Yield Management to Maximize Revenues

The objective of yield management is simple; maximize revenue given a finite, and often perishable, inventory.  However, the successful execution of yield management in hospitality is not as simple as it might sound.  Managing yield requires constant strategy management and a nimble approach to managing the process of selling the right service to the right guest at the right time at the right price.

For the sake of this Hospitality Gem, let's focus on yield management for hotels and restaurants.  Glenn Withiam of Cornell University College of Hotel Administration published an excellent study of yield management in which he identified four yield management levers management utilizes to adjust the business to maximize revenues called the  "Four C's"; Calendar, Clock, Capacity and Cost. 

• Calendar:  There are certain days, weeks or seasons that are more valuable than others.  For restaurants, Valentine's Day and Mother's Day are highly valuable.  Most resorts have rates that vary based upon seasonality, such as a ski resort in Aspen that doubles their room rates during the winter ski season. A key element to managing the calendar is demand forecasting.  Both restaurants and hotels should use historical data coupled with current occupancy and demand variables to accurately forecast demand which, in turn, affects Cost.
• Clock:  Timing is important in matching inventory to guests' desires.  Some bars and restaurants increase business during off-peak dining times with happy hour specials or late night dining discounts.  Hotels watch "the clock" to ensure unsold rooms get filled as vacant nights approach.  Additionally, managing the clock duration a guest utilizes a particular service (spa, restaurant, room check out time, etc) is an important yield lever to monitor and control.
• Capacity:  Hotels have a limited number of rooms and restaurants a finite number of seats.  Restaurant capacity management is a bit more difficult than hotels since a time variable is introduced in which the amount of time a guest occupies a table and the number of times a table turns over (seats a new dining party) varies and affects overall seating capacity while hotel room capacity remains fixed.
• Cost:  Cost is a yield management lever that is used to match pricing to current market conditions and target demographic to drive revenue based upon several factors including elasticity of demand.  Cost is more frequently used in hotels to maximize occupancy rates rather than restaurants since the menu prices don't typically fluctuate from day to day.

Let's be clear that yield management is much more than simply adjusting prices to generate more bookings.  Yes, utilizing the Cost lever of yield management does sometimes involve discounting, but discounting without considering the three other "C's" is entirely the wrong approach since the outcome focus inappropriately shifts to capacity maximization and away from revenue maximization.  For a more detailed understanding of discounting, see my previous Hospitality Gem "Why Hotel Discounting Doesn't Work".

Since Calendar and Cost are somewhat fixed yield levers for restaurants, they would do well to establish service standards that focus on controlling the Clock lever to optimize Capacity.  These are actually related since restaurant capacity can be dramatically increased by turning tables more frequently.  By establishing timing standards for product delivery, restaurants can more efficiently turn tables and increase the volume of guests that can be served.  For example, service standards that dictate appetizers are delivered to the table within 8 minutes of the order, the salad course delivered within 5 minutes of the appetizer being cleared, entrees delivered within 7 minutes of the previous course being completed and desserts delivered within 7 minutes of the last entree being cleared will decrease table turn times and increase revenue while not rushing the guest's dining experience.

For hotels, it is important to ensure the Hotel Operations department works closely with the Marketing department to effectively identify, segment and market to guests who are price motivated.  By identifying and segmenting price sensitive and price insensitive guests, hotels can employ a yield management strategy that maximizes revenues by filling available inventory to higher value price insensitive guests and back filling unsold inventory to price sensitive guests who may be more flexible with their Clock or Calendar demands.

I once had an employer who constantly focused on outcomes, outcomes and outcomes.  Yield management is cut from that same line of thinking.  Focus on your core outcome, which is maximizing revenue, and let that revenue focus drive yield management decisions.  If you consistently pull the right yield management levers at the right time to sell the right inventory to the right guest you'll be delighted to see the positive results on your next P&L statement. 

What did you think about this Hospitality Gem? Have you identified the "Four C's" that you can manipulate to manage your yield and maximize your revenues? Please leave a comment below or feel free to contact me at davidknight825 @ yahoo.com with your comments, queries or feedback!