Yield Strategy and Meaning in Hotels

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Yield Definition

Yield is all about the percentage of income that can be achieved in a business venture. In hotel businesses, the objective is to realize 100 per cent room occupancy. This is because their yield is determined by the percentage of room occupancy that they achieve. As such, yield in the hotel business ventures can be defined as the ratio of the actual amount of revenue obtained from the number of rooms sold at their full rack rate, to the amount of revenue that could be obtained if all the rooms in the hotel are sold at their full rack rate. In other words, yield is the percentage of the amount of revenue that could be obtained if all rooms (100 per cent of available rooms in a hotel) were sold at their full rack rate. The formula for calculating yield is written as follows:

Yield = (Revenue obtained or revenue realized/ Revenue potential) x 100.

Occupancy Percentage Comparison.
Hotel	No. Room Available	No. Room Sold	Rate	Income	Occupancy%
X	200	100 60	$100 $120	$10000 $7200 $17200	80%
Y	200	60 100	$100 $120	$6000 $12000 $18000	80%

Table 1 above represents the cases of two hotels; X and Y. Hotel X has 200 rooms and sells 100 rooms at the rate of $ 100, and 60 rooms at the rate of $120, generating an income of $ 10000 and $ 7200 respectively. As such, the revenue obtained or realized from 160 rooms sold, amounts to 17200. The rate of $120 is the rack rate for hotel X. If all the 200 rooms available were to be sold at this rate, then the revenue potential would be $ 24000. Therefore, the yield for hotel X would be defined or determined as follows:

Yield = (Revenue obtained or revenue realized/ Revenue potential) x 100 = (17200/24000) x 100 = 71.667% = 71.67%

Similarly, hotel Y has 200 rooms and sells 60 rooms at the rate of $ 100 and 100 rooms at the rate of $120, generating an income of $ 6000 and $ 12000 respectively. As such, the revenue obtained or realized from 160 rooms sold amounts to 18000. The rate of $120 also remains the rack rate for hotel Y. If all the 200 rooms available were to be sold at this rate, then the revenue potential would be $ 24000. Therefore, the yield for hotel Y would be defined or determined as follows:

Yield = (Revenue obtained or revenue realized/ Revenue potential) x 100 = (18000/24000) x 100 = 0.75 x 100 = 75%

Table 2 below shows the comparison between the yields obtained by the two different hotels selling the same number of rooms but at different rates.

Yield Comparison.
Hotel	Revenue Realized	Revenue Potential	Yield%
X Y	$17200 $18000	$24000 $24000	71.67% 75%

Discounts Strategy

Providing discounts is a yield management strategy that can be effectively employed by hotel businesses, in order to improve their yields especially when the demand for rooms is way below or rather less than their supply. However, it is crucial for hotel businesses to effectively determine when to offer discounts on their rooms, and how much discount to offer on the rooms available. As indicated above, the goal of the hotel business is to have 100 per cent occupation of their available rooms. As such, it is significant for hotel businesses to always sell their available rooms at full rack rates. However, this is only possible when the hotel is confident enough that the demand for rooms will be far much higher than the supply of rooms. As such, if a hotel predicts that all its rooms will be sold or are likely to be sold, it would be unnecessary to offer discounts for customers on the rooms in order to help secure their sales. The hotel must take full advantage of the demand in order to ensure 100 percent room occupancy and improve its yield.

It is realistic to acknowledge that hotels will not have the demand for rooms outweigh the supply of rooms all the time. As such, they will occasionally be required to offer discount plans for their customers on rooms, in order to help secure their sale and improve the yield. Table 3 below is a yield management strategy, indicating the predicted demand for rooms in terms of percentage occupancy and the discount strategy rate to be offered to customers, in order to secure the sale of rooms and improve the hotel yield.

Forecasted Room Demand	Rate Strategy
Less than 50% occupancy 50% – 70% occupancy 71% – 90% occupancy 91% – 100% occupancy	Offer discounts up to 30% Offer discounts up to 20% Offer discounts up to 10% Offer no discounts

Discount is a crucial strategy in yield management, based on the demand for rooms. When the demand for rooms is very light, for instance below 50 per cent based on demand prediction, hotels are most likely to offer very high discounts of up to 30 per cent on their rooms in order to help secure their sale. Customers requesting room reservation at this discount rate would be accepted. However, request for room reservations with such discounts would be declined in periods when the demand for rooms is high between 91 per cent and 100 per cent. Hotels will also offer discounts of 10 per cent and 20 percent when the demand is slightly stronger, between 71 per cent and 90 per cent, and between 50 per cent and 70 percent respectively.

Noone and colleagues (2003) reiterate that the revenue obtainable from a single transaction is maximized by guests’ length of stay, as well as the strategic levers of rates on rooms. However, in managing demand, they do not emphasize the varying lifetime value of a guest and as such, do not provide a way forward on long term profit maximization. According to Shoemaker (2003), a guest or rather a customer may develop a negative perception or attitude towards a hotel, when there is incorrect usage of RM in the management of the hotel with regard to customer service. As a result, this may adversely impact on the business, if it diminishes the loyalty of the customer. Incorrect usage of RM in customer service in the hotel business is a case of overpricing. Hoang (2007) posits that this overpricing may enable hotel businesses realize higher revenue in the short-term but in the long-term, the value of possible repeat customers will be ignored. As such, it is the hotel business that will lose customers in the future due to the incorrect usage of RM for instance, in the case of overpricing.

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Yield Strategy and Meaning in Hotels

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