Understanding Yield Management

By David Peckinpaugh

If you've been in the meeting planning industry for any length of time, you've no doubt heard hoteliers use the term "yield management." But you may not know exactly what it means and how it came into being. Basically, yield management is an inventory management system that allows hoteliers to forecast supply and demand and adjust their pricing strategies accordingly. Yield management also plays an integral role in determining the size of group blocks, group cutoff dates, preferred arrival/departure patterns, reservation restrictions, and food and beverage guidelines.

The airline industry is primarily responsible for the birth of yield or revenue management. Prior to deregulation in 1978, all airlines offered the same government-approved fares; discounts were rare with the exception of night and weekend flights. When People's Express introduced the industry's first low fares nationwide, major carriers were forced to react or go out of business. That's when American Airlines unveiled the first true yield management system, which allowed it to track fares and bookings systemwide and adjust fares based on historical and current booking patterns.

Up until the late 1980s, revenue management for most hotels was similar to revenue management for the airlines before deregulation. Their rate variables consisted of offering weekday and weekend rates, negotiating corporate volume discounts, and overselling group blocks in order to maximize occupancy. Once the airlines instituted yield management, however, the hotel industry gradually woke up and realized the potential that this management philosophy, and subsequent technology tools, offered.

So, in the early 1990s, major hotel chains began experimenting with yield management models. Some chains, like Hyatt, invested in sophisticated computerized systems that tracked numerous sources of data. Others responded with predominantly manual systems combining the reporting capabilities of their reservations and front desk systems with a team of trained managers to direct pricing and inventory issues. Either way, the result was the same: Hotels discovered that they could dramatically increase revenue growth and profitability by committing to yield management systems.

In 1996, for example, a typical hotel suddenly realized that a 1 percent increase in fixed-cost expenditures yielded a paltry 2.3 percent increase in operating profit. But a 1 percent increase in pricing yielded a hefty 11.1 percent increase in profit. (The inverse held true too - a 1 percent decrease in pricing resulted in an 11.1 increase in loss.)

Considering these figures, it's easy to understand why hotels invested heavily in both the technology and manpower to attack yield management head on. Yield management allows properties to discount with discretion in order to build market share, uncover hidden demand that promotes aggressive pricing, identify lost revenue opportunities, and, most importantly, increase revenue growth without increasing fixed costs.

To this day, yield management practices still vary widely from chain to chain and hotel to hotel. Some chains live and breathe yield management, creating entire revenue management teams dedicated to crunching the numbers at the property level. Others utilize yield management but rely more heavily on input from the general manager, director of sales, sales managers, convention services managers, and reservation manager of each hotel. And others have yet to adopt yield management practices, but they are rare.

Generally, yield management is an ongoing, day-in and day-out, week-in and week-out process. The yield management team at a property may meet once a week to review a predetermined period into the future, but on a daily basis team members are most likely evaluating each and every piece of potential business to see how and if it fits into the acceptable business guidelines of the hotel.

One of the major effects of yield management is more consistent pricing from sales manager to sales manager, hotel to hotel, and competitor to competitor. Translation? Less negotiating power and rate flexibility for the meeting planner.

As properties take a closer look at their overall market mix in an attempt to maximize their return, certain hotels may decide to cut group blocks and allocate more rooms to other market segments such as transient leisure, corporate volume accounts, wholesale, and tour and travel. That affects not only the availability of rooms at individual hotels, but also the number of hotels that need to be utilized for citywide events.

In addition, due to yield management, cutoff dates have truly become a rate issue, not a date issue. Hotels want the ability to control their inventory after cutoff in order to maximize the return on their remaining rooms. As a result, meeting planners are seeing less flexibility with cutoff dates and contract terms that allow the group rate to be honored after cutoff only "if group rooms are available in inventory."

Yield management has affected contracted concessions as well. Concessions that directly impact REVPAR (Revenue Per Available Room), such as reductions on rate and increases in complimentary rooms, are far less attractive to hotels than soft cost items such as VIP amenities, airport transfers, and food and beverage discounts.

The bottom line is that it is now more difficult, but by no means impossible, to find a "good deal" at a hotel. It is, however, more important than ever for the hotel to perceive your convention as being valuable. Essentially, you need to sell your meeting to the property by pushing as many of the right revenue buttons as possible.

Here's an example of yield management at work at a 700-room hotel with a maximum group block of 500:

Rack rate: $175 (peak season)
Peak seasons: March - May, September - November
Meeting space: 25,000 square feet
Desired catering revenue per room per night: $74-$65 peak season, $64-$50 shoulder season, $50 or below
off season
Peak demand days: Midweek (Monday-Thursday)
Slow days: Weekends (Friday-Sunday)
Desired patterns: Thursday-Sunday, Wednesday-Sunday, Sunday-Wednesday
Peak season transient (individual traveler) demand:
200 rooms

If your meeting profile matches most of the hotel's guidelines based on the above considerations, your ability to negotiate will be excellent. But if you want to book 200 rooms in April, arrive on Tuesday and depart on Friday, use all of the meeting space, and hold only continental breakfasts on site, the property will most likely turn down your business. The decision hotels must make is: Do they book your meeting today or do they wait to book a higher revenue group and risk having empty rooms and meeting space if they're unable to do so? (For more information on how you can make your meeting more valuable to a hotel, see "Negotiate Like a Pro.")

In summary, it's important to keep in mind the following points:

It is currently a supplier's market. Rate and occupancy will continue to increase over the next few years.
Demand drives hotel pricing. Hotels do not have consistent margins; their product is perishable and its shelf life is one day.
Many variables affect pricing; the key is to be flexible and knowledgeable about your meeting and your group.
Yield management is here to stay…so learn how to play the game.

David Peckinpaugh is vice president of sales at Conferon, Inc. in Twinsburg, Ohio.