Yield Management

A technique used to Maximize Room Revenue

Used for reservations of a Perishable Commodity:– Hotel Rooms– Airplane Seats– Rental Cars– Cruise Ship Cabins

Hotels are shifting from High-Volume to High-Profit bookings

Yield Management

As Demand exceeds Supply

Increase Rates to Maximize Profits

As Supply exceeds Demand

Decrease Rates to Maximize Occupancy

$

$

Elasticity of Demand

How sensitive is demand to a change in price?

ELASTIC

– Demand is very sensitive to price

INELASTIC

– Demand is not sensitive to price

Guest Booking Profile

Days before arrival100 0

Re

servatio

ns

Business

Leisure

Inelastic

Elastic

Yield Statistic

Actual Rooms Revenue

Potential Rooms Revenue

Potential Rooms Revenue– Every room sold at full rack rate

– # Rooms x 365 days x Rack Rate

Yield Management Tools

Discount Allocation• Manage discounted room rates

• Encourage upselling

Duration Control• Place time constraints on reservations• May reject reservation requests

Combination• Discounts for 3 nights, but rack for 1 night

Duration Control

Minimum Length of Stay• Reservation for a certain number of nights

Close to Arrival• Guest must arrive before a certain date

• Limit number of check-ins on a given day

Sell-through• Similar to minimum stay

• Sell days around a peak day

Room Discounts

Hurdle Rate• Minimum room rate for a given day

Displacement• Occurs when a hotel accepts group business at the expense of

transients

Wash Factor• Deletion of group room blocks

Rooms Availability Formula

150 Guestrooms - 5 Out of Order - 45 Stayovers - 50 Reservations + 10% No-show + 5 Understays - 20 Overstays

40 Rooms Available for Sale

Forecasting Rooms Revenue

Forecasted Annual Rooms Revenue =

Rooms Occupancy Average

Available Percentage Daily Rate

Rooms Available = Total Rooms X 365 Days

Forecasting Rooms Revenue Example

100 Room Hotel100 x 365 days = 36,500 Rooms Available

75% Occupancy Percentage.75

$50 Average Daily Rate

36,500 x .75 x $50 = $1,368,750

Hotel Operational Statistics

Occupancy PercentageThe most commonly used operating ratio

Average Daily Rate (ADR)Average of all room types and rates

Revenue per Available Room (RevPAR)Measures revenue capabilities of hotel

Occupancy Percentage

Number of Rooms Occupied Number of Rooms Available

What does rooms occupied include?Rooms sold + comp rooms

What does rooms available include?Use the rooms availability formula

2000 = 63.9%

Occupancy Percentage Example

Number of Rooms Occupied Number of Rooms Available

Sold 95 rooms with 5 comps

150 room hotel with 25 out of order

95 + 5 = 100 =

150 - 25 = 125

80%

Daily Occupancy Rates

47.8

62.467.7 68.3 65.3 66.5 70.1

0

10

20

30

40

50

60

70

Sun Mon Tues Weds Thurs Fri Sat

Average Daily Rate (ADR)

Rooms Revenue Number of Rooms Sold

Number of Rooms Sold may or may not include comps

1999 = $81.07

Average Daily Rate Example

Rooms Revenue Number of Rooms Sold

$10,000 Rooms Revenue

Sold 95 rooms with 5 comps

$10,000 $10,000 =

95 + 5 = 100

$100

Revenue per Available Room (RevPAR)

Actual Rooms Revenue

Number of Available Rooms

or:

Occupancy Percentage x ADR

1999 = $51.50

RevPar Example

Actual Rooms Revenue

Number of Available Rooms

$10,000 Rooms Revenue

150 room hotel with 25 out of order

$10,000 $10,000 =

150 - 25 125$80

Hubbart Formula Approach

“Bottom-up”Approach

Begin with desired profit based upon expected Return on Investment (ROI)

Calculate pretax profits, fixed charge, management fees, & operating expenses

Estimate other departmental income

Determine the required rooms department income

Add expenses to get rooms department revenue

Room Revenue / Rooms Sold = Average Room Rate

Hubbard FormulaItem Calculation Amount

Desired net income Investment x ROI $375,000

2,500,000 x .15 = 375,000

Pretax income Pretax income = net income $625,0001 - t

Pretax income = 375,0001 - .4

Interst expense Principal x int. rate x time $900,0007,500,000 x .12 x 1

Income before interest & tax $1,525,000Est. depreciation & insurance 40% of income before interest & tax $610,000

Income before fixed charges $2,135,000Undistributed operating expenses 60 % of income before fixed charges $1,281,000

Required operated depts revenue $3,416,000

Department income excluding roomsLess: Food & beverage 5% of required operated depts revenue ($170,800)Plus: Telephone loss 2% of required operated depts revenue $68,320

Rooms dept. income $3,313,520

Rooms dept. direct expenses 54,750 x $10 $547,500

Rooms revenue $3,861,020Room revenue $3,861,020

Required average room rate Room sold 54,750 $70.52

Hubbard Formula Figures

Owner Investment = ??? Principal Loan Amount = ??? ROI = 15% Tax Rate = 40% Annual Interest Rate = 12%

Depreciation & Insurance

= 40% of income before interest & taxes

Undistributed Operating Expenses

= 60% of income before fixed charges

Hubbard Formula Figures

Other department gains & losses:

F&B = 5% of required operated depts. revenue

Phone = 2% of required operated depts. Revenue

Annual rooms sold = ???

Depends on your occupancy percentage

Rooms department direct expenses

= $10 per room sold