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Chapter 6 Yield Management

“The worst thing that the hotel industry did was to teach their guests to expect discounts”.

Chapter Objectives

On completion of this chapter the reader will understand:

· The environment required for the use of yield management.

· The definition of yield management.

· The way in which yield management is used in today’s management environment.

· The impact that aggressive use of yield management can have in the long term on sustainability.

· The way in which the internet has influenced yield management, and how management can control the negatives of the electronic environment.

· The relationship between yield management and guest satisfaction.

Key Word Definitions

Yield management

Electronic environment

Occupancy

Economy of scale

Rack rates

Price inelastic

SARS: Severe Acute Respiratory Syndrome

Chapter Review

For a hotel manager the understanding, implementation and use of yield management is an important issue as it can greatly influence both the short and long term success and even survival of a hotel (Okumus, 2004). Although yield management has been used for many years in the aviation industry, its use in the hotel industry is still reasonably new and in many respects is not well understood. The purpose of this chapter is to define and give examples of the use of yield management along with emphasising current issues that influence the decision-making surrounding yield management. The discussion emphasises the impact that a pricing strategy has on the sustainability of a business, along with such issues as the impact that yield management has on hotel guest perception and satisfaction and how the internet has influenced the way managers deal with the pricing issue. In addition, emphasis is placed on the over-use of price variation to control occupancy and the pitfalls of such action. The chapter also emphasises that a culture of yield management needs to be developed in a hotel for it to succeed (Higley, 2003). The discussion covers the positive aspects of the use of yield management, and also gives emphasis to the negatives.

It must be noted that in parts of the world “revenue management” is used in place of “yield management” and has the same meaning. For the purpose of this book “yield management” will be used exclusively. Many hotels have revenue managers, either individuals or whole departments whose job is to analyse and make recommendations on pricing strategies.

Introduction

Yield management in a hotel is a technique allowing managers to focus on obtaining the maximum return or yield for the investment in the space in the hotel (Berman, 2005). It can be defined as selling the right inventory (the room or space in the hotel) to the right customer for the right price at the right time (Smith, Leimkuhler and Darrow, 1992), and yield management is about doing exactly that. However, it is a much more complex issue for managers than this definition may suggest. The objective is to focus management decision-making not on simply selling rooms but selling rooms in such a way that would make the most financial return for the hotel.

To successfully use the principles of yield management, hotel managers must achieve an understanding of the market in which they are operating. They also have to achieve a long term vision of the hotel’s future so as to not be enticed into deciding on a short term gain which could detrimentally affect the long term sustainability of the property. This reflects a change in management direction towards a need for managers to be aware of and promote sustainability. This means the hotel does not merely exist from one year to the next but that the environment and actions of management make the hotel a sound entity for all parties, from the staff employed to the investors in the property. The principles of yield management are not solely applicable to room sales as the same principles can be applied in other areas of the hotel (Okumus, 2004).

Yield management and computer systems are often linked together in texts, giving the feeling that these two things are inseparably related, suggesting perhaps that yield management decisions become a mechanical part of the hotel’s computer system (Overby, 2005). In such a diverse industry, this approach is an oversimplification as for yield management to be successful, it is as much art as science, with a large diversity of approaches (Koide & Ishii, 2005; Okumus, 2004). It is therefore important to ensure the involvement of staff so that yield management does not become just the application of a mathematical formula (Lieberman, 1993).

There are two commonly used measures that specifically look at the hotel room and its use, these are:

1. Average room occupancy – number of rooms available divided by the number of occupied rooms.

2. Average room rate – total Revenue from rooms divided by the number of rooms occupied.

The problem faced by hotel managers is that while each of these figures is important, each has an influence on the other. The question that must be answered by hotel management is whether to sell a large number of rooms for one night at low rates (this has the effect of reducing the average room rate), or holding out for room sales at published (or higher) rack rates (this would result in high room rate but low occupancy).

Abid Butt, General Manager, TURTLE BAY RESORT, Hawaii, USA Yield management – how do you deal with that?

We have a Revenue manager, similar to any other hotel. You have to look at the business in different segmentations, and the buying behaviours within that segmentation. Then all that has to be measured up against the positioning of the hotel. Just a couple of months ago we were having this conversation with our Reservations Team, that could we do more business in terms of bodies and room nights if the room rate was $50, and the answer unequivocally is “Yes”, there are more people who would fit into that filtration mechanism and come to stay. Not that there is anything wrong with people who only want to pay $50 but that’s a different position for this resort. Instead if a resort decides to charge $250 where there is more filtration that has to come through, price in itself filters some of the people out because everyone has a different disposable income. So you look at the demand that is going to be there and any typical patterns that might be there. On top of that if you have any specific events that are going on that are going to target the more affluent than possibly the more rate sensitive folks, and then the decision has to be made on what to sell and how to position for that time period, the driver being the demand.

In contrast to the above approaches yield management works by using the following formula:

Yield = Revenue realised

Revenue potential

In the formula for yield the revenue realised is a variable and the revenue potential is generally fixed (as long as the same number of rooms are available).

