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Concept of Yield Management in Business Report (Assessment)

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Updated: Aug 12th, 2019

Summary

Hotel managers are required to have a proper understanding of yield management, its use, as well as implementation. This is mainly because it is a strong determinant of the course hotel takes, that is, in terms of success. Its use has widely been witnessed in the aviation industry in which it has been a success.

Yield management is quite new in the hotel industry and more needs to be understood on its implementation (Arnold, 1994, p. 30-34). Yield management as practiced in hotels refers to the method employed by managers to ensure that the highest possible return is achieved from available space.

Most authors refer to it as selling of the right space to the right individual (customer) at the time and price. It therefore involves a lot of decision making to attain the best return from available space.

Several elements like having a proper understanding of the market, and setting of viable strategies aimed at achieving long term visions can sustain the business.

Strategies such as exploring competitors’ methods of pricing should therefore be put into consideration when dealing with yield management (Ellerbrock, Hile & Wells, 1984, p. 11-18).

Sustainability is an essential element in every business; managers should therefore focus on ways that can maintain that. This has to wok through all departments of the system, ranging from investors through the managers to staff.

Computer systems are vital in facilitating yield management implementation; it therefore requires diversity in decision making from managers. Factors such as average room rate along with the average room occupancy are essential in influencing the manager’s decisions on yield management.

The manager has to decide on high sales at lower rates or low sales at high rates since the two factors influence each other (Lockyer, 2007, p. 157-181). He/she has to weigh these options in decision making to achieve the best balance. Yield management can thus be calculated as revenue realized divide by revenue potential.

There are two main requirements for yield management namely low variable and high fixed costs, in hotel management. Fixed costs are considered as building costs while variable costs include servicing expenses.

The traditional theory and logic states that if the fixed cost is covered in the shortest possible period by revenue, then discount can be offered to customers for rooms. This has led to establishment of room inventory management as well as differential pricing of rooms to balance yield management (Koss, 1992, p. 84-85).

Several strategies are employed by managers to decide on room rates since hotel industry is very competitive. This depends on demand and available space and has always conflicted economies of scale since it purely depends on customers.

Managers that consider large number of customers usually lower their rates, in effect, generating lower profits per room and hence defying economies of scale. Managers have the responsibility of ensuring the right pricing at the right time.

Customers also tend to dislike sharp changes in price, it therefore force most managers to review their prices annually. This has lead to creation of varying room rates for the same hotel (Withiam, 2011, p. 1). These varying room rates can be as many as fifteen so as to attract different customer categories.

Several factors have been observed to affect pricing; these include advertising costs, variable costs, fixed costs, competitors, available amenities, and time or season of the year, among others. According to Ellerrbrock et al., variable costs are very important factors in pricing.

Moreover, customers further complicate pricing issues as they sometimes feel that the higher the price the better equipped the hotel (Kimes, 2004, p. 52-68).

Most hotels face decision crisis on charging high prices for low occupancy or low rates for high occupancy, The latter may have a disastrous long term effect as customers feel that the cheaper the hotel the less equipped. On the other hand, the former can also cause adverse effects on both long term and short term revenues.

It is therefore quite important that managers balance the two. Recent studies, for instance in Malaysian hotels have shown that hotel owners are increasingly taking control of pricing, which in effect dictates yield management and may cause adverse effects on revenue (Landany, 2001, p. 18).

Environment in which a business is situated is quite vital in determining yield management techniques, for instance issues that affect the surrounding such as holidays and tourist sites, among others, have direct impact on yield management.

Ensuring guest satisfaction is also very crucial in enhancing yield management; this has the prospect of attracting more customers at the same or higher price. Internet is also a factor in pricing and has an interesting effect on customers.

This is because some hotels advertise themselves as offering the best prices, which may not be true, but they get away with it in attracting several customers.

Yield management encompasses several factors apart from pricing and discounts, external factors such as environment and internet should be considered with great focus. Managers should take into consideration all factors and elements that affect yield management before its implementation.

