Yield Management And Hotel Software

When a hotelier is approached by a “yield-management specialist,” it is usually a short time before the wonders and value of computer tools and systems are discussed.

Discussions of yield management appear to be inextricably linked to computer systems and their capabilities of forecasting demand, optimizing reservation-inventory allocations, and limiting discount availability.

Yield management is neither a computer system nor a set of mathematical techniques. It is an approach to increasing revenues and improving service by responding to current demand. It is a process, a way of conducting business.

Certainly, computer-based tools can be a key component of a yield-management program. The full range of the benefits of yield management will not be achieved without computer-based tools that do the following: forecast demand, cancellation, and no-show activity; determine when to restrict the sale of discounts; estimate the revenue displacement of transient demand caused by a group; recommend and control reservation availability on the basis of length of stay and daily rate; and perform many other actions that could not otherwise be effectively carried out.

But other yield-management practices can be implemented with little or no investment in computer resources. Upselling programs, enhanced scripting for reservations agents that enables them to be more-effective sales agents, revised performance measures, and marketing programs and packages that produce incremental revenue gains are a few of those actions.

Some hotels can carry out those business processes better than others because of the way they monitor employee actions and customer purchasing behavior and identify and communicate the actions of hotel staff members.

Although yield-management decision making may be supported by sophisticated mathematical modeling, yield-management programs also involve other elements, for example:

• Education and training,

• An appropriately designed and delivered product, and

• Corporate policies and procedures that encourage revenue enhancement.

Those three areas must be addressed in a coordinated manner when developing or enhancing a yield-management program. Focusing too heavily on any one of them will lead to an unbalanced program that will not produce anticipated benefits. Employees must be able to learn from their decisions—information-feedback mechanisms are critical. As a yield-management program

becomes more sophisticated, so too will the feedback mechanisms.

Product.

One concept of yield management that has proved successful focuses on offering a

product at multiple prices, differentiating the price by some service or purchase characteristic at

each price point. Many hotels have had trouble implementing yield management because they have failed to modify their product appropriately. The customer wants each product to have only one price.

When you go into a store, a product sells for a single price. You either buy it or you don’t. (It is interesting to note that many car dealers in the United States are finding that customer satisfaction is increasing as they move toward selling new cars by promoting prices that are nonnegotiable. Several hotel chains are now beginning to follow suit.)

On the other hand, when you call some hotels and are quoted a price, if it is too high, you will be quoted additional lower prices—often for the same room and without any service variations. Why? If a hotel offers multiple prices for the same room, the rates need to be differentiated. Effective market segmentation is critical. These questions need to be answered:

What types of customers will purchase the product?

What value do they place on it?

How do the purchase needs and behaviors of the market segments differ?

Airlines have differentiated their product on the basis of purchase and service restrictions such as

refundability, advance-purchase requirements, and Saturday-night-stay requirements.

Hotels that offer multiple prices for a room must do the same. The particular service characteristics may differ from the airline approach, or even among hotel chains. But consumers must understand why the same room can cost either $69 or $169.

Policies and procedures.

Corporate policies and procedures should be designed to encourage revenue enhancement. One firm had a performance-measurement system with multiple monthly goals. As the end of the month approached, employees’ behavior would often change to reflect their progress toward achieving each of the goals.

The end-of-the-month behavior, while maximizing an employee’s compensation, did not maximize the firm’s revenue. Changes in the performance measures have helped reduce the problem.

Senior managers at another firm were acutely aware that accepting reservations beyond capacity

resulted in unaccommodated customers. But they did not know how much additional revenue was

generated by overbooking.

Personnel in the yield-management department received several directives to reduce over-booking

levels. During a review of the company’s yield-management practices, departmental procedures

to constrain the overbooking levels were identified, and their implications were discussed with

senior management. The revenue implications of the constraining procedures were estimated. When senior management learned how much revenue loss was associated with its directives, changes were instituted, overbooking levels were pushed to a higher level, and revenues increased.

Technical models.

Using the right technical models is critical in identifying the right actions to take. A hotel-casino stopped using available yield-management computer software because management believed that the software was making incorrect recommendations. The management was correct: the software did not consider the value of gaming revenue when making recommendations about room-rate

availability.

The software was useful to the free-standing hotels in the hotel chain, but not to hotels with casinos. The management of the hotel-casino was right to stop using the software, but it was

mistaken in its belief that yield-management concepts did not apply to its business.

Because yield management is a business process, it would be unwise to say that the tail (yield

management) should wag the entire dog (the hotel). One hotel chain reportedly spent more than a million dollars on yield-management software. During its implementation, however, the hotel

company’s managers realized that the software did not meet the operating needs of many of the

chain’s hotels. The chain is currently working to replace the software with a yield-management

program that better meets the actual needs of its hotels. Hoteliers are well advised to think and plan ahead before selecting yield-management software.

