Is Yield Management Accessible to the Small Hotelier?

By Robin Williams, Aïda Díodeplus

When we talk of yield we say that it can be used in almost any hotel given the necessary basic requirements. Obviously, the lower the capacity of the hotel, the more restraints there are to its application, but the theories in themselves if applied correctly can still give excellent results. The fact is that yield is simply the application of methods already used by many hoteliers in combination with probability based formulae and a systematic approach which gives us that added benefit. However in some cases, the introduction of yield has been superseded by the proliferation of internet. Some may ask, why does this cause a problem? Basically for two reasons:

Firstly, the advent of the internet in a period when the major cities are experiencing a boom in the construction of hotels and the beachside resorts are suffering from increased competition from other foreign destinations, is resulting in an overdependence on this channel. All too often hotels are putting too much reliance on the internet and as a result entering in a price war with their competitors which, in the end can only lead to reduced quality of product and lower long-term benefits. This reliance on internet also means the dilution of the traditional segments used to drive the techniques of yield management; all too often we hear of companies with negotiated contracts calling to say that the price being offered in the internet is better than their negotiated rate.

Secondly and more importantly, the proliferation of internet has come about before the client and the hotelier has been brought to accept the application of restrictions in hotel rates. Its common knowledge in the purchase of plane tickets that, the cheaper flights are offered in advance with a series of restrictions that make them unattractive to certain clientele. Unfortunately, with the major supply of hotels causing proliferation of cheap hotel rooms through internet without any restrictions, it has become more difficult to introduce these techniques into the existing market.

If we add to these points the common tactic of suppliers of internet services to describe there products as Yield Management Tools and the high costs in the actual selection of Yield Management software, it is not hard to understand why the majority of small hoteliers do not appreciate the concept of Yield Management and its benefits or simply think that it is beyond their reach.

Yet in reality the internet is only a channel of sale which like any channel of sale, can only be used effectively if the hotel has a detailed long-term plan of action where the intervention of third party internet agents is constrained to the capture of new clients and within the parameters of a correct pricing structure.

Equally the existence of major software applications for the practice of Yield Management is a result of the need to manipulate large quantities of information in a rapid and effective way. Information which can be, to a more primitive extent, manipulated using simple databases.

Speaking purely of Yield Management then, we can say that technology has very little potential for the small hotelier if they do not understand the basic concepts of its application. All too often the hotelier when consulted will say openly that they are practicing the techniques of Yield, but when probed does not really have even the basic knowledge about optimisation and periodically revised medium term forecasting. And there are many examples of hotels and even groups who have inverted large quantities of capital in Yield Management software only to become disillusioned because they do not have the correct quality and quantity of historical data to give an effective recommendation or because they do not understand how to apply, in an effective way the recommendations that are produced.

The most successful approach to yield is a step by step development of knowledge, techniques and data, making the most of the resources available. The starting point has to be the acquirement of knowledge. Understanding the basic principles is what will provide any hotelier with the foundation on which to build an effective Yield Management process. Once this knowledge is obtained, the key is a clear and defined pricing policy and consistency. If the hotelier has the knowledge to create an adequate rate structure with correctly designed products for their establishment and can grow accustomed to the application of a consistent uniform approach to forecasting, then even the most basic techniques should bring an increase in benefits.

Many hoteliers have had great success by using simple databases and calculations with existing although reduced historical information and this has given them the encouragement to continue improving these processes gradually but effectively. Take for example a typical small hotel with limited data from the past. It is reasonable to assume that they have access to a list of occupancies and revenues by day and perhaps a list of the reservations made during the last year. With a sound foundation in the principles of Yield the hotelier can create a reduced but effective pricing structure and with the aid of the above mentioned data create rough estimates on demand in order to apply the techniques of optimization. Granted that these estimates are no where near the level of information that one would draw from a standard Yield Program but in general they will be conservative estimates which the hotelier can use to practice some basic techniques without taking excessive risks. Once the hotelier becomes accustomed to using Yield on a regular and consistent level they will find ways to maximise on the limited data available and more importantly, will put in place the processes required to improve that information for the future.