Yield management is therefore quite simple to define, but very difficult to implement in hotels to achieve the best returns (Huyton, Evans & Ingold, 1997, p. 84-87).

Discussion Questions

How can short-and medium term objectives be in conflict?

Short term objectives may have several implications on the mid term and long term objectives of hotel management as well as yield management. Short term objectives are those objectives aimed at generating quick cash or continued cash flow. It may involve reduction in room rates or room prices.

These objectives usually focus on overcoming some short term goals, like attaining a number of occupancy with an aim of sustaining them.

In most cases this rarely happens as more people come expecting even more reduction in prices while other customers tend to move ways from very cheap places fearing for poor management and facilities. Short term objectives therefore face several potential problems.

These problems may range from poor maintenance of hotel facilities due to lower room rates, unstable cash supply in the long term which may result from poor room management and in effect destroying the reputation of that particular hotel (Gijsbreechts, 1993, 115-151).

Medium term effects on the other hand usually focus on the mid term revenue generation, and this can be achieved by effecting moderate price ranges for rooms.

Medium term objectives also focus on the future sustainability of customers and may contain a wide range of room rates to accommodate variety of customers. Medium term objectives can be useful in determining sustainability of the business which is very important (Lewis, 1987, p. 83-88).

Managers usually have difficult times in deciding whether to go for medium term or long term goals. When the cash flow is favorable then it is quite easy to move into medium term goals or even long term objectives.

However when there is low cash flow and off season, it is very tasking and more often managers resort to short term objectives so as to sustain their hotels within those difficult periods.

Medium term objectives are more favorable to yield management as it focuses on sustainability of the business for the long run. This is quite different from short term objectives which may lead to long term problems (Jones, 1999, p. 1111-1119).

For instance, in short term objectives, when a manager reduces prices considerably to enable the hotel overcome a difficult period, customers, as has been stated above, never understands this; in fact, some would love the prices to be lowered much further, especially during the high seasons.

In addition, some would consider the hotel non competitive due to the considerably low prices. These categories of customers usually make it complex for managers to strike the best deal in making pricing strategies.

However, when it comes to medium term goals, the manager is not in any crisis in the first place, so he tries to make the hotel sustainable for a much longer period. The long term goals are not adversely affected, and prices are not very low.

Furthermore there is variety of room rates which befits a wide range of guests; this makes business more sustainable as compared to short term objectives. It is therefore quite clear that short term objectives conflict medium term objectives.

Their focus on the long term sustainability of the business widely differs and in most cases short term objectives are only aimed at saving cash flow which may dry out during low seasons.

Moreover, price strategies in both cases differ as one focuses on continued growth while the other (short term) emphasizes on saving the hotel from running out of cash flow (Lockyer, 2003, p. 297-305).

How can staff training influence the profitability of a hotel?

Staffs consist of all the service provides in the hotel. They are availed in different departments depending on their functions such as finance, among others.

Their coordination is very essential in ensuring high profitability. Coordination improves service delivery and saves time, which is very important for customers (Licherman, 1993, p. 34-41). When service delivered is quality and time saving, guests in that hotel would prefer to return regardless of the prices charged.

Most guests consider hotel facilities and services before they go into price details (Higley, 2003, p. 8). They prefer better facilities at higher costs than poor services which may be cheap.

Staffs are therefore a very instrumental component of yield management and for higher profitability to be attained, staffs must be involved.

Since yield management requires an in-depth understanding before its implementation, it is important that staffs are trained on yield management methods and their coordination to enhance efficiency.

Staff training should be conducted in a timely manner to achieve the best return at the right time. When the right customer is served by the right staff (adequately trained staff), then this helps in achieving yield management (Enz, 2003, p. 4-6).

Profitability of hotel depends on the pricing as well as occupancy rate. When there are many guests, at a high rate, profitability is sound but when the opposite is experienced, the manager has a difficult task.

Having known most guests to value services offered above prices, it is quite clear that instead of reducing prices considerably, one should first ensure that the right kind of staffs offer these services. Adequately trained staff will therefore be of much value to a business than lowering prices (Fesertag, 1992, p. 4).