When a hotelier is approached by a “yield-management specialist,” it is usually a short time before the wonders and value of computer tools and systems are discussed.
Discussions of yield management appear to be inextricably linked to computer systems and theircapabilities of forecasting demand, optimizing reservation-inventory allocations, and limiting discount availability.
Yield management is neither a computer system nor a set of mathematical techniques. It is anapproach to increasing revenues and improving service by responding to current demand. It is a process, a way of conducting business.
Certainly, computer-based tools can be a key component of a yield-management program. Thefull range of the benefits of yield management will not be achieved without computer-based tools that do the following: forecast demand, cancellation, and no-show activity; determine when to restrict the sale of discounts; estimate the revenue displacement of transient demand caused by a group; recommend and control reservation availability on the basis of length of stay and daily rate; and perform many other actions that could not otherwise be effectively carried out.
But other yield-management practices can be implemented with little or no investment in computerresources. Upselling programs, enhanced scripting for reservations agents that enables them to bemore-effective sales agents, revised performance measures, and marketing programs and packages that produce incremental revenue gains are a few of those actions.
Some hotels can carry out those business processes better than others because of the way theymonitor employee actions and customer purchasing behavior and identify and communicate theactions of hotel staff members.
Although yield-management decision making may be supported by sophisticated mathematicalmodeling, yield-management programs also involve other elements, for example:• Education and training,• An appropriately designed and delivered product, and• Corporate policies and procedures that encourage revenue enhancement.
Those three areas must be addressed in a coordinated manner when developing or enhancing ayield-management program. Focusing too heavily on any one of them will lead to an unbalancedprogram that will not produce anticipated benefits. Employees must be able to learn from theirdecisions—information-feedback mechanisms are critical. As a yield-management programbecomes more sophisticated, so too will the feedback mechanisms.
Product. One concept of yield management that has proved successful focuses on offering aproduct at multiple prices, differentiating the price by some service or purchase characteristic ateach price point. Many hotels have had trouble implementing yield management because they have failed to modify their product appropriately. The customer wants each product to have only one price.
When you go into a store, a product sells for a single price. You either buy it or you don’t. (It is interesting to note that many car dealers in the United States are finding that customer satisfaction is increasing as they move toward selling new cars by promoting prices that are nonnegotiable. Several hotel chains are now beginning to follow suit.)
On the other hand, when you call some hotels and are quoted a price, if it is too high, you will be quoted additional lower prices—often for the same room and without any service variations. Why? If a hotel offers multiple prices for the same room, the rates need to be differentiated. Effective market segmentation is critical. These questions need to be answered:What types of customers will purchase the product? What value do they place on it? How do the purchase needs and behaviors of the market segments differ?
Airlines have differentiated their product on the basis of purchase and service restrictions such asrefundability, advance-purchase requirements, and Saturday-night-stay requirements.
Hotels that offer multiple prices for a room must do the same. The particular service characteristics may differ from the airline approach, or even among hotel chains. But consumers must understand why the same room can cost either $69 or $169.
Policies and procedures.Corporate policies and procedures should be designed to encourage revenue enhancement. One firm had a performance-measurement system with multiple monthly goals. As the end of the month approached, employees’ behavior would often change to reflect their progress toward achieving each of the goals.
The end-of-the-month behavior, while maximizing an employee’s compensation, did not maximize the firm’s revenue. Changes in the performance measures have helped reduce the problem.
Senior managers at another firm were acutely aware that accepting reservations beyond capacityresulted in unaccommodated customers. But they did not know how much additional revenue wasgenerated by overbooking.
Personnel in the yield-management department received several directives to reduce over-bookinglevels. During a review of the company’s yield-management practices, departmental proceduresto constrain the overbooking levels were identified, and their implications were discussed withsenior management. The revenue implications of the constraining procedures were estimated. When senior management learned how much revenue loss was associated with its directives, changes were instituted, overbooking levels were pushed to a higher level, and revenues increased.
Technical models. Using the right technical models is critical in identifying the right actions to take. A hotel-casino stopped using available yield-management computer software because management believed that the software was making incorrect recommendations. The management was correct: the software did not consider the value of gaming revenue when making recommendations about room-rateavailability.
The software was useful to the free-standing hotels in the hotel chain, but not to hotels with casinos. The management of the hotel-casino was right to stop using the software, but it wasmistaken in its belief that yield-management concepts did not apply to its business.
Because yield management is a business process, it would be unwise to say that the tail (yieldmanagement) should wag the entire dog (the hotel). One hotel chain reportedly spent more than a million dollars on yield-management software. During its implementation, however, the hotelcompany’s managers realized that the software did not meet the operating needs of many of thechain’s hotels. The chain is currently working to replace the software with a yield-managementprogram that better meets the actual needs of its hotels. Hoteliers are well advised to think and plan ahead before selecting yield-management software.