What is yield management?

Yield management meaning: a dynamic pricing strategy, used by hotels, that sees room rates change in response to a variety of factors, to ensure that a hotel is making as much money as possible from its rooms.

But this yield management definition only offers a broad sense of what this strategy looks like, and how an independent hotel might use it, so let’s take a closer look.

With hotels, any room left unsold is lost revenue. Yield management is about making sure those rooms are filled in the most profitable way possible. You will sell the right room to the right market segment at different rates under various circumstances.

Yield management is based on the theory of supply and demand: guests will pay different prices for the same thing, depending on a variety of factors. Therefore, you change your rates accordingly to get more incremental revenue.

In the hospitality industry, yield management refers to all of the ways you price your products so that you can make more money with the same resources, by selling to the right type of guest at the right time.

As a small accommodation provider, here’s what you need to know.

View real-time competitor rates and boost your property’s yield

When you know what your competitors are doing, you’ll know what to charge to attract more guests. Gain access to this critical info with Little Hotelier.

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How does yield management apply to the hotel industry?

For hotels, a yield management system is one that helps you to identify demand for a specific room on a specific date, and identify the supply of such a room in the broader market, to understand the maximum price that a guest would be willing to pay to book that room.

Hotel yield management is built on a foundation of forecasting. It’s about using historical data and market insights to understand the levels of demand months into the future, so you can set the ideal price on any given day. 

Why is hotel yield management important?

Without using yield management strategies, you miss out on the opportunity to get more bookings, offer competitive rates and promotions, get more revenue per booking, and forecast the upcoming booking season.

To get more profit, you need to sell enough rooms to cover your fixed operating costs, then sell the remaining rooms at higher rates to maximise revenue and profits.

How to execute yield management strategies

There are many different pricing strategies used to manage yield effectively. Here are four hotel yield management strategies that could increase the bookings your hotel secures, and the profit generated by each reservation.

Rate strategies

This is when you have different rates depending on various factors, like…

  • Rack rates: Based on room type (suite vs. standard room, ocean view vs. pool view), type of bedding, and occupancy. The ‘regular’ rate that guests are quoted.
  • Group and tour rates: How many guests are booking (minimum number of guests per room, lower rate for large number of rooms per booking). Discounts for groups who book many rooms and can even be offered to tour operators to drive in regular occupancy
  • Package rates: Special events e.g. sporting events or special functions. Includes within the packages different elements such as tickets, shuttle transport, etc.
  • Promotional rates: Discounts for regular markets e.g. students, business travellers and airline staff

Seasonal strategies

Increase your pricing when there is high demand, and offer valuable discounts to entice deal seekers when demand is low.

This is when you have different rates depending on popular and unpopular times. You can do this according to:

  • High vs low season rates
  • Day of week rates
  • Time of day (e.g. with regard to facilities)
  • Peak periods (e.g. public holidays)
  • Last minute

Up-selling and cross-selling strategies

Another way to drive incremental revenue is to up-sell and cross-sell every guest. As long as you offer them relevant extras, it’s a win-win situation: you’re enhancing their experience staying with you, and also making it worth your while.

Some ideas:

  • Shuttle transfers
  • Room upgrades
  • Equipment hire
  • Tours & activities
  • Car rental
  • Event tickets

Do this before their stay and during their stay. If you’re working with other operators, you will likely get a good commission for your referral!

Your booking engine should have the ability to offer extras even before the reservation is made, and be able to easily add extras to the guests’ stay.

Advanced purchase rate strategies

Advanced purchase rate strategies are a form of yield management pricing that helps you secure a good number of bookings early, which reduces the pressure of securing last minute bookings to generate revenue.

The most common advanced purchase rate yield management solution is the early bird discount, where a guest enjoys a great deal when they book well in advance – perhaps 12 months or more. These deals often come with a no-refund policy attached, so your hotel is guaranteed the revenue.

Yield management pricing example

Let’s say your hotel has just added a new room, and it’s the most luxurious on your property. Looking at similar offerings in your area, you believe that this room is worth $600 on an average night. But you believe that you need to create a bit of buzz, and secure a few glowing reviews, before you can charge what you want to charge.

You decide to set an early-bird rate, offering the room at a 25% discount for the first five guests who book it. To secure those reviews, you decide to offer some extras for free – a free shuttle transfer and a bottle of champagne on arrival.

Buzz secured, you can then switch to a dynamic pricing strategy, based on that $600 per night baseline, moving the room rate up and down based on demand.

Using yield management system software for dynamic pricing

Hotel yield management software is designed to factor in the wealth of considerations that this pricing strategy must take into account. And Little Hotelier is one such hotel yield management tool.

Serving up the real-time rates of your direct competitors, the Little Hotelier Insights feature helps you to find your pricing sweet spot. Our Competitor Rates and Rate Parity reports grant you total clarity over how your pricing compares to that of the market at large, and reveals opportunities to secure more bookings in the quiet times, and maximise your revenue in the busy times.

By Dean Elphick

Dean is the Senior Content Marketing Specialist of Little Hotelier, the all-in-one software solution purpose-built to make the lives of small accommodation providers easier. Dean has made writing and creating content his passion for the entirety of his professional life, which includes more than six years at Little Hotelier. Through content, Dean aims to provide education, inspiration, assistance, and, ultimately, value for small accommodation businesses looking to improve the way they run their operations (and live their life).