In essence, profitability of most hotels depends more on service delivery than pricing. Yield management factors in staff training for its implementation to be considered successful.

Trained staffs have a better understanding of their environment of work, this help in enforcing a working culture that the business can emulate in every staff member to instill confidence in guests who are usually sensitive to several issues.

The level of staff training determines their service delivery and how they interact with customers. Professionalism is an essential element that guests should notice in staffs, and this cannot be achieved without training (Da Costa, 2001, p. 252-262).

Staff training is therefore very important in determining the number of returning customers (Budinelli, 2000, p.476). These customers who return are likely to market the hotel wherever they go, giving it a higher rating.

More customers mean higher profitability if their presence is triggered by good work ethics in business rather than price reduction (Brewton, 1991, p. 19-21). Trained staff is also essential in cementing relationship with regular customers which is quite important in ensuring sustainability.

Staff training is a factor that positively affects yield management and most managers would find it easy implementing and achieving yields management when their staffs fully understand the steps involved as well as coordination.

In this regard, managers of hotels should ensure that every staff member is well trained to deal with required tasks efficiently; this will improve the overall rating of the institution, in the process building a strong partnership with regular guests as well as making it an attractive prospect to potential customers (Berman, 2005, p. 169).

Reference List

Arnold, D. (1994). Profits and prices: A lodging analysis. Council Hotel & Restaurant Administration Quarterly. 35 (1). 30-34.

Berman, B. (2005). Applying yield management pricing to your service business. Business Horizons. 48 (2). 169.

Brewton, C. (1991). Cutting prices to boost occupancy can be risky. Hotel & Motel management. 206 (11). 19-21.

Budinelli, R.D. (2000). An optimal, dynamic policy for hotel yield management. European Journal of Operational research. 121 (3). 476.

Da Costa, N. (2001). Differential pricing segmentation on the internet: The case of Hotels. Management Decision. 39 (4). 252-262.

Ellerbrock, M.J., Hile, J.C., & Wells, G. (1984). Competition and lodging room rates. International Journal of Hospitality Management. 3 (1). 11-18.

Enz, C.A. (2003). Hotel pricing in a networked world. Cornell Hotel and Restaurant Administration Quarterly. 44 (1). 4-6.

Fesertag, H. (1992). Discounting rates does more harm than good. Hotel & motel management. 207 (18). 14.

Gijsbreechts, E. (1993). Prices and Pricing research in consumer marketing: Some recent developments. International Journal of Research in Marketing. 10 (2). 115-151.

Higley, J. (2003). Discounting isn’t bad when it’s done correctly. Hotel and Motel management. 218 (13). 8.

Huyton, J., Evans, P., & Ingold. (1997).The legal and moral issues surrounding the practice of yield management. International Journal of contemporary Hospitality Management. 9 (2). 84-87.

Jones, P. (1999). Yield management in UK hotels: A system analysis. The Journal of Operational research. 50 (11). 1111-1119.

Kimes, S.E. (2004). Restaurant revenue management: Implementation at Chevys Arrowhead. Cornell Hotel and Restaurant Administration Quarterly. 45 (1). 52-68.

Koss, L. (1992). Room-rate structures simplified. Hotel & Motel Management. 207(7). 84-85.

Landany, S. P. (2001). Optimal hotel segmentation mix strategy. International Journal of Services Technology and Management. 2 (1/2). 18.

Lewis, R.C. (1987). The measurement of gaps in the quality of hotel services. International Journal of hospitality Management. 6 (2). 83-88.

Licherman, W.H. (1993). Debunking the myths of yield management. Cornell Hotel and Restaurant Administration Quarterly. 34 (1). 34-41.

Lockyer, L.G. (2007). The International Hotel Industry: Sustainable Management. Business and Economics. The Haworth Press, Inc. doi: 10.1300/5869_07

Lockyer, T. (2003). Hotel Cleanliness: How do guests view it? Let’s get specific. The International Journal of Hospitality Management. 22 (3). 297-305.

Withiam, G. (2011). . Cornell University School of Hotel Administration. Web.

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