Yield management in a Hotel

Case
On a flight to Goa, two passengers were discussing
about the price they paid for the flight and hotel.
They were amazed at the price difference as one of
them was charged 6800 INR for a round trip airfare
and 30000 INR for a hotel and the other 4600 INR for
the airfare and just 18000 INR for the same hotel.
The first passenger had booked his flight and hotel
only one day in advance while the other a month in
advance. How can the same airline or hotel manage
profit by charging so discriminately? The answer to
this amusing question is “Revenue Management” .
 Yield Management is a method of
selling:

• the right inventory to

• the right customer at
• the right time at
• the right price.
 Yield Management

• Perishable Inventory
• Variable Demand, Fixed Capacity
• Sales via Reservations
• Multi-Pricing Capability
• Low Variable Costs
• Pricing is a Powerful Drive
 Introduction
• Hyatt possesses 111 hotels and resorts and
more than 55,000 guestrooms in 44 countries.
• Annual Revenue of Hyatt is $3.4b.
 Determinants of demand of Hotels
• Tourist arrivals to India increased
- Tourist growth rate @14%
– Average length of stay in the country is highest
in the world i.e. 31.2days.
• Indian Govt. plans to boost the travel &
tourism industry
– Abolishment of air travel tax of 15%
– Reduction in the aviation fuel to 8%
– Campaigns

• MNCs are growing rapidly in India.

 Bookings
• Sales via Reservations
• makes reservations in advance
• Weeks and Months ahead
• Many reservations also made at last minute
 Multi-Pricing Capability

• Market Segmentation
• Published Price List (available online or
telephonically )
Low Variable Costs
• Fixed:
Construction Costs, Admin Personnel
• Variable:
• Service Provider
• Room Cleaning, Products
 Financial Impact

• Before YM
100K Revenue
10K Profit (10%)
• After YM
105K Revenue (+5%)
12.5K Profit
25% Increase in Profit
 strategy
• Two fare classes : full price and discount price.
• The hotel has 210 rooms available for oct 29 (assume that oct 29 is
a Monday night). It is now the end of september, and the hotel is
beginning to take reservations for that night. The hotel could sell
out all 210 rooms to leisure travelers at the discount price, but it
also knows that an increasing number of business customers will
request rooms as March 29 approaches and that these business
customers are willing to pay full price.
• To simplify this problem, the Hotel assumed that leisure demand
occurs first and then business demand occurs. Hence it decided how
many rooms it was willing to sell at the leisure fare or in other
words, how many rooms shall it protect (i.e., reserve) for the full
price payers.
• If too many rooms are protected, then there may be empty rooms
when March 29 arrives.
• If too few are protected, then the hotel forgoes the extra revenue it
may have received from business customers.
 yield management in hotels
1.It is expensive or impossible to store excess resource
(they cannot store tonight's room for use by tomorrow night's customer).
2.Commitments need to be made when future demand is uncertain (they must set
aside rooms for
business customers - "protect" them from lowpriced leisure travelers - before we
know how
many business customers will arrive).
3.The firm can differentiate among customer segments, and each segment has a
different demand
curve (purchase restrictions and refundability requirements help to segment the
market between
leisure and business customers. The latter are more indifferent to the price.).
4.The same unit of capacity can be used to deliver many different products or services
(rooms are essentially the same, whether used by business or leisure travelers).
5.Producers are profit-oriented and have broad freedom of action (in the hotel
industry, withholding rooms from current customers for future profit is not illegal
or morally irresponsible.
 Predictors tracked at Hyatt to determine duration of
demand cycle. How best to plan for high
demand?
• one day (varies by hour)
• one week (varies by day)
• one month (varies by day or by week)
• one year (varies by month or by season or
reflects annual events)
• some other period
 Causes of these cyclical variations?

• employment schedules
• wage and salary payment dates
• school hours and vacations
• seasonal changes in climate
• occurrence of public or religious holidays
• natural cycles, such as coastal tides or phases
of the moon
Demand Levels are changed randomly due
to :
• day-to-day changes in the weather
• health events whose occurrence cannot be
pinpointed exactly
• accidents, fires, or even criminal activities
• natural disasters, from earthquakes to storms to
mud slides and volcanic eruptions
Patterns and Determinants of Demand: Predictable Demand Patterns
and Their Underlying Causes

Predictable Cycles Underlying Causes of

of Demand Levels Cyclical Variations

– billing or tax
– day payments/refunds
– week – pay days
– month – school hours/holidays
– year – seasonal climate changes
– other – public/religious holidays
– natural cycles
– employment
(e.g., coastal tides)
 Hotel Room Demand Curves by
Segment and Season
Price per
room
night Bl Bh
Th Bh = business travelers in high season
Bl = business travelers in low season
Tl Th = tourist in high season

Tl = tourist in low season

Th
Bh
Bl Tl
Quantity of rooms demanded at each price
by travelers in each segment in each season
 Variations in Demand Relative to Capacity

– Use marketing strategies to smooth out peaks, fill in valleys

• Many firms use a mix of both approaches
VOLUME DEMANDED
Demand exceeds capacity
(business is lost)
CAPACITY UTILIZED

Maximum Available Demand exceeds

Capacity optimum capacity
(quality declines)
Optimum Capacity
(Demand and Supply
Well Balanced)

Excess capacity
Low Utilization (wasted resources)
(May Send Bad Signals)

TIME CYCLE 1 TIME CYCLE 2

 Recommendations
• Booking hotel reservations online
• Online travel booking through “Branded Website”
• Sliding scale pricing
• Tie up with Transportation service providers like
buses , cabs to bring customers
• Doing extra benefits of stay in hotel during lean
period to be different than other hotels and attract
more customers.