YIELD MANAGEMENT AND

FORECASTING

Yield management, or revenue management, is the process by

which sales of a limited quantity of goods, such as hotel rooms,
airline seats, apartment leasing, rental cars, or etc. are managed
in order to maximize profits. Successful yield management
focuses on selling the product in such a manner that is timely,
price competitive, and directed towards the right subset of
customers.

 Yield management is a set of techniques and procedures

used to manipulate occupancy and/or ADR in order to
maximise the hotel’s revenue.
 It is also an evaluative tool that allows the FOM to use
potential revenue as the standard against which actual
revenue can be compared.
 The goal of YM is to consistently generate the highest
possible revenue from the given number of rooms in a
certain period of time.
 It therefore is a set of demand forecasting techniques used to
determine whether room rates should be raised or lowered
and when a reservation request should be accepted or
rejected in order to maximise revenue.

METHODS OF MEASURING HOTEL PERFORMANCE

Yield management is designed to measure revenue achievement.

One of the principal computations involved in yield management
is yield, which is the ratio of actual revenue to potential revenue.
Actual revenue is the revenue generated by the number of rooms
sold. Potential revenue is the amount of money that would be
received if all rooms were sold at full rack rates.
The mathematics of yield management is relatively simple,
although several formulas are usually involved. This section is
intended to introduce the basic formulations of yield
management computations.
Suppose a hotel has 300 rooms and collects an average of Rs.
2000/- per room. Suppose it is operating at 70% average
occupancy currently. Let us further suppose that there are
100 rooms with one bed ( single bedded) and 200 rooms with
two beds ( double bedded ) rooms. Let us say the room tariff
is as follows:
a) One bedded room tariff is Rs. 3000/- when sold for single
occupancy.
b)One bedded room tariff is Rs. 4000/- when sold for
double occupancy.
(This situation is possible when an extra bed is put in the
single bedded room)
c) Two bedded room tariff is Rs. 3500/- when sold for single
occupancy.
(This situation is possible when a double bedded room is
sold to a single occupant).
d)Two bedded room tariff is Rs. 4500/- when sold on
double occupancy.

Formula 1:
Potential average single rate it is found by multiplying the
number of rooms in each type by its single room rack rate and
dividing the sum total by the number of potential single rooms in
the hotel.
Potential Average Single Rate = Single Room Revenue /
Number of Rooms
Formula 2:
potential average double rate it is found by multiplying the
number of rooms in each type by its respective double-room rack
rate and dividing the sum total by the number of potential double
rooms in the hotel.
Potential Average Double Rate = Double Room Revenue /
Number of Rooms
Formula 3 :
multiple occupancy percentage an important element in
determining a hotel’s yield statistic is the proportion of the
hotel’s room that are occupied by more than one person, that is,
the multiple occupancy percentage.
Multiple occupancy = Number of rooms Occupied by More
than One Guest / Number of Rooms Occupied

Formula 4 :
rate spread : the determination of a room rate spread among
various room types can be essential to the use of yield decisions
in targeting a hotel’s specific market.
Rate Spread = Potential Average Double Rate – Potential
Average Single Rate
Formula 5:
potential average rate a hotel’s potential average rate is a
collective statistic that effectively combines the potential average
rates, multiple occupancy percentage, and rate spread. The
potential average rate is determined in two steps. The first step
involves multiplying the rate spread by the hotel’s multiple
occupancy percentage. The result is added to the hotel’s potential
average single rate to produce a potential average rate based on
demand (sales mix) and room rate information.
Potential Average Rate = (Multiple Occupancy% X Rate
Spread) – Potential Average Single Rate
Formula 6:
Room rate achievement factor (also called Rate Potential )the
percentage of the rack rate that the hotel actually receives is
contained in the hotel’s achievement factor (af), also called the
rate potential percentage. The achievement factor is found by
dividing the actual rate the hotel is currently collecting by the
potential average rate.
Achievement Factor = Actual Average rate / Potential
Average Rate
Formula 7 :
Yield an important element in yield management is the yield.
The yield calculation incorporates several of the previous
formulas into a critical index. There are various equivalent ways
to express the yield equation.
1. Yield = Revenue Realized / Revenue Potential
2. Yield = Room Nights Sold x Actual Average Room Rate /
Room Nights Available x Potential Average Rate
3. Yield = Occupancy Percentage x Achievement Factor
Instead of computing yield as a percentage, some lodging
operations prefer on alternate statistic which focuses on revenue
per available room (RPAR OR REVPAR). The RPAR can be
calculated using either of the following equations:
RPAR = actual room revenue / available room
RPAR = occupancy % x ADR

Formula 8:
identical yields
Identical Yields = Current Occupancy % X Current rate /
Proposed Rate