Granted that for a puritan in Yield this approach would appear insufficient or petty, however for those who are only just learning what Yield is or for the small hotelier with limited resources, this approach can be far more profitable than simply not using Yield Techniques due to a series of misconceptions.

Based on this idea of starting small and building on strong foundations, it would seem that what the majority of hoteliers need today is good strong tutoring in the principles of Yield and the possibilities available to them without the need for excessive resources.

We can say then that Yield is available to the small hotelier, provided they can obtain a strong tutoring in those principles and techniques and provided they understand the benefits which can be brought about by inverting time and energy in the required processes.

What external services are then available to the small hotelier in order to embark successfully in the path of Yield Management? The options are dependent on the amount of independence the hotelier wishes to have and the limitations of expenditure desired.

Talking of expenditure on Yield Management, the most important consideration is not the actual cost, but the net profit expected. For example if a hotel with an annual total revenue of 2,5 million euros can increment its revenue just 1% it will gain an extra 25,000 euros, if it has to invert 10,000 euros in order to achieve that gain it will profit by 15,000. Granted, the lower the expenditure required the greater the profitability, provided that, the expenditure is sufficient to provide those expected increases. Likewise, it has been demonstrated that a full scale application of Yield using the required software can give gains of closer to 5 or 7%. However, the cost involved is much higher and all importantly, these amounts of gain will only be achieved if the historical data is sufficiently precise and the hotelier has the knowledge to apply the results. Clearly then, we can see that the decision on which path to take in which moment is very important.

As far as the acquisition of knowledge is concerned, there are several options available in the market, however one should be careful in choosing the right course dependent on the level of knowledge and future plans. An elemental course may be useful for an introduction to the subject and some may chose this option for economy. However, alone, it will not provide the knowledge to carry out an extensive implementation of Yield. Likewise it is important to consider that while a second viewpoint is always educational, the attendance of more than two courses at the same level is not a cost effective solution as the hotelier will always be touching the same themes without improving their knowledge base. At some point, the hotelier will have to consider one of the very few advanced courses available in the marketplace.

As for the implementation of yield, some small hoteliers have opted for outsourcing. Here, the hotel agrees to let an external consultant manage the booking on all or part of his inventory in exchange for a fixed fee or proportion of the increase in revenue obtained. The benefits of this system are that the hotelier does not need to have a major level of knowledge in Yield and the cost is normally geared towards the increase obtained. The disadvantages are that the hotelier is tied to the consultant permanently and dependent on them for the control of their results. In this case it is important that the hotel is clear about it’s long term aim, if they wish one day to be independent they must build on their knowledge in order to one day be able to produce their own forecasts and administer their own rates.

The most effective and profitable long term solution is a full implementation of the techniques of yield driven by the management of the hotel internally and with the assistance of a professional in the area. This solution does not necessarily involve the purchase of revenue software.

The main limitation to the small hotelier is the commitment to apply yield in their hotel and resolve effectively the barriers that may exist to a successful implementation. Barriers which in general, are internal and psychological, rather than physical. The greatest problem in the implementation of Yield is its acceptance within the company, both by management and operating staff. If the management clings to traditional conceptions about maximum occupancy or minimum price it will be impossible to take total advantage of yield techniques and if the employees are not clear about the aims of yield they will not give the support necessary for the implementation to work.

The small hotelier needs a much more personal and tailor-made approach to Yield where he can be confident that the end result will be an effective, low cost yield process which is free of external chains and takes into account their particular situation. An approach which includes formation for all levels of personnel and, tuition in the application of the techniques.

This solution may be more costly in the short term but is much more profitable in the long term as it provides the hotelier with total independence to control his inventory and lower “running” costs once the processes are in place.

In other words what the small hotelier needs in order to embark successfully on the road to yield are solutions at there own level, solutions which provide the hotelier with a support when needed, be it for a large scale implementation tailored to there needs or punctual assistance in resolving problems, assistance provided by an expert in the field who they themselves could not support within their structures but who understands there business so they know that there is always help at hand when necessary.