Hotel managers faced with decisions about the timing of reservations and the rate to charge for rooms often make decision after applying yield management techniques. Choices come down to deciding whether it’s better to book as many rooms as possible in advance and make less per room, or whether it’s better to hold off making reservations and charge more for each room. Objectives of yield management and corresponding techniques work to make the best use of the hotel’s resources and maximize revenue.
Successful implementation of yield management techniques oftentimes depends on how well a hotel manager understands and manages inelastic and elastic demand. Inelastic demand refers to the number of room reservations a hotel manager can expect as a result of being in business. Because location and the image the hotel projects often determine the degree of inelastic demand, a clean, well-run hotel located close to an airport can often expect inelastic demand to be higher than one of lesser quality located in the middle of a city. Elastic demand refers to demand that results from promotional and pricing strategies. Yield management techniques are vital to creating a profitable balance between inelastic and elastic demand.
Setting a standard protection level and booking limit is a typical starting-point yield management technique. The protection level is the total number of rooms made unavailable for advance reservations at discount rates to account for the likelihood of last-minute customers booking these rooms later in time and at a higher room rate. Subtracting the total number of available rooms from a protection level estimate is a first step in identifying the hotel’s booking limit. In the next step, historical demand data and forecasting variables such as seasonality, the day of the week and whether there is a holiday or special event are used to establish the booking limit for a specific timeframe.
Dynamic pricing works to increase elastic demand by adjusting prices according to a customer’s willingness to pay. The focus is on attracting customers who are more sensitive to price and less sensitive to time. While dynamic pricing is commonly used to fill rooms during off-peak times and off-peak seasons, discounting room rates also can be used when rooms identified as protected haven’t been filled by a specific date or time-of-day. An example are hotel rooms advertised on Internet travel sites at discount rates
Overbooking is a common but sometimes tricky yield management technique. It increases revenue generation, but can negatively affect a hotel’s reputation. Overbooking is based on the premise that a certain percentage of customers will reserve a room and not show up. Rather than simply submit to the loss of revenue, the hotel will book more rooms than actually are available. Determining whether or how much to overbook depends on the results of an opportunity cost analysis or the cost to the hotel of making one decision over another. The decision essentially involves deciding whether revenue the hotel stands is more or less than the potential long-term cost of the ill-will overbooking can generate. In some cases, compensatory measures such as giving the customer a gift certificate for a future stay or finding the customer a room at another hotel, can temper the cost of choosing to implement overbooking as a yield management strategy.