Formula 9:
Equivalent occupancy a more effective way of evaluating
whether a change in room rates is justifiable involves
determining an equivalent occupancy. The equivalent occupancy
formula can be used when management wants to know; what
other combinations of room rate and occupancy percentage
provide equivalent net revenue.
The marginal cost of providing a room is the cost the hotel incurs
by selling that room (for example, cleaning and supplies); this
cost would not be incurred if the room were not sold.
Equivalent Occupancy = Current Occupancy % X Current
Contribution Margin / New Contribution Margin
ELEMENTS AND BENEFITS OF YIELD MANAGEMENT

While developing a successful Yield Strategy, the following

Elements are very important:
 Group Room Sales
 Transient (FIT) Room Sales
 Food and Beverage Activity
 Local and Area-wide Conventions
 Special Events

1. Group Room Sales:

 Group Booking Data

 Determines whether the Group blocks already recorded in
the Reservation File should be modified or not and adjusts
expectations by reviewing the Group’s Booking History
 Group Booking Pace
 Watches out for the Rate at which Group Business is being
booked (Consider Historical Trends)
 Anticipated Group Business
 Watches out for repetitive Group Patterns and act
accordingly in order to forecast the Pressure on the Market,
and hence adjust Selling Strategies
 Group Booking Lead-Time
 Measures how far in advance of a stay Bookings are made.
This is very important in determining whether to accept an
Additional Group and at what Room Rate to book the New
Group
  Displacement or Transient Business
 Occurs when a Hotel accepts Group Business at the Expense
of Transient Guest. This might engender Profitability
Problems and Bad Reputation

2. Transient Room Sales:

The Front Office Management shall monitor the Booking Pace

and Lead-Time of Transient Guests in order to understand how
Current Reservations compare with Historical and Anticipated
Rates

3. Food and Beverage Activities:

All local Food and Beverage Functions should be viewed in light

of the Potential for Booking Groups that need Meeting Space,
Food and Beverage Service, and Guest Rooms

4. Local and Area-wide Activities:

Even when a Hotel is not in the immediate Vicinity of a

Convention, Transient Guests and Smaller Groups displaced by
the Convention may be referred to the Hotel (as an Overflow
Facility) and this may have a tremendous Impact on Hotel’s
Revenue

5. Special Events:

In Special Events (Concerts, Festivals, and Sporting Events),

Hotels might decide to benefit from High Demand by restricting
Room Rate Discounts or requiring a Minimum Length of Stay
Benefits of Yield Management

1. Improve forecasting – Revenue management helps

improve forecasting.
2. Improve seasonal pricing & inventory decisions – It
helps in deciding the season and off-season pricing for
accommodation products and also in making important
inventory decisions like renovation.
3. Identification of new market segments – New market
segments can be identified on the basis of yield
management.
4. Identification of Market segment demands – The
demands of the targeted market segments can be
identified with yield management.
5. Develop coordination between F/O & sales
Department – Since the two divisions work together to
forecast and manage revenue and yield, it helps enhance
coordination between them.
6. Determining of discounting activity – Yield
management helps to determine the amount of discounts
to be offered, depending on the dates and periods.
7. Improved Development of short term & long term
business plans – Revenue management helps develop
business plans as the management can forecast the
revenue that can be generated and take measures to
generate those figures.
 8. Increase business & profits- Good revenue management
helps increase revenue and profits.
9. Helps is saving expenses like labour cost and operating
expenses.
10. Initiation of consistent guest-contact scripting –
Revenue management helps initiate consistent contact
with guests.

CHALLENGES IN YIELD MANAGEMENT

1. Measuring performance- Occupancy rates and yield are measures that

are affected by external competition. Therefore, an ideal measurement
can be done using the opportunity model, that is, if the hotel segments
the market and fixes different rates for different guests, then it has to see
that the revenue is generated from those rooms and it has to be utilized
ideally.
2. Guest satisfaction- Sometimes guests do not like the practice of
differential pricing. In evaluating the efficiency of yield management
system, the business between short-term profit & developing long term
guest loyalty need to be studied carefully.

3. Employee malpractice- Revenue Management may influence the

employee to follow wrong practices. Eg:- hotels might offer incentives
to the staff for selling higher category rooms & this might motivate the
reservation agents to upsell while making reservations. So the agents
might not sell the basic room category & not concerned with the guest.

YIELD MANAGEMENT STRATEGIES

Revenue management strategies differ during high- and low-

demand periods.

