The Basics of Yield Management

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The Basics of

Yield Management
Weld-management systems have boosted revenue at many properties, but these electronic tools are not always compatible with the operating atmosphere of a hotel. If you want to introduce yield management at your property, you may need to make some changes first

by Sheryl E. Kimes
YIELD MANAGEMENT is becoming part of the standard operating procedure for many hotels with sophisticated electronic property-management systems. Appropriately tailored to the hotels they serve, yield-management systems generally increase revenue and take much of the guesswork out of rooms-management decisions. However, installing a yield-management system can create problems if management does not lay the proper groundwork. This article addresses the issues operators should consider in determining whether yield management is right for their property and discusses Sheryl E. Kimes is an assistant professor of'quant#ative ~llel]lods at the School of Hotel Administration at Cornell University. She has a Ph.D. in operations management from the Universit), of Texas-Austin.



some of the measures managers should take to pave the way for successful adoption of such systems.

What is Yield Management?
Basically, yield management is the process of allocating the right type of capacity to the right kind of customer at the right price so as to maximize revenue or yield. In the case of hotels, yield management is concerned with the n u m b e r of rooms that should be sold at various rate levels. Obviousl); a tradeoffexists. T h e manager would prefer to sell all rooms at the highest rate possible, but since this rarely is feasible, following this policy may lead to empty rooms and lost revenue. Conversel}; ira hotel fills its rooms with low-price customers, the revenue that could have been obtained from higher rates will be lost. T h e objective of yield management, then, is to define what these trade-offs should be. How many rooms should be allocated to and protected for each market segment over time? Orkin' defined the yield statistic as the occupancy rate multiplied by the rate efficiency. T h e rate efficiency is the average room rate divided by the m a x i m u m room rate. As he points out, hotel managers need to be concerned with maximizing yield, or revenue, rather than focusing only on a high occupancy rate or a high average room rate. Another definition of yield management, borrowed from the airline industry, is maximizing revenue (or yield) per available room. Tiffs may be a more appropriate definition because of the difficulty in defining the m a x i m u m room rate. Yield management consists of two separate but related parts: room-inventory management and pricing. T h e inventory-manageIEric B. Orkin, "Boosting Your Bottom Line with Yield Management" The Con~ell llotd and Reslaurant AdminL~tration Quarterly, 28, No. 4 (February 1988), pp. 52-56.

ment process deals with how different types of rooms are to be allocated to demand. Tile pricing procedure is more concerned with the best prices to charge in different situations. In this article, I will concentrate primarily on tile roominventory component of yield management.

Where D o e s Y i e l d Management W o r k ?
T h e airline industry is considered tile birthplace of yield management. After deregulation in tile late 1970s, airline competition increased, and the airlines tried to operate their planes as efficiently as possible. Yield management was one of the methods developed as a way of increasing competitive advantage and increasing revenue. In airlines, yield management is concerned with sdling the right seat to the right customer at the right price so as to maximize yield. T h e airline and hotel industries have several characteristics in common that make them ideal c a n d i dates for yield-management systems. Both have relatively fixed capacities. Once an airplane has been purchased or a hotel has been...
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