Yield management was first used by airline industry following airline deregulation in the USA in the 1970s. The objective as defined by American Airlines (Smith, Leimkubler & Darrow, 1992, p.22) was “to maximise passenger revenue by selling the right seats to the right customers at the right time”. The requirements of yield management are 1). High fixed costs 2). Low variable costs. In relation to an airline, there is the high cost of the purchase of the aircraft, and a low variable cost per seat. The same characteristics are present in the hotel industry where there is a high cost of building the facility and a low cost of servicing the room. The marginal cost of selling one additional room is (or at least can be) low, as these costs are related items such as the cleaning of the room and the laundry, which are generally low costs. Traditional management theory and logic suggests that as long as the revenue covers all variable costs and contributes to fixed costs in the short term, the room could be sold at a discounted rate. But this approach has a number of problems associated with it (Higley, 2003) as will be seen later.

Yield management comprises two parts:

1. A differential room rate pricing strategy – the price charged to a guest in any particular situation.

2. Room inventory management – allocating different types of rooms to the pattern of demand.

Finding the balance between these two has impacts upon the sustainability of the hotel property and on guest level of satisfaction, and is a far more complex question than may be initially anticipated. It requires considerable research and an in-depth understanding of the market in which the hotel is operating.

Octavio Gamarra, General Manager, RITZ-CARLTON MILLENIA, Singapore. How do you approach yield management?

We have a revenue director and personal assistant and then we have a total revenue management team, and we get together every Tuesday. The members of the team are myself, Director of Marketing, the Revenue Director, Director of Catering, Director of Computer Services, Director Room Services and some other people to talk about whatever the topic is going to be. We discuss our group business, we look at what the competition is doing, we look at what kind of response we are getting for our products, we look at results for the different channels for the hotel. We measure all that.

The Ritz-Carlton is a large (600+ room) luxury hotel and needs to undertake extensive research. The process is no less important to the following 54 room hotel in India, but it is interesting to see how this manager handles the aspect of assessing his competition.

P S Ramdas, Managing Director, TOURIST HOME (Pvt) LTD, Egmore, Chennai’ India What research do you undertake in relation to your competitors?

In the evening when I drive past, I always look into other hotels. If you have lights on in a lot of rooms then you can estimate their occupancy. I can look at the hotel and tell how well they are doing. My work boys (outsourcing staff) come here, and I ask them. If I see someone from another hotel close to mine, I will ask him how are things going. Sometimes they do not tell you right - I go by in the evening and I know things are not as they say.

In addition to techniques such as observing what the competitors are doing to promote occupancy, there are a number of software packages that electronically enquire of computer reservation databases and retrieve the competitors pricing strategies and then produce reports comparing the prices.

William Chu, Director Revenue Strategy, RITZ-CARLTON MILLENIA, Singapore. How much time is spent finding out what your competitors are doing?

Very little time because there are only 4 or 5 hotels that are closely competitive with us, in the secondary environment there are 10-13 hotels that are competitive in different segmentations of the market. With ecommerce and the GDS [Global Distribution System] and internet in this environment now, getting information is not difficult because with the rate view program, that shows two rates and 4 channels and you create a report. And besides that you always have the three month report, and the up to 30 days occupancy report. We can easily deduce what to sell from our own data on the market.

Room Rate and Occupancy

Changing room rates is a strategy which management often uses to try to maximise revenue. Depending on the objective of management the room rate can either be increased or decreased. The success of increasing the room rate depends on the elasticity of the market and the availability of an increase in the number of customers (Brewton, 1991). The hotel industry in most situations can be classified as “purely competitive” - the characteristics of such a market are detailed in Table 6‑1.

Table 6‑1 Characteristics of a Purely Competitive Market

· The industry has a large number of producers.

· A homogeneous product.

· Ease of entry and exit from the industry by firms.

· Buyers have perfect knowledge of the market.

· There is no collusion between groups of buyers or sellers.

Melotte, 1995, p.47.

Operators fearful of loosing market share use price-cutting to the point that it becomes a ruinous tactic in an effort to induce travel and increase occupancy (Arnold, 1994). This has resulted in a reversal of the concept of economy of scale. Economy of scale is defined as reduction in cost per unit resulting from increased production, realised through operational efficiencies. In the reverse the effect is an increase in cost per unit, with an increased level of sales. While the number of rooms occupied has increased, which has increased the variable total cost, the amount of profit per room has decreased. As a result rate cuts have generated more revenue but not necessarily additional profit (Arnold, 1994). To overcome the reduction in the profit from rooms some hotels have increased prices in other parts of the hotel with the objective of reversing the declining room profit. For example charging $38 for a modest breakfast in a New York hotel (Marshall, 1995). Because of the hotel's desire to increase occupancy, and the use of discounts to aid in this, the hotel industry has educated the travelling public to shop for discounts and bargains (Feiertag, 1992).

Terry Holmes, Executive Director, THE STAFFORD, London What is the long term impact of price reduction?

Our business is cyclical. During a downturn, often the first thing managers do is slash their prices and cut their labour force. If you can charge £500 one day and £200 the next day, there is something not right about what you were doing in the first place. What we have done through difficult times was we did not cut our service and we didn’t cut our rates because I have seen it before. For new management, that is the first thing they do and yet if you read enough textbooks and speak to enough people, you know it just doesn’t work. It takes forever to get the price back up.

