Front Office-yield management-notes

Revenue(Rate Management)

Having identified the product straHaving identified the product strategy it is time to focus on price.

 Selling the Right Room

 To the Right Guest

 On the Right Night

 At the Right Rate

 Through the Right Channel

Price matters. As revenue managers none of like to hear it; reality is that consumers still rate price as one of the top factors when making a buying decision. As you will have read in previous Articles like ‘BAR More Than Just a Rate Code‘ I am a big believer in flex pricing based on market demand.

The right rate is the rate that the consumer views as a good value which will cause them to book. Sounds simple enough; where it gets tricky is when pricing for each of the markets that will be layered into your hotel to maximize the revenue, while preventing people who would have bought at a higher rate to buy down.

The chart below shows one of the fundamental learning’s of Revenue Management 101. Layering in a number of different segments of business leads to a better result in RevPAR than keeping one price for all.

Few things to consider before rate setting

1. All rates should fit into one of the following buckets:

o BAR (Best Available Retail Rate): the anchor of the rate strategy representing the fair market price based on demand. As demand changes so will the BAR price.

o Package (Room plus Inclusions): floats off BAR at a premium; shows value when compared to the sum of the parts a la carte.

o Qualified Discounts: floats off BAR at a discount offered to a portion of the population that qualifies.

o Corporate Rates: continue to be both flat and floating prices depending on account. Where possible avoid Last Room Availability allowing for yield opportunity.

o Group Rates: should also be based on demand, while group rates normally provide a volume discount; be sure to measure demand first. There are times where group rates should be at or even higher than BAR.

2. Float as many rates off BAR as possible; allowing for ease of measurement and efficient yielding.

3. Take your competitor pricing into consideration; don’t allow it to dictate your pricing.

4. The consumer determines the right price for your product, be sure to test your pricing, measure the response, and repeat continuously.

5. When Unconstrained Demand is higher than your physical supply shut the back doors in to lower rates. This is the first place to look when your ADR is surprisingly low in high demand periods.

Pricing is a critical element to a solid hotel revenue strategy; take the time to set up your rate plan so that it makes sense and listen to the consumer.

Yield Management

Yield management, or revenue management, is the process by which sales of a limited quantity of goods, such as hotel rooms, airline seats, apartment leasing, rental cars, or etc. are managed in order to maximize profits. Successful yield management focuses on selling the product in such a manner that is timely, price competitive, and directed towards the right subset of customers

An economic concept first posited by Dr. Matt H. Keller, and first used by the airline industries beginning in the 1970s, yield management has evolved in more recent years as an important tool especially for the airline and hotel industries for staying economically competitive in otherwise saturated business playing fields.

The basic concept of yield management is based in the economic principle of supply and demand: when supplies are short, prices go up; when supply is high, prices go down. Yield management is a studied, systematic method by which managers can logically place customers within the supply demand spectrum, and thus gain the highest yield for their products. For example, a customer who has very little flexibility in his or her travel plans is the customer who is most likely to pay a higher price for airline tickets and hotel rooms. The customer with a great deal of flexibility is not as inclined to pay a higher price.

Yield management is a set of techniques and procedures used to manipulate occupancy and/or ADR in order to maximise the hotel’s revenue. It takes into account as many factors influencing business trends as possible. It is also an evaluative tool that allows the FOM to use potential revenue as the standard against which actual revenue can be compared. Yield management or YM can be viewed as the application of tactics that predict or forecast consumer behaviour and effectively price highly perishable products like room nights to maximise RevPar. The goal of YM is to consistently generate the highest possible revenue from the given number of rooms in a certain period of time. It therefore is a set of demand forecasting techniques used to determine whether room rates should be raised or lowered and when a reservation request should be accepted or rejected in order to maximise revenue.

Hotel Chains and Yield Management

Many hotels rate their success by their occupancy levels, but this isn't necessarily the best measure of success. Another way to rate a hotel's performance is by determining its REVPAR, or Revenue per Available Room. REVPAR is calculated by dividing the total room revenue by the total number of rooms. For example, a hotel that makes $6,000 one night with a total number of 100 rooms has a REVPAR of $60.

