotional campaigns).
Demand-based fences are the other type of yield control rate fences that can boost your inventory and room revenue. With these types of non-physical rate fences, you sell your rooms to specific market segments at pre-defined prices, without cannibalising the demand of segments that are willing to pay more. The aim is to sway customers who are willing to pay more towards higher rates with fewer restrictions, and those with more limited budgets towards lower tariffs with certain booking restrictions. The key is to design demand-based fences that respond to the identified consumer behaviour of each of your guest segments.
The three most common forms of hotel booking restrictions that are usually offered with lower rates are:
- Minimum Length of Stay (MLOS): where reservations can only be made for a specified number of consecutive nights (for example, a guest only gets a lower rate if they stay for a minimum of 3 nights)
- Closed To Arrival (CTA): where guest arrival dates are blocked for specific days (for example, a guest cannot check in on a Friday if they pay a lower rate)
- Closed To Departure (CTD): where guests cannot depart on specific dates (for example, a guest cannot check out on a Saturday if they pay a lower rate)
In contrast, those who are willing to pay higher rates can do so without any of the aforementioned booking restrictions. That way, the price that each guest segment pays aligns with the booking restrictions that they are willing to accept.
By using physical and non-physical-based strategies such as the ones we have discussed in this post, you can implement an effective yield management strategy with the right controls to promote revenue growth in your business.