Pricing is different depending upon the market the hotel is operating in. But what is important is that the correct pricing strategy is followed for a particular type of hotel property.

William Chu, Director Revenue Strategy , RITZ-CARLTON MILLENIA, Singapore. What is your philosophy in relation to yield management? What are the things you are doing in this very competitive market to make it successful?

Ritz-Carlton is in the luxury frame and the pricing must always be correct. There are three steps of pricing that I have developed in order to be competitive in the market. You do need to know the price of the competitors, but first of all, the first step is rational pricing, followed by sectional pricing. So as long as you get rational pricing correct you fit into the competitive environment, at the right rate for the right product, you will be able to sell better with higher market penetration than the competitors. Sectional pricing - you need to sell where there is demand for certain packages or promotions, not so much as a seasonal feel but more segmentation. The third one covers seasonality, where you move your prices up and down according to demand and supply.

The pricing in many hotels can involve as many as 10 or 15 room rates for each hotel (Koss, 1992; Gijsbrechts, 1993). Table 6-2 illustrates some of the issues to be considered in relation to changes in room prices. Fluctuating prices too rapidly may lead to customer rejection (Brewton, 1991).

Table 6‑2 Factors Influencing Room Price Change

· The number of items to be increased will depend on the frequency of yearly increases.

· Managers should resist increasing the price of their best-selling room type once its rate reaches the top end of its dollar range.

· The more places that hotels have rates listed, the more difficult it is to change prices.

Brewton, 1991, p.21

To assist in the understanding of the factors influencing hotel room price, reference can be made to classical microeconomic theory which looks at the different factors that impact upon the price of accommodation. Equation 6-1 illustrates where P equals price, at any given establishment (est.) i, in any given time period t, in region k.

Equation 6‑1 Model of Hotel Room Pricing

Pitk = ((Fitk, Vitk, Aitk, Lik, Mik, YI(t-1)k, Ktk, Nt)

where:

Pitk = average rental rate ($) of the i th est. in the t th time period in the k th region;

Fitk = fixed cost of the i th est. in the t th time period in the k th region;

Vitk = variable costs of the i th est. in the t th time period in the k th region;

Aitk = advertising expenditures by the i th est. in the t th time period in the k th region;

Lik = location of the i th est. in the k th region;

Mik = amenities of the i th est. in the k th region;

YI(t-1)k = percent occupancy rate of the i th est. in time period t-1 in the k th region;

Ktk = amount of competition in the t th time period in the k th region;

Nt = season or time.

est. = establishment

Ellerbrock, Hite & Wells, 1984, p.11

In Equation 6-1 there is particular focus on the variable cost. “Profit is maximised by setting price such that the marginal revenue received from renting the last room equals the marginal cost of renting the room” (Ellerbrock, Hite & Wells, 1984, p.12). The marginal costs of any room influences the number of rooms that an operator is willing to make available for rental up to a maximum of those available.

Hotel prices are often set without an understanding of consumer perceptions of price (Zeithaml & Bitner, 1996). The pricing for service industries faces three complicating factors as detailed in Table 6-3.

Table 6‑3 Pricing for Service Industries

· Customers often have inaccurate or limited reference prices for services.

· Customers use price as a key signal for quality.

· Monetary price is not the only relevant cost for service customers.

Zeithaml & Bitner, 1996, p. 484

The issues illustrated in Table 6-3 relate to the intangibility of the product as discussed earlier. The first factor listed in the Table 6-3 depends on frequency of use – arguably business users have experience of prices but it could be the demand is price inelastic, or less sensitive to changes, if a corporation is paying.

Incentives build occupancy – while there is considerable risk in cutting prices in the face of tough competition, that risk can be minimised by using price incentives. These build occupancy without eroding profits because they are aimed at attracting new customers or additional sales from current customers (Brewton, 1991).

Nash Nasihin Ali, General Manager, MUTIARA HOTEL, Johor, Malaysia. In light of the heavy competition and cost-cutting, why don’t cooperate with other hotels in pricing?

We did a couple of years back. Hotels got together for a lunch, and decided not to shock the market too much by agreeing to rates. Five star hotels would have nothing below 180 ringits, 4 star will sell nothing less than 140, 3 star can go around 100. Everybody was happy, shook hands in agreement. But it only worked for two months. Then the customers reported that some hotels charge lower. So we checked with the General Manager, he looked shocked and passed the buck to Sales Manager. Finally we said ok, it is a free market, anything you want to, do it. As long as I keep my hotel full, my staff is happy, they get their salary, they get their service charge, fine. We did try to increase 10 ringgits [approximate conversion Malaysian RM 3.80 to US$1.00] and saw our market shifting. It is a very simple economic logic – I have 400 rooms, if I increase by 10 ringgits I may have 30% occupancy but if I maintain my rate I may have 70% occupancy. It is a very sensitive market. The choice is ours, whatever we want.

A pricing method often suggested is that of $1 charged for every $1,000 of development price (Lewis & Shoemaker, 1997). Using this model, a room that cost $100,000 to develop would have a daily rate of $100. This is often used as a basic concept and although is considered a “rule of thumb” (Mullen, 1998), has little application. This approach is referred to as “cost-driven pricing”. Although giving some indication of the price for a room, cost-driven pricing has also been criticised as an approach to setting prices (Shaw, 1992). The establishment of a rack price involves a number of issues - most of these involve a price driven costing approach.