The yield manager's job is to maximize the revenue per available room by selling rooms to the right customers, at the right price, at the right time. How does the yield manager accomplish this somewhat nebulous task?

Successful yield management arises from several factors: an understanding of what the hotel hopes to achieve (whether that is room occupancy, REVPAR, or some other measurement); a clear understanding of what kind of hotel the manager is working with, which will lead to an understanding of what a customer visiting the hotel wants in his or her hotel experience, and why customers choose their hotel over another hotel; an ability to measure group sales against the overall goals of the hotel (for example, a hotel whose main goal is occupancy will be happy to host a large group at a lowered rate, but a hotel whose main goal is revenue may turn down a larger group in favour of a smaller group who can pay a higher rate); and a knowledge of what will cause the market to fluctuate (such as holidays, regular regional and local events, etc.). The yield manager will ideally consider all these factors when creating different rates for hotel guests.

REVENUE MANAGERS SHOULD BE IMPLEMENTING YM PROCEDURES UNDER FOLLOWING CONDITIONS:
1. Room demand varies by day of the week, time of month, season or in response to local special events.

2. Demand variance is predictable.

3. A potential guest willing to pay rack rate has to be turned away as the room is booked for another guest at a discounted price.

4. Hotel serves guests who are not only value conscious but also those who spend for convenience status etc.

5. The hotel can create difference in services and rooms that can be easily explained to guests.

6. Resources are available to train staff for effective implementation of YM.

7. Hotel seeks to maximise RevPar.

Elements of YM

Flexible rates lead to more guests and associated transactions makes YM a complex managerial tool. It becomes even more complex when discounting is granted on a selective rather than general basis and when it involves selling rooms for which there may be competing buyers. While developing a successful Yield Strategy, the following Elements are very important:

Group Room Sales
Transient (FIT) Room Sales
Food and Beverage Activity
Local and Area-wide Conventions
Special Events

1. Group Room Sales:

Group Booking Data Determines whether the Group blocks already recorded in the Reservation File should be modified or not and adjusts expectations by reviewing the Group’s Booking History. Determine if group blocks should be reduced owing to anticipated cancellations or over estimations of group size. Groups generally block 5% to 10% more rooms than they require so that they have sufficient space for their members. DELETION OF UNNECESSARY

GROUP ROOMS FROM GROUP BLOCK IS CALLED WASH FACTOR.

Group Booking Pace Watches out for the Rate at which Group Business is being booked (Consider Historical Trends). Booking here is the initial agreement between the group and the hotel and not the individual rooms in group block by group members. It is in form of percentage compared to the number of previous years’ bookings during that same period. Management should try to keep the method for tracking group bookings pace forecasts as simple as possible.

Anticipated Group Business Watches out for repetitive Group Patterns and act accordingly in order to forecast the Pressure on the Market, and hence adjust Selling Strategies. It is unbooked business likely to return. A group for example may rotate in 3 cities having its congression once in 3 years in the same city. Although a contract may not yet be signed, but the management may be confident that the group will return according to the cycle. TENTATIVE BOOKINGS that await final contract negotiations are also normally included in YM.

Group Booking Lead-Time Measures how far in advance of a stay Bookings are made. This is very important in determining whether to accept an Additional Group and at what Room Rate to book the New Group. Average lead times may be up to 2 months or more. Management must determine its hotels lead time for group bookings so that a booking trend can be charted. This trend can be combined with the booking pace information on a graph to illustrate the rate at which the hotel is booking business compared with historical trends. This information is essential in determining whether to accept an additional group and at which room rate. If current rate of group bookings is lower than historical rates the book rooms at discounted prices.

