Is your yield management strategy working consistently?

Are you still persisting with traditional hotel revenue management strategies?

Have you begun embracing a post pandemic era rethink of your yield and revenue model?

Ironically, it is a retracing of steps to an approach that is considered a given.

What am I talking about?

Hang on, I will be clarifying myself.

Watch this quick video (less than a minute) to get an overview of yield.

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While the post pandemic changes are sweeping they are hardly insurmountable.

They merely require you to go back to the drawing board.

On revenue management.

More specifically, ensure your yield management fundamentals are strong.

You still look puzzled.

I will lay out a case for this rethink in yield management strategies.

Along the way, we will answer questions like:

• What do you mean by yield management?
• What is the role of yield management?
• What is the formula for yield management?

And how the rethink includes embracing innovation that works.

Sounds good?

Let’s get going.

This Blog Post will cover:

This post is Part 2 of a 7 part series on Hotel Revenue Management Strategies and will cover key concepts of yield management in a post pandemic era.

Click below to read the first two posts in this 7 part series.

Hotel Revenue and Yield Management

In the post pandemic era, customer preferences (more like demands actually) have dramatically changed.

This has significant implications for yield.

Before that however, we must clear the air on basic differences between revenue and yield.

People confuse revenue with yield.

The two are related but definitely not the same.

Revenue is simply the dollar equivalent of income earned in a certain period.

But yield is a different animal.

Yield brings in an element which immediately makes looking at only revenue less important.

It is like placing a stick on the ground and looking at it.

The moment you place a second longer stick next to the first one, it becomes relative now.

Yield does that to revenue

So, if revenue is the metaphorical shorter stick, what does yield do as the longer stick?

Yield is not necessarily the longer stick.

However, it definitely makes its presence a relative one.

How you ask?

What is Yield & Yield Management?

Yield makes a comparison with a unique factor of revenue.

It brings in potential or capacity.

In other words, the formula is:

Yield = Revenue Earned / Potential Revenue

Yield thus compares

• what is earned with
• what could have been earned.

Businesses do not want to just measure what they earned.

They need to benchmark themselves with the potential.

Yield does that job.

One of the most important hotel KPIs is RevPAR or Revenue Per Available Room

REVPAR measures:

• how much of revenue is earned
• for every hotel room that is
• available to sell
• not rooms actually sold which is what ADR or Average Daily Rate calculates.

So, you could say:

• ADR is a revenue measure while
• REVPAR is a yield measure.

It is more important to measure yield because then you see how much more revenue you could generate.

This is one of the key secrets to achieving highest hotel revenue and profit.

You must know your revenue yield and therefore your profit potential.

Yield Management in Revenue for Your Hotel

You need to go to the heart of the revenue management system of your hotel to discover yield

Let us backtrack a bit.

Hotels set something called a Rack Rate for each one of their room types.

The Rack Rate is the highest non-discounted rate applicable to a particular room type.

How do you relate yield to this rate?

Well, there are quite a few steps to achieve that.

You also need information that you may not have access to unless you are the revenue manager of the hotel.

Briefly stated, the Yield Management System for the hotel:

• will throw up on a daily basis as part of its reporting,
• a listing of every room that was sold according to different room types.

It will, among other things, show for each room type:

• (A) the rack rate as well as
• (B) the average of all discounted rates that were actually sold for that day.

Multiplying the rooms actually sold on that day to both “A” and “B” will give you

• Potential Room Revenue and
• Actual Room Revenue for that room type.
• The system will show % of B to A.

In other words, it will show for each room type:

(B) Actual Room Revenue / (A) Potential Room Revenue X 100

Or

The Yield % for the revenue earned.

Note the last two words above.

This yield calculation is one type of yield known as price yield.

You will see another type of yield later based on capacity.

Analyzing Yield

Now, the analysis of this yield.

You learned earlier about the seasonality of business volume in a hotel.

The yield will depend upon how heavily room rates are discounted.

Typically, in a peak month, there will be less discounting as demand will be high.

Hotels will want to maximize yield.

So, one of the foremost strategies to achieving highest hotel profit is to ensure yield is maximized.

This also means as said earlier resorting to less of discounting.

On the other hand, it is a different ball game in lean months when hotel occupancies are down.

Hotels resort to heavy discounting to drive occupancies up.

This will depress yield.

This is why the seasonality element needs to be understood well and the impact on yield.

In turn, yield will impact bottom line or profit.

Without going through hoops, how does one quickly determine whether yield in this month is better than last month?

What KPI would deliver that yield information?

After all, as a hotel manager, that is what you would be interested in.

Well, let me deliver you out of your dilemma.

That KPI is RevPAR.

We will see why RevPAR is representative of yield shortly.

The Battle for Yield - Example

Let us quickly recollect the formula we saw in the previous section for yield.

Yield = (B) Actual Room Revenue / (A) Potential Room Revenue X 100

For example, say for a Deluxe King Bed Room Type in Paradise Hotel, the Rack Rate is $300.

Assume further that this room is actually sold for $230 on any day.

In this case:

• Potential Room Revenue is $300 and 
• Actual Earned Room Revenue is $230.
• And Yield is: $230/$300 X 100 = 77%

Stated differently, this Deluxe King Bed Room Type has been discounted 23% (100% minus 77%).

Similarly, every day a hotel discounts different room types at different levels based on demand.

Rarely does a rack rate get charged without any discounting other than in exceptional circumstances.

To make it crystal clear to you, let us take a look at the Rooms Market Segments Statistics table for Paradise Hotel.

Yield Management Illustration

In this particular table, rack rate and discounting are not reflected.

But you need to understand something critical.

The Average Daily Rate shown in the table is for an entire month (different months).