In setting the rack price a reference pricing process may be involved. This is the price of any service that a consumer thinks of as an appropriate price for that item (Lewis and Shoemaker, 1997). This price can comprise “the price last paid, the price most frequently paid, or the average of all prices customers have paid for similar offerings” (Zeithaml & Bitner, 1996, p.486).

Christopher Norton, Regional Vice President/GM, FOUR SEASONS HOTEL, Singapore How do you deal with pricing?

Singapore is a very competitive market so you look at yourself within the context of your competitive set. We look at our key competitors as far as benchmarking ourselves and we are consistently beaten by anywhere from $20-38. We do it because we don’t sell on price, we sell on the value that you receive when you stay here. When business travellers come and stay here there is a certain commodity that they have very little of and that is time. They come and stay here because our service has a direct impact on the productiveness they can achieve during their stay, say the 2½ days that they are here. From the time between their wake up call and their breakfast arrives … there are a thousand little things (the air conditioning not working, your cereal not being right, your fruit not being right, not having a comfortable bed, not receiving your wake up call) that can make you less productive. This hotel is quietly efficient. I refer to our department heads and staff as a precision-deal team, and so we are part of these people’s lives. They spend another $50-60 Singapore, which in the context of the trip is nothing (most of them are flying business or first class), and so we run pretty good occupancies and a higher average rate.

Pricing for services are more difficult for consumers to identify than for products. Consumers often know how much they paid for a television or a bag of sugar, but for a hotel room this is quite a different issue in their minds (Lewis & Shoemaker, 1997). A major reason is the variability across services (size of room, facilities offered, level of service, and other features), whereas a bag of sugar is tangible and can be clearly seen and judged by the consumer. This lack of a clear reference makes it complex for consumers to establish a firm reference point for pricing service purchases.

A study undertaken by Morley (1994) examines the multidimensional nature of the tourism price. The author (Morley, 1994, p.8) records that “Practitioners in tourism marketing have stated to the author that potential tourists facing such a complexity of prices focus their attention on the larger cost items, particularly airfares for long distance touring.” The article reports on an investigation of the effects of some tourism price components on potential tourist choice of destination using a multinomial logit model analysis of stated choice frequencies. Three factors investigated in relation to tourists originating from Kuala Lumpur and travelling to Australia indicate airfare has the most significant effect on the choice of tourism. Hotel rate and exchange rates have an impact on choice of destination which, for changes of the order of +/-15%, is smaller than the airfare impact (Morley, 1994).

Pricing Strategies

An aspect of hotel pricing strategies is the impact that a short term gain may have on the long term survival of the property. It may be argued that the combination of low occupancy and high room rates, or high occupancy and low room rates are equally desirable, ignoring for the moment the potential sales revenue that may be generated in other outlets in the hotel by following a policy of high occupancy and low room rate. They clearly are not equable as a policy of high occupancy and low room rate may in the short term give some satisfactory returns, however in the long term it also can be a disastrous policy to follow. It needs to considered that each time a hotel room is occupied, there is deterioration of that facility taking place. This may be very small, and not visible on a day-to-day basis but is evident in the long term.

Nash Nasihin Ali, General Manager, MUTIARA HOTEL, Johor, Malaysia. Do you find that the problem with high occupancy is that the rooms deteriorate, if you are not charging enough to maintain the facilities and quality of rooms, over time the quality of the hotel tends to decline and so you have to charge less?

A lot of the hotels, particularly in Malaysia, are experiencing cash flow problems and when you have a cash flow problem, you would rather sell a little bit lower so you would have enough cash turn around. But again the owners have their ideas. A lot of hotel managers now are being so-called detected by the owners. The owners have a direct involvement in hotels, becoming more obvious now for the last 5 years. A hotel general manager may want to achieve the highest rate because he needs money to improve the product. We tried this once, raised rates then got ‘shot down’ by the owner when the occupancy dropped. The owner was looking directly at occupancy percentages only.

Market Segmentation

Part of yield management and part of the earlier definition is that of selling to the right person. Although this is discussed in the chapter on Marketing, the segmentation of the market has a direct impact on the amount charged for a particular room, with any particular market being segmented in a variety of different ways (Ladany, 2001).

One way in which this is being done is the use of electronic pricing on the internet (DaCosta, 2001), but this may not be the best approach. For a fuller discussion refer to the chapter on Marketing.

External Influences

There are a number of models available for the determination of decisions that maximise yield in a hotel, and these vary from simply being based on time and vacancies to extensively more complex models (Badinelli, 2000). A major part of yield management is the monitoring of the environment in which the hotel is operating. This involves being aware of and monitoring the influence that events are having on the hotel; these vary widely in their nature from local and national holidays, special tourist events, issues affecting another local properties, introduction of new rooms into the market, weather, right through things like industrial action in areas such as airlines and railways and even hospitals. The application of yield management is also influenced by management and other staff in the hotel and their view of yield management’s implementation and its effectiveness (Okumus, 2004). This also includes major disruptions such as SARS, terrorism, natural disasters, bird ‘flue, etc.