Displacement or Transient Business Occurs when a Hotel accepts Group Business at the Expense of Transient Guest willing to pay rack rate. This might engender Profitability Problems and Bad Reputation. A hotel should first look into the revenue factors and accept a group if the expected revenue gain offsets the transient guest revenue loss. Also consider guests who cannot be accommodated if they are regular or first time guests along with secondary and tertiary displacements

2. Transient Room Sales:
The Front Office Management shall monitor the Booking Pace and Lead-Time of Transient Guests in order to understand how Current Reservations compare with Historical and Anticipated Rates

3. Food and Beverage Activities:
All local Food and Beverage Functions should be viewed in light of the Potential for Booking Groups that need Meeting Space, Food and Beverage Service, and Guest Rooms

4. Local and Area-wide Activities:
Even when a Hotel is not in the immediate Vicinity of a Convention, Transient Guests and Smaller Groups displaced by the Convention may be referred to the Hotel (as an Overflow Facility) and this may have a tremendous Impact on Hotel’s Revenue

5. Special Events:
In Special Events (Concerts, Festivals, and Sporting Events), Hotels might decide to benefit from High Demand by restricting Room Rate Discounts or requiring a Minimum Length of Stay

Functions performed by YM techniques:

1. Improves forecast demand.
2. Determines of discounting activity whereby discounts are eliminated during high demand periods.
3. Uses MLOS minimum length of stay and CTA closed to arrival to maximise revenues in peak demand periods.
4. Implements special event rates in peak demand periods.
5. Improved seasonal pricing and inventory decisions.
6. Identification of target market segment demands.
7. Improved development of business plans.
8. Establishment of value based rate structure.

Points to kept in mind while managing yield:

1. Occupancy and ADR index should be close: within a few percentage points of each other.
2. Rate integrity should be maintained over various distribution channels.
3. Revenue management should be a daily activity with constant monitoring of competition rates via internet, call around etc.
4. It may be necessary to gamble on rates sometimes, but do so based on known data and with minimal costly walks.

Techniques of YM

Capacity management:

1. Also called as selective over booking.
2. It involves controlling and limiting room supply.
3. It balances risk of overselling against loss in potential revenue arising from SPOILAGE- rooms going unoccupied after reservations were closed off.
4. Also involves number of walk-ins to accept in place of expected cancellations and no shows.
5. It varies with room type; it being more prudent to overbook lower priced rooms.

Discount allocation:

1. Involves restricting the time period and the product mix available at reduced prices.
2. Primary objective is to protect enough remaining rooms at a higher rate to satisfy the projected demand at that rate while at the same time filling up rooms that would otherwise have remained unsold.
3. Works on the principle that sale of a perishable item at a reduced price is often better than no sale at all.
4. Limiting discounts also encourages up selling.
5. PRICE ELASTICITY refers to relationship between price and demand that needs to be carefully considered

Duration control:

1. This places time constraints on accepting reservations in order to protect sufficient space for multi day requests.
2. A reservation for one night stay may be rejected even though space is available.
3. Hotels in peak occupancy should prefer reservations to be for more than one evening. MLOS/CTA.

Putting Yield Management to Work

in principle, yield management tactics are fairly straightforward. In practice, they require you to be diligent, shrewd, and always on top of your game as a hotelier. Gone are the days of simply offering a rate discount to convention attendees in order to lengthen their stay beyond convention days. Today's hotelier must know the tendencies of each demand segment and how to satisfy those tendencies in a way that maximizes profit. Offering solutions instead of discounts to parsimonious patrons has proven a far more effective way of encouraging them to stay, and stay longer, at your hotel. This is where an investment in yield management pays off.

A profitable yield management strategy also involves exploiting the best (and diminishing the least-efficient) aspects of a hotel's daily operation. Wholesale cost-cutting rarely proves effective because there aren't many viable areas, depending on a hotel's brand and service level, in which to make cuts: you can't close down one day a week to save on energy and maintenance, you can't shut down the pool just because only a handful of guests are there to swim, and you can't leave the front desk unmanned to save the cost of a shift.

