What is Yield Management in the hotel industry? An introductory guide

Yield management is the practice of making sure you sell your set inventory of rooms at the best price to maximize your revenue and cover your operating costs.

For an independent hotelier with little commercial experience, dipping your toe into Revenue Management or Yield Management can be daunting. There’s a lot to learn and so many things to consider to make a success of your business.

One of those things is optimizing your room revenue.

Understanding and managing revenue streams, expenses, and profitability is a non-negotiable part of the commercial side of your hotel. But making effective pricing decisions isn’t as easy as it seems, especially when you have to weigh up factors like seasonality and competitors.

Yield management, underpinned by a dynamic pricing strategy, enables you to eliminate guesswork and drive as much profitability out of your room rates as possible.

So, how can you successfully implement this strategy at your independent property?

What is Yield Management?

Your hotel has a limited number of rooms available each night and if they don’t get filled that night of room revenue is lost forever.

Yield management is the practice of making sure you sell your set inventory of rooms at the best price to maximize your revenue and cover your operating costs.

Bear with us for a second, but imagine your hotel is a lemonade stand. Yield management means figuring out the best times to sell lemonade and how much to charge to make a profit. For example, when it's hot outside, more people want lemonade, so you can charge a bit more. But on cooler days, you might need to lower the price to attract customers.

Now, you’re selling hotel rooms, not lemonade, but the concept still applies. Yield management is about being smart with your resources, understanding the market, and determining a strategy to maximize Revenue per Available Room (RevPAR).

This enables you to find the right balance between filling your rooms and turning a profit.

Yield management versus revenue management. What's the difference for hoteliers?

Yield Management & Revenue Management - what’s the difference?

Yield Management and Revenue Management are closely related concepts in the hospitality industry, but they have distinct focuses and approaches. Let’s look at how they differ:

  • Yield Management

    Yield Management came before Revenue Management and originated in the airline industry in the early 1980s.

    It has a more specific focus on maximizing revenue by dynamically adjusting prices based on demand fluctuations and inventory availability.

  • Revenue Management

    Revenue Management is a more all-encompassing concept that includes Yield Management and extends beyond pricing to include all aspects of revenue optimization and strategic planning.

    It considers revenue generation across all revenue streams and business segments within a hotel or hospitality organization.

    For independent hoteliers who are unfamiliar with hotel Revenue Management or are constrained by time, Yield Management is a good starting point for your property.

The importance of Yield Management in the hotel industry

In an industry as competitive as hospitality, any advantage you can gain should be seized. Yield management is essential for several reasons. It helps you:

  • Maximize revenue

  • Optimize occupancy

  • Improve profitability

  • Enhance the guest experience

  • Achieve financial stability

  • Gain valuable insights into market dynamics

When you’re operating with time-limited, perishable inventory and facing stiff competition, Yield Management helps you capitalize on demand fluctuations and market opportunities.

This means you not only sell enough rooms to cover your operating costs but you make a sustainable profit.

Calculating Yield

Determining your yield can help you make the right pricing choices to turn a profit.

A basic yield management equation involves dividing actual revenue by possible revenue and then multiplying by 100.

For instance, if your hotel has twenty rooms available for booking and the maximum rate is $200, its potential revenue is $4,000. If the hotel manages to sell ten rooms at $170, its actual revenue is $1,700.

You would then divide 1700 by 4000, and multiply by 100 to find your yield, which is 42.5%.

A basic yield management equation for hotels involves dividing actual revenue by possible revenue and then multiplying by 100.

Key concepts in Yield Management

Yield Management revolves around several key concepts that help you maximize revenue:

  • Demand forecasting: Predicting future demand for your hotel rooms is essential for effective yield management.

    You can do this by analyzing your historical data and market trends, future-facing market intelligence, and looking at upcoming events in your region.

  • Inventory management: Yield Management focuses on managing hotel room inventory effectively.

    This includes controlling room availability, allocating inventory to different distribution channels, and implementing restrictions such as minimum length of stay and overbooking to maximize revenue potential.

  • Dynamic pricing: This involves adjusting room rates in real time based on demand fluctuations, market conditions and other factors. This is the key element to successful Yield Management.

    Hotels now use pricing algorithms and tech solutions to set optimal prices that maximize revenue.

Where to begin: Implementing Yield Management at an independent hotel

Think you’re ready to implement Yield Management at your hotel but aren’t sure how to start?

That’s what we’re here for. Let’s get to the basics first:

  • Understanding your hotel's demand patterns: Begin by understanding your market’s demand patterns, including peak seasons, low-demand periods, and factors influencing demand fluctuations.

    Factors could include seasonality, local events, or weather conditions, for example.

  • Segment your market: Divide your target market into segments based on factors such as demographics, booking behavior, and preferences. This segmentation allows you to tailor pricing and promotions to different customer groups.

  • Setting your pricing strategy: Develop pricing strategies that correctly align with demand patterns and market dynamics. Determine optimal pricing for different room types, booking channels, and customer segments.

    Consider factors such as competitor pricing, consumer willingness to pay, and value-added services.

This may sound like a lot of analysis to create a dynamic pricing strategy when you have limited resources at your disposal.

Luckily, this is where technology comes into play.

The right tech solution is essential to successful Yield Management at your hotel

The role of technology in Yield Management

Using the right tech solution is now essential to successful Yield Management at your property.

This allows you to hand over the burden of data analysis to machine learning, saving you time and enabling you to make more informed pricing decisions. That’s right: no more time spent weighing up market dynamics and applying guesswork to your pricing strategy.

For instance, Pricing Assistant by Lighthouse is the new pricing recommendation tool built for independent hoteliers, which easily automates dynamic room pricing at your property, so you can easily reap the benefits of effective Yield Management, with minimal effort.

With tailored and transparent AI-driven room price recommendations, you can capture revenue opportunities, while saving time.

It instantly displays price recommendations for up to 365 days in the future.

Say goodbye to manual updates and countless hours of pricing estimates, so you can spend your time where it matters most.

Start automating dynamic room pricing at your property. Try Pricing Assistant today.