Nash Nasihin Ali, General Manager, MUTIARA HOTEL, Johor, Malaysia What happened with SARS?

Our occupancy didn’t go that low. At that time we were still doing 40% average occupancy. Some Singapore hotels were hit very badly, some doing single digits. SARS or not, we still have business travellers. Where hotels were dependent so much on the leisure market, they were hit hard by SARS. We were fortunate. Normally we would have done 60-65%, so it did drop off but not too much. At the very lowest it was 38%.

Abid Butt, General Manager, TURTLE BAY RESORT, Hawaii. Have things changed since 9/11?

Incentive travel has changed. After 9/11 all of the corporate travel dried up overnight, so a lot of the incentives were not in place. For about a year or so that incentive market virtually went away. As the recovery started the incentives were put back into place to gain the revenues by the companies, but certainly not as lavishly as they were done before 9/11, definitely smaller. Here in North American terms there is another example – there have been a lot of the legislative changes after the debacle of ENRON and WORLCOM – a lot of the major Fortune 500 companies are under major scrutiny. In the past, when there was an incentive where the CEO would to put you up and charter a plane, well, those days are gone.

Because of all these events, many of them external to the hotel, constant monitoring is important. Many hotels will regularly phone other properties pretending they are potential guests and enquire about the amount being charged for a room. Other hotels use software which electronically searches internet websites and collates the prices being charged. One technique used in yield management is that of discount for early booking, but although this adds some security of occupancy, it requires careful monitoring of overbooking policies (preset percentages) and it reduces the ability of the hotel to make decisions close to the time that external events may influence occupancy (Koide & Ishii 2005).

A useful way to view yield management and the multiple influences that impact upon the decision process is from a systems perspective. In short a systems approach to decision-making looks at the influence that the different parts of an organisation, in this case a hotel, has on yield management decisions. The effectiveness of yield management may be impacted by these factors. As already indicated these influences can be external to the hotel but may be within the hotel as well, eg unwillingness in certain quarters for staff to make decisions.

David Lim, Executive Assistant Manager, CROWNE PLAZA, ShenZhen, ROC. How do staff handle decision-making within the hotel?

In China it is not an easy matter. We like to say we empower staff, but if you look at rank and file staff, it is quite difficult to say you are allowed to make decisions worth a given amount. Staff still feel that they need to check with the supervisor, supervisor with manager and so on. I don’t think it is really happening here. A supervisor is able to write off a meal ticket, give a bottle of wine – those things are assigned regularly. But the rank and file staff are difficult to get to that level because they are not used to making decisions. Division Heads are fully empowered. They make decisions; as long as they keep me informed about what is going on I don’t want them to check with me on day-to-day operations.

This impacts on the effectiveness of yield management. For a fuller discussion of the use of yield management and systems analysis see Jones (1999).

Other Hotel Operations

Going back to the requirements for yield management, those of high fixed costs and low variable costs, these characteristics lend themselves very well to the sale of rooms in a hotel as previously discussed. But what about other operations in a hotel, do they have similar characteristics so that they can benefit from the use of yield management?

An interesting article published by Kimes (1999) suggested that where in our earlier discussion we were looking at yield management in relation to the room only, Kimes (1999. p17) expands this definition to restaurants as “selling the right seat to the right customer at the right price and for the right duration”.

The determination of "right" entails achieving both the most revenue possible for the restaurant and also delivering the greatest value or utility to the customer. Without that balance, yield management practices will in the long term alienate those customers who will feel that the restaurant has taken advantage of them.

A restaurant in general, and specifically a restaurant in a hotel, has a lot of its cost tied up in the space occupied and the equipment. The space allocated to a restaurant influences the return on the investment in the hotel. If it does not give an appropriate return it may be better converting it into a conference room. The better utilisation of the facility raises many of the same questions as in room utilisation. In short how can the asset of the restaurant give the maximum yield on the investment (Kimes Barrash & Alexander, 1999). Because each seat in the restaurant has a cost, maximising its use can influence the revenue generated from that seat - this is referred to as seat turnover. If one customer occupies the same seat all evening, the revenue is allocated to just that one person. But maybe it is possible to have two or three people occupying that seat. This is commonly done by moving customers to bars, lounge areas for coffee or drinks before and/or after the meal. If the asset of the chair is used by more than one person then the revenue for that chair will increase. The second part, just as in the hotel room, is price variation. This variation of price can be used when, if a restaurant has most of its guests arriving between 7 and 8 in the evening, and it is mostly fully booked, a discount to use the restaurant earlier may help to spread the use of facilities (Sill & Becker, 1999). However, it may be difficult to manage the departure time of the guest, and therefore the handling of meal duration may raise difficult problems for restaurant management. Although at this time little research has been done in this area of yield management, it is evident that it has further implications.

Impact on Guest Satisfaction

The impact of yield management on hotel guests is often portrayed in positive terms, in that the guest can experience a reduction in the amount charged for the room. But yield management also has a number of legal and moral issues surrounding its use (Huyton, Evans & Ingold, 1997; Jones & Hamilton, 1992). The use of yield management in hotel pricing can produce large fluctuations in price, eg a room that is 100 dollars today may be 150 dollars tomorrow, and these changes can cause dissatisfaction among guests. Management therefore need to consider ways in which these transitions can be handled, minimising any dissatisfaction that may occur. This may include the education of guests in the practice of yield management (Kimes, 2004)

India, Madras How do you handle discounts?