Instead, leveraging some routine costs can be useful in bolstering hotel revenue. For example, costs associated with a hotel's breakfast buffet, including food preparation and waste disposal, will exist whether the hotel is fully or sparsely occupied on any given day-that is, the table could be all laid out but with too few guests to partake of what's offered. A 'free breakfast' offering during slow periods can encourage more guests to stay at your hotel, improving overall revenue with only a marginal effect on food and beverage costs. Likewise, complimentary phone and Internet use are swiftly becoming the norm for negotiated corporate rates. As hoteliers cast their lines into the uncertain waters of 2009, such value-added amenities can prove an essential lure in capturing demand.

What is Revenue Management?

To use the American Hotel and Lodging Educational Institute’s definition, revenue management is “a set of revenue maximization strategies and tactics meant to improve the profitability of certain businesses.” This definition purposely leaves the complex multidisciplinary aspects of the process vague, to emphasize its ultimate goal: improving profitability. It is complex because it involves several aspects of management control, including rate management, revenue streams management, and distribution channel management, just to name a few. Revenue management is multidisciplinary because it blends elements of marketing, operations, and financial management into a highly successful new approach.

Perhaps the best definition is Wikipedia’s: revenue management is the process of understanding, anticipating and influencing consumer behaviour in order to maximize revenue or profits from a fixed, perishable resource (such as airline seats or hotel room reservations). This encapsulates both the overarching goal of the process, and its crucial relationship to consumer behaviour. What is revenue management except a means to mould consumer behaviour in a way that benefits the hotel?
Understanding

The first step in this long and ongoing process of encouraging consumer behaviour that is beneficial to the hotel is understanding consumer behaviour in the first place. What motivates a potential guest to book a room at one hotel as opposed to another, or at one price and not another is an essential concept to grasp. Though this can be conjecture, the relationship between pricing and booking pace (and that of a hotel’s competitors) is easily measured, and elucidates the same set of behaviours. Selling a room to a guest at the right price to both maximize occupancy and the revenue it generates is impossible without first considering what will prompt a consumer to make the purchase. It is very easy to understand the consumers buying habits if you are able to collect a property’s purchasing data analyze it and then read and interrupt the data in real time. This is easier said than done, but very possible if you have the right system in place.

Anticipating

Once an understanding of consumer behaviour is gleaned- both in a general sense and specific to the property and the property’s competitors- then management can begin to anticipate that consumer behaviour. This is where the real challenge or revenue management emerges: being as accurate with this anticipation as possible, through forecasting, modelling, and exhaustive research. Only when consumer behaviour is at least partially anticipated can a hotel hope to sell and distribute their room inventory effectively, which is how revenue management leads to higher revenues and profitability. Once all data is collected and analyzed a pattern will begin to form. This pattern will constantly change and evolve just like any market. The key is to have a system in place with Artificial Intelligence (AI) that can understand and adapt to these changes in real time.

Influencing

The last, and most critical aspect of revenue management, is actually influencing consumer behaviour. If a hotel can understand and anticipate a consumer’s decision, then the next logical step is to guide that decision in a direction that is beneficial to the property. In terms of selling rooms, exerting influence is largely a function of presentation and sales channel distribution, in an effort to display a room to a customer at the price most likely to incite them to buy (while simultaneously being the price that earns the most revenue for the hotel in that situation). The process of influencing consumer behaviour is the capstone of revenue management; it is supported by understanding and anticipating consumer behaviour, but in the end it is all the only visible result of a revenue management strategy. Once you have collected and analyzed all of the data, it will be simple to implement the findings into your revenue management processes. By doing so, it will provide you with a huge competitive advantage in the market, thus helping you capture a bigger share of the market.

Of course, being capable of executing the technical aspects of revenue management is crucial to the success of any revenue management strategy. The ability to modify prices in a real time environment, effectively manage inventory, balance and optimize sales channel distribution and facilitate cross-departmental cohesion are important nuts and bolts of the revenue management machine; it won’t function without them. But neither will it work without an understanding of the fundamental principles of revenue management.

So remember: Understand, anticipate and influence. These are the fundamentals of revenue management and the keys to a hotel’s financial success.