High Demand and Low Demand

High Demand
During high demand period, the management considered the
following points:-
1. No discount will be given.
2. Limitations in minimum length of stay.
3. Avoid the group booking, because in group the room rate is
very low.
4. Cancel the procedure as per the policy of holding the room
till 1800 hrs, to avoid last moment no-show or last minute
cancellation.
5. Hotels strictly follow the procedure & policy of guarantee &
cancellation, to avoid last moment no-show or last minute
cancellation.
6. Increase the room rates as reliable with competitors to get
maximum revenue.
7. Make packages instead of giving more discounts.
8. Apply rack rate to higher categories of room like suite,
presidential suite, executive rooms etc.
9. Select dates that are to be closed to arrivals.
10. Apply the policy to pay and stay or deposit the amount
or guaranteed the reservation to the last night to stay.
 Low Demand
During low demand period, the management considered the
following points:-
1. Introduces packages & special offers.
2. Keep discount like advance booking rates, corporate rates
open.
3. Give discount or discount coupons in spa, restaurant etc.
4. Establish good & healthy relationships with competitors.
5. Encourage upgrades.
6. Lower rates are a technique to attract more guest and to
generate more revenue.
FORECASTING AND VARIOUS RATIOS

Hotel forecasting is the ultimate resource for anticipating the

future performance of hotels’ key metrics – occupancy, ADR
(Average Daily Rate) and
RevPAR (Revenue Per Available Room).
Forecasting future demand in the lodging industry is crucial
because it leads to are efficient planning for, and decisions
making to all the departments, and most importantly, it is one of
the drivers of pricing.

Benefits of Forecasting

1) Accurate forecasting is one of the ways to increase

predictability of duration of use. In hotels, duration is
defined as length of stay; in airlines, as time in flight
(known as origin - destination); in restaurant, as length of
meal; and in rental cars, as length of keep. To help increase
the predictability of duration, hotels forecast demand by
length of stay for different categories; airlines try to forecast
 demand by origin destination city-pairs; restaurants forecast
demand by length of meal depending on the number of
persons per table; and rental car companies predict demand
by rate category and length of keep.
2) The accuracy of forecast is essential because the forecast is
the main driver of pricing/room allocation decisions;
inaccurate forecast or predictions will diminish the hotel’s
revenues and profit margin. In fact, a 10% improvement in
forecasting accuracy translates into a 1.5 to 3.0% increase in
revenue generated from a revenue management system.
This will probably impact the net income in a much larger
way, due to small margins, existing in the hotel industry.

Therefore, in addressing the importance of forecasts, one

can state that forecasting is the most important driver of any
revenue management optimization approach.

3) Forecasting remains the job of the Revenue Manager and is

performed in different ways; few hotels utilize the manual
excel based approach to forecasting and others implement
automated systems called Revenue Management systems.
Many hotels decide to invest in such systems considering
that inaccurate forecasting may lead to incorrect decisions
and severely impact revenues and profit margins.
4) Forecasting may be the heart of any hotel operations.
Experienced Revenue Managers produce
forecasts/predictions for one year and more, but this task
may become challenging if it is required to be completed
daily and broken down by segments, source of business or
channels, in this case accurate hotel data may be are issue.
2) Forecasting in the lodging industry has relatively important
to depend on the nature of industry and operational
characteristics and difficulties. This importance is not only
related on wide demand fluctuations, but also the efforts to
increase occupancy rates, ADR and RevPar. The forecast is
the most important driver of any revenue management
optimization approach. Hotels should forecast at a detailed
level if true benefits available from revenue optimization
are to be achieved.

Records required for forecasting Room Availability

The forecasting of room availability is not work on guess

analysis. Forecasting the availability of rooms require the
information about the past trends such as :-

 The number of arrivals on each day during the

same period.
 Number of Walk-inns.
 Number of Understay.
 Number of Check-outs.
 Number of No-show.
 Number of Overstay.
 Cancellation
 Number of Stayover.

Percentage of Walk –inns = Number of

Rooms walk-inn 100
Number of Rooms
arrivals
 Percentage of under stay = Number of
under stay rooms 100
Number of expected
Departure

Percentage of No-Show = Number of

No-Show 100
Number of Room
reservations

Percentage of Over stay = Number of

Over stay rooms 100
Number of expected
Departure

Percentage of Stay Over = Number of

Stay Over rooms 100
Number of expected
Departure

Occupancy Percentage = Number of

rooms occupied 100
Number of rooms
available

Multiple Occupancy Percentage = Number of rooms

sold in double occupancy 100
 Total number of rooms
available
Capacity Management/ Overbooking
The availability of rooms plays a very important role in taking
advance booking of rooms. Based on the experience & previous
data available Hotel Managers take chances to book more rooms
than the total inventory of rooms available in the hotel.
Overbooking of rooms is the practice/ technique which is done
purposely for selling more rooms then the available, in order to
manage the reservation status like cancellation, No-Show and
under stay (Early Departure).
Under stay: - When guests leave the hotel before their expected
date of departure is known as under stay. In this situation the
number of vacant rooms increases. So, if we do not take
overbooking the under stay rooms will be unsold, & the hotel
will bear the loss