50% of my clients are repeat. I have to concentrate on keeping them by making sure they are happy. Price is very competitive. We don’t offer discounts. I don’t give discounts for one reason – you are a person who comes to stay one night, a walk-in customer. In order to sell the room on that particular day I may give a discount to the walk-in customer. The customer who comes every week and is charged the regular price is going to say that he has been cheated.

In times of drastic reduction in occupancies, accommodation providers undertake various forms of cost cutting to maintain profitability (Arnold, 1994). But a close watch must be made when reducing costs to ensure that this process does not affect the quality, both physical as well as the service offered to guests, with this in turn detrimentally impacting on occupancy (Stewart, 1994).

The dominance of price as a factor determining occupancy does not seem to take into account the research into the factors that attract guests in the selection of a particular establishment, in fact they seem to represent a management perspective that is devoid of an understanding of the guest. This difference is demonstrated when reviewing literature relating to guest factors affecting selection. Weaver and McCleary’s (1991) research indicated that the most important factor affecting the selection of accommodation by business travellers was a clean, comfortable, well-maintained room. Of particular note is that price or room rate was a low 18th in importance as a factor influencing selection of accommodation. Other researchers, Saleh & Ryan (1992) Mehta & Vera (1990) Lewis (1987), found the same importance as it relates to cleanliness. More recently research into female business travellers identified an emphasis on cleanliness, appearance and safety (Shifflet & Bhatia, 1998). This author has also undertaken a number of research projects that have investigated the factors that influence guest selection of accommodation. What has emerged from this research is that the question “what are guests looking for in hotel accommodation” is beset by numerous complexities. Much of previous research gave predetermined lists of attributes and asked for those to be rated. Simply asking a potential guest to rank or indicate in some other way the importance of a number of attributes is inadequate, as this approach does not take into consideration the many factors which influence the decision process, seeming to have focused on the information search stage, and the evaluation of a series of alternatives. As a result there is a fundamental flaw not only in method of the research but also of logic (Lockyer, 2005a). Of interest is that when closed questioning of potential guests is undertaken there is close commonality of results, with cleanliness being identified as the most important (Lockyer, 2000; Lockyer, 2002; Lockyer, 2003). However, when focus groups are used for the research other factors such a price become more important (Lockyer, 2005a; Lockyer, 2005b).

In relationship to quality perception, an investigation carried out by Gabor and Granger asked consumers to state the highest and lowest price at which they would purchase selected inexpensive items (Gijsbrechts, 1993). The results of the enquiry allowed the researchers to determine upper and lower price limits for these products based on revealed preference analysis. From the research it is suggested that within these limits price may continue to act as a quality indicator but not act as an absolute barrier to purchase. Outside these limits however, price may act as the dominant indicator of quality and may become a barrier. Price also acts as an indication of quality where if the price is reduced the actual or perceived quality of the establishment can be affected. Therefore, price has an influence on customer expectation and the formation of quality perceptions in a service purchase situation (Lewis & Shoemaker, 1997). When price is used as a dominant indicator of quality, the pricing aspect of the marketing mix can be used to position the product and service offering.

Bruce Fery, General Manager, GRAND AMERICA, Salt Lake City, USA. In this city there are a lot of promotions around, some even as low as $39.95. How do you cope with the competitive market you are operating in?

Usually through the service. If they pay $245 or $325, they are not looking for a free breakfast or a bargain. What they are looking for is personal attention, that you personally ‘recognise me for who I am’. If we can get people to come and stay here, we usually ‘capture’ them because we really try and give outstanding service where we personalise. For example for guests staying here for the first time, I will do a nice handwritten card from the manager and I’ll attach my business card, and we will send them a gift – it could be a chocolate piano, or cheese and crackers. We track each stay, we have a profile on each guest, so when a guest comes to stay here, when he comes next time we know he likes a foam pillow, he likes his turndown done at 5 o’clock, prefers scotch vs vodka,etc. Each time he comes to stay here we personalise the visit.

The Internet

In recent times the internet has changed the way in which guests perceive hotel pricing and how management of a hotel control their yield management practices. Websites such as “hotel.com” promote themselves as having the “best prices”, as do Expedia, Travelocity, Speedy.com and others.

http://uk.hotels.com/hotel-htdocs/uk/index.htm - Downloaded 12 April 2005

A major starting point for internet discounting was in France, where in 2000 the website Res-Hotel was established to offer a system capable of linking hotels and internet users in real time. It initially had a selection of independent properties and those in lodging chains. The claim made by Res-Hotel was that they directly link hotels with customers for the price of an internet connection. The same basic approach to hotel reservations has been implemented by a large number of companies. The strategy followed by many of these sites is to focus to a large extent on the price of the accommodation.

