Handout Concept and Importance of Revenue Management

CONCEPT AND IMPORTANCE OF REVENUE MANAGEMENT - HANDOUT
Introduction
Historically, a hotel's daily performance has typically been evaluated on the basis of either
occupancy percentage or average daily rate (ADR). Unfortunately, such one-dimensional
analyses fail to capture the relationship between these two factors and the room revenue they
produce. For example, a hotel may reduce its prices, or ADR, in an effort to boost occupancy.
This strategy, while helping to increase the occupancy percentage, fails to account for the
revenue lost because of lower prices. Similarly, increases in room rates, or ADR, may be
accompanied by a decline in occupancy percentage. This means that some revenue will be lost
because rooms that might have been sold at lower rates will remain unsold. Some companies
prefer to build occupancy percentage using low room rates to attract business. Other
companies prefer to set a target average room rate and are willing to sacrifice occupancy to
achieve it. Yield management presents a more precise measure of performance
because it combines occupancy percentage and ADR into a single statistic: yield. Simply stated,
yield management is a technique used to maximize room revenues. Yield management takes
into account as many of the factors influencing business trends as possible. It is also an
evaluative tool that al- lows the front office manager to use potential revenue as the standard
against which actual revenue can be compared.
NATIONAL COUNCIL FOR HOTEL MANAGEMENT AND CATERING TECHNOLOGY ,B.Sc. , H&HA
SIXTH SEMESTER
CONCEPT AND IMPORTANCE OF REVENUE MANAGEMENT
BY: ISHIT MOHANTY
2
Definition
Yield management is a pricing strategy, which is commonly utilised by businesses

in hospitality, air travel and other tourism related fields, in order to generate
maximum revenue from a perishable inventory (e.g. hotel rooms, or airline seats).
In simple terms, yield management is a strategy based on selling to the right

customer, at the right time, for the right price. Within the hotel industry, this
typically means selling the right room, to the right guest(s), at the best possible
time, for the highest amount, in order to maximise the revenue earned.
Yield management shares many similarities with the concept of revenue

management, but has actually existed for longer. Nevertheless, it is important to
note that yield management has a more narrow focus and is concerned only with
the selling price and the volume of sales, so that the best possible revenue yield
can be achieved.
The basic concept behind yield management is that certain fixed, time-limited
resources, such as hotel rooms, can be sold for different prices, based on the time
of year, the level of demand, the number of rooms already sold and a wide range
of external factors besides.
The same product (i.e. a hotel room) can be sold to two different customers for
entirely different prices, because of the amount of variables involved in the
process. Yield management strategies take a data-driven approach to ensuring
pricing is adjusted in order to maximise business results.
SIXTH SEMESTER
BY: ISHIT MOHANTY
2
History
The airline industry is considered the birthplace of yield management. After

deregulation in the late 1970s, airline competition in-creased, 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 con-
cerned with selling the right seat to the right customer at the right
price so as to maximize yield.The airline and hotel industries
have several characteristics in common that make them ideal
candidates for yield-management systems. Both have relatively fixed capacities.

Once an airplane has been purchased or a hotel has been built, it is rather difficult
and ex-pensive to increase capacity. The idea, then, is to use your capacity in the
best (most profitable) way possible.
Yield-management techniques are appropriate when a firm is operating with a

relatively fixed capacity, when demand can be segmented into clearly identified
partitions, when inventory is perishable, when the product is sold
well in advance, when demand fluctuates substantially, and when marginal sales
costs are low but marginal production costs are high. What is not as widely known
is the potential application of yield management to other service industries. Yield
management has proven successful in the lodging, car rental, cruise line, railroad
and touring industries—basically, in situations where reservations are taken for a
perishable commodity. The key to successful implementation appears to be an
ability to monitor reservations and to develop reliable forecasts.
SIXTH SEMESTER
BY: ISHIT MOHANTY
2
Basis Of Yield Management
Yield management is based on supply and demand. Prices tend to rise when
demand exceeds supply which is why revenue management seeks to increase
revenue by focusing on high profit bookings rather than high volume bookings.
As a result
 By increasing booking on low demand days and by selling rooms at higher

room rates on high demand days, the industry can improve its profitability.
 In general Room rates should be higher(in order to maximize rate) when
demand exceeds supply and lower (order to increase occupancy) supply
exceeds demand.
Key to Successful Yield Management
 To sell the right product (guestrooms, banquets, food and beverage,

ancillary services)
 To the right customer (business, leisure, convention or government guest)
 On the right day (weekday, weekend)
 For the right price(rack rate, corporate rate, group rate ,government rate,
membership rate)
SIXTH SEMESTER
BY: ISHIT MOHANTY
2
Flexibility of yield management
Once hotel managers started using revenue management techniques, they

recognised that room rates could accurately be adjusted based upon the demand
of specific market segments , such as the following
 Business travellers booking less then seven days prior to arrival.

 Leisure travellers booking three to six months prior to arrival.
 Member of the hotels frequent guest program.
 Travellers making reservations over the internet.
 Travellers making reservations at the hotel website.
 Travellers requiring car rentals, airline reservations and other components
of a complete travel package.
Potential Scope of Yield Management Techniques
Hotels can use revenue management techniques to evaluate the total revenue
potential of a guest or group, including revenue from
 Sale of food and beverages

 Telephone services
 Internet access
 Spa services
 Fitness centre services
 Business centre services
SIXTH SEMESTER
BY: ISHIT MOHANTY
2

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CONCEPT AND IMPORTANCE OF REVENUE MANAGEMENT - HANDOUT

against which actual revenue can be compared.

Yield management is a pricing strategy, which is commonly utilised by businesses

In simple terms, yield management is a strategy based on selling to the right

Yield management shares many similarities with the concept of revenue

The airline industry is considered the birthplace of yield management. After

candidates for yield-management systems. Both have relatively fixed capacities.

Yield-management techniques are appropriate when a firm is operating with a

 By increasing booking on low demand days and by selling rooms at higher

Key to Successful Yield Management

 To sell the right product (guestrooms, banquets, food and beverage,

Once hotel managers started using revenue management techniques, they

 Business travellers booking less then seven days prior to arrival.

Potential Scope of Yield Management Techniques

 Sale of food and beverages

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