It averages all the rates charged at different discounts for different room types.

So, how can you know yield from this table.

Well, not surprisingly, RevPAR to the rescue!

Look at the ADR, Paid Occupancy % and RevPAR rows in the table.

Remember the RevPAR Calculation? - ADR X Occupancy %

So, for Paradise Hotel for the month of January 2019:

RevPAR = ADR ($246) X Occupancy % (80%) = $197

Stated in a different way, REVPAR has just told you the yield.

How?

RevPAR ($197) is 80% of ADR ($246).

In layperson language: 

• RevPAR achieved for the Paradise Hotel shows a 80% yield
• Only 80% of the rooms available is being utilized.

Now look at Paid Occupancy % for February 2019 which is 60%

Notice,  how RevPAR has gone down becoming $241 X 60% = $145.

We can conclude that

• in two months of the same year and
• actually months one after the next and
• with the same rooms available,

RevPAR has declined by 26% $197-$145.

The powerful lesson that comes out is this.

RevPAR uses rooms available (potential) to not merely tell you:

• where you stand in yield at a current level of occupancy and price point,
• but also how much potential is available to improve it.

And did you notice another fact from the example?

• The Paid Occupancy % level is impacting the yield

And the other element that is affecting it is the average daily rate.

• Or, in other words, the extent of discounting that is being practiced by Paradise Hotel on its room rates for its different room types.

Room Rate discounting is now a fact of life.

Hotels are constantly paring down room rates with attractive discounts.

This while reducing profit potential:

• keeps that occupancy graph up and
• balances the yield factor to some extent.

Best Available Rate - a Yield based Approach

Let us go back to the Market Segments section of the Paradise Hotel statement.

You will notice one sub segment called Best Available Rate under the Individual market segment.

The Best Available Rate is a yield based approach.

How does it work?

Every day the Yield Management System (software attached to Hotel Property Management System) based on the:

• forecast occupancy and
• average daily rate for the forthcoming days and weeks,

throws up for:

• specific room types,
• the lowest publicly available rate 
• called the Best Available Rate for that date.

What does this achieve?

The Best Available Rate allows a hotel:

• to offer a substantially discounted rate to be offered to customers
• for specific room types like say, a Deluxe King Bed Room.

Assume that this room type rate is:

• discounted anywhere from 20% to 40% 
• based on some other factors like whether lean or standard month etc.

It offers an attractive rate for a room type (Deluxe King) that is in good demand consistently.

It is a value offering that normally has good takers.

Hotels generally avoid (or offer very little rooms) making Best Available Rate offerings during peak months.

Because, these are the months when they are

• trying to maximize hotel occupancies and
• average daily rates and
• thereby revenue and profit yield.

So, as you can see, room rate discounting is a deliberate strategy that is pursued to optimize hotel revenue yields.

Innovative Yield Based Hotel Business Models

Over the latter part of this decade, millennial and Generation Z customer profiles have almost sounded a death knell to traditional business models.

A potent mixture of young, mobile, urban customers have become the sought after customers.

Carrying with them great spending capability.

They have completely altered market segmentation techniques entrenched for about half a century.

The changes in their tastes and preferences have been disastrous for hotel businesses.

Traditional room and restaurant combinations are producing less incremental revenue and profit.

This has manifested itself in falling room occupancies and plummeting average rates.

In other words, yield is dwindling and the returns stalling.

There was one silver lining though in the clouds of apparent despair.

For a couple of decades now, stakeholders have successfully discovered another cash cow (so to speak).

Into the traditional business model of rooms-restaurant, they have injected a money spinner.

A revenue source that was tried and tested.

With high yield performance.

That delivered consistently high bottom line results.

And drove traffic to hotels.

Wow, that is an impressive combination.

Enter the Retail Business Model.

With retail adding to rooms-restaurant revenue sources, the project got a new name.

These were called mixed use developments.

As in multiple business models in one project.

Retail raised yield a couple of notches higher.

Yield Management was also different for retail compared to rooms and restaurants.

It is a paradigm shift in hotel revenue management strategies.

Covid-19, with its sweeping changes in customer preferences has forced a thorough re-look at another yield factor.

Market Segments.

Re-Calibrating Yield in Market Segments

Market Segments need a major re-calibration in the post pandemic era.

Obsolete ones need to be discarded.

New ones identified and nurtured.

It means a major shift in yield management strategies.

The Competitive Set is one of the most critical first steps in understanding and influencing market share.

However, its real power is a deeper scrutiny of its building blocks (so to speak).

These building blocks are the market segments.

And those need major re-calibration.

Market Segments emphasize the diversity of your target audience.

This means multiple yield levels.

Every market segment does not have the same yield performance.

So, you need to identify the higher yield market segments.

It is generally a good strategy to have diversity in your target audience without spreading yourself too thin.

And the post pandemic era has brought in its own rendition of market segments.

So, the re-calibration process would require identifying which market segments are still relevant.

Plus, which ones have changed.

With some of these transformations understood, your hotel is ready to begin the re-thinking of yield basics too.

And that means going back to the drawing board.

What Are Your Yield Management Strategies Post Pandemic?

How are you re-thinking your hotel yield management strategy?

Are you taking a close look at your yield sources?

Comment below, I will be keen on knowing what your plan of action will be.

Elevate Your Yield Management Learning

For a nuts and bolts illustration of hotel:

• revenue management concepts and
• how revenue and profit can be maximized,

enroll in the Revenue Management Basics Course.

CLICK Below to Enroll in Advance [at Special Limited time 30% off full price] for Revenue Management Basics Course 

Next Week - Behind the Scenes - Professional Development Libraries

We will go behind the scenes to see how Financial Skills Academy Membership includes your very own professional development libraries.

See you next week there.