More recently hotel managers have realized that the use of pricing on the internet may not be the best approach. One of the main reasons for that is the level of competition that the use of the internet produces. For example when a potential guest is looking for accommodation on the internet they have the ability to tailor the request in a number of different ways, but almost always the user is presented with an array of different hotels with varying prices. At this point the potential guest is very strongly influenced by price, and may not consider other attributes of the hotel, resulting in price becoming the major decision component. It is difficult to measure what impact using the internet has on the pricing of hotel products (Enz, 2003). Overall, the result has tended to force prices down because price is used as the comparator.

Terry Holmes, Executive Director, THE STAFFORD, London, England It is often said that one of the worst things that the industry did was to expect a discount?

Yes – A) to expect discounts and B) to give the control of their inventory to an outside source. If you don’t control your own inventory …. To companies like Expedia, Travelocity – that you would give your inventory, and they could sell it at what they want. Once you do that you have lost control of your business. 90% of the ones that went to it are coming back. At the end of the day there are not a lot of new things to learn about running a business as such. You get new technology and maybe different styles, but the thing that everybody looks for is a fairy godmother to come and save them.

Because of this management have endeavoured to regain the control developing their own websites to promote their products in their own individual ways, thereby removing the focus away from price alone. More attractive prices are offered on individual hotel websites to attract the prospective customer and promotions and added value features are presented there to encourage the viewer to purchase.

Bruce Fery, General Manager, GRAND AMERICA, Salt Lake City, USA. Hotel.com has been a real issue in the US, how has it changed what you do in managing your pricing strategies?

It has particularly with some of the larger chains; they have really struggled with it because it has become an increasing cost to them, although I am seeing a shift – the cheapest way to get a hotel reservation is through your own website, and I am seeing a shift with people trying to sell more of those instead of using Expedia and Travelocity and try to shift them to their website where they give them best rate guarantee program, where if you book through the website you are given the best rate possible. Everyone is trying to do it. Parity is playing a big role, where everyone is trying to get their rate on par with each other versus the website. Companies like us are spending more and more time on website development. I have a whole staff – two people – who just work on that every day, making sure our rates are updated, making sure our packages are listed out there, because a lot of people are looking for packages. When you come to the nicer hotels or resorts they want to buy a package all inclusive – maybe breakfast, spa –something to attract them. This has the effect that price is not such an issue, the guest perceives the whole package, not just the room cost.

Linda Wan, General Manager, HOTEL CRESCENT COURT, Dallas, USA Do web sites such as hotel.com influence what you do?

We have established rate parity with internet sites and that particular segment of our business (internet sales) has declined but I think that the customer who wants to come to the Crescent, wants to come to this hotel, and although that particular market segment has decreased we have been able to increase in the other market segments so the rates are higher, better and the demand has been good enough for us to be able to follow that type of strategy. As a company policy our rates are at parity with what is on the website. In our case this works. I think that the typical sophisticated business traveller shops around, certainly ours do perhaps a little, but ultimately they know where they want to go, they know why they want to come here.

Luis C Barrios, General Manager, HACIENDA HOTEL OLD TOWN, San Diego, USA. How is your use of the internet changing?

We are following in the steps of the big companies that are booking business on the websites. If you want to get the discounts from the big companies you have to go to the websites so we are shifting to that mentality. It is not easy because guests have been trained now to expect and look for discounts. So that is the main concern today. I don’t think we can ever maintain control against the very rich marketing companies. They reach out into the market. We are working together, managing our website and offering value to our customers. It is difficult. Of course we have the different kinds of hotel, the 5 diamonds down to the 3 diamonds. In all that there is a great differing knowledge on how to achieve the ends. There are some small companies who do not know what is going on, and they give all they have to Expedia because it is their engine. A company like this one has a different way of looking at that. I am a lot of time involved in this, in order to manage rate, maximise rate and be profitable.

The internet is also a source of information for a hotel on the prices being offered by competitors. There are a number of computer packages which automatically search and enquire of web sites the rate being charged and then this information is correlated into a report to give information on competitive pricing.

William Chu, Director Revenue Strategy , RITZ-CARLTON MILLENIA, Singapore: What about internet room rate review software?

We use a third party software called Travel-Quick. It electronically searches for prices that are being charged on the internet for each of the hotels and provides a report.

This sort of software gives revenue managers the ability to evaluate their pricing decisions in relationship to their competitors’ practice. Therefore this represents a valuable resource and one of the important tools in the management of yield.

Summary

Yield management is an easy topic to define but hard to implement. The discussion in this chapter has reviewed the fundamental requirements for the implementation of yield management. Also the chapter has pointed to the fact that decisions on pricing have not only an influence on the day-to-day operation of a property but also can have a much longer term effect. In many properties room price has become such an important issue that there is a risk that it will become the single most important determinant of the level of occupancy. It is evident from the interviews and other research that such a move is not good for either the individual hotel or for the industry as a whole. By very definition the industry is a service industry and the concepts of service need to be maintained as part of the determinant of occupancy.

It is also evident that short term decisions have long term implications in regard to guest opinions of an establishment, and this influences future purchase behaviour. For example once a guest has been given a discount it is very hard to not give a discount on the next stay in the hotel.

Yield management is not just related to pricing and giving discounts, it is a way of operating, requiring the support of the whole work force to ensure that the yield of a property is maximised. There is clear evidence that properties are actively working to take back control of their pricing from internet companies such as Hotel.com, and by doing do can add value to their hotel product.

The most important issue in any discussion of yield management is that of the monitoring of external events, so that those making decisions are making them with a clear understanding of all of the issues that can influence the business in the hotel, and that that information is timely.

Discussion of the Issues

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

· In considering a number of hotel internet sites, how they influence you as a manager, and your decisions?

· How can staff training influence the profitability of a hotel?

· What is the relationship between yield management and market segmentation?

· Imagine you are the hotel manager in a very competitive market, you note that the average room rate for hotels in your area are declining, what action could you take?

· What level of empowerment would you give your front office staff in setting room rates? (You may wish to review the chapter on empowerment)

· Looking at your local hotel industry, what do you see as the most pressing yield management issue?

Case Studies:

Case Study 6.1: Management Response to Market Fluctuation

On a year round basis in 2004 occupancy was around 75%. In the year 2000 it was 89%. So occupancies without doubt fell. We hit a peak and didn’t know it. Our business is cyclical - we always seem to have five good years and one bad. I think the year 2001 was an all time peak for London and we all felt that it was going to be that way for ever. However, even without 9/11 we wouldn’t have kept growing - it just couldn’t keep getting better every year. As things happen, whether it be a stock market crash or a war, I think only know how to manage your way through it if you have been there before and made the mistakes already. What happens now in a crisis, the first thing people do is slash their prices and cut their labour force. If you can charge £500 one day and £200 the next day, there is something not right about what you were doing in the first place. For us, we did not cut our service and we didn’t cut our rates because I have seen it before. Those new to hotel management, that is the first thing they do and yet if you read enough textbooks and speak to enough people, you know it just doesn’t work. It takes forever to get back. Terry Holmes, Executive Director THE STAFFORD HOTEL, London Questions: 1. How does the business cycle impact on Yield Management? 2. How does long term planning help to elevate the effect of world crises? 3. Why do inexperienced management cut room rates first?

Case Study 6.2: Desire to sell.

It is very expensive to advertise in the newspaper. I could put up billboards, however, billboards are not very effective because people just get out of the train and walk. Those domestic tourists who come here, they would have a look at the hotel and they would say, “OK I will come back”. Then they go to the next hotel, and so on finally choosing between, say, four properties. Actually my selling skills would come in that point. If I am there at the counter with my employees, I have a better chance of selling that room because the employees don’t have the same desire and commitment. Secondly, 50% of my clients are regulars, they probably come straight to me; they are professionals and they come to the city regularly and they bring their clients, and so they know the staff and everybody is friendly to them; staff know their needs. So 50% of my clients are all repeat. I have to concentrate on keeping them, making sure they are happy. Price is very competitive. We don’t offer discounts. I don’t give discounts for one reason – you are a person who comes to stay every week. Also, there is a walk-in customer; in order to sell the room on that particular day I may give a discount. The customer who comes every week is going to say that he has been cheated. People are watching you and you run the risk of losing the regular customers. P S Ramdas, Managing Director TOURIST HOME (Pvt) LTD, Egmore, Chennai, India Questions: 1. Why is desire important in yield management? 2. What role do the hotel staff play in yield management? 3. How can managers reduce problems in giving discounts to certain groups of guests?

Case Study 6.3: Relationship between business prosperity and hotel yield.

Unfortunately in Malaysia we talk less about yield management because it is so competitive, especially after the monetary crisis in 1990s with Iraq war, followed by monetary crisis 1996/7, then we had SARS and economic downturn. A lot of travellers are very cautious about what they are getting in their hotel rooms. We depend on the business market segment. We have very little tourist business. Therefore when industry is affected by monetary crashes a lot of the factories and those in the manufacturing sector either close down or scale down their operations, at the same time they cut down on their travelling expenses, their meeting expenses so it affects us. We don’t talk yields. If I charge more the guest says no, other hotel offers me a lower rate. It can even lose a sale for as little as 5 ringgits! (less than US1.50). A couple of years back all of the hotels got together to coordinate our approach. We decided not to shock the market too much and decided that five star hotels would have nothing below 180 ringgits, 4 star would sell nothing less than 140, 3 star could go around 100. Everybody was happy and shook hands, but it actually worked for about two months. Then customers began to report that other hotels were charging lower, they rang around. So we checked with the General Manager - he looked shocked and passed the buck to Sales Manager. Finally we said ok, it is a free market, do anything you want to do, as long as I keep my hotel full, my staff is happy, they get their salary, they get their service charge, fine. We did try to increase 10 ringgits and straight away you can see your market shifting. And it doesn’t matter if occupancy is high or low, you still have to carry the same staff. The trouble is as the rooms deteriorate, if you are not charging enough to maintain the facilities and quality of rooms, over time the quality of the hotel tends to decline and so you charge less. I don’t know how tight market is in New Zealand but here the number of staff same whether you have 50% or 80%. It doesn’t matter if occupancy high or low, you still have to carry the same staff. Nash Nasihin Ali, General Manager MUTIARA HOTEL, Johor, Malaysia Questions: 1. Identify the relationship between room rate and property deterioration in a hotel in your area. 2. Is it ethical or legal for hotel managers to set prices together? 3. How could you better control yield management at times of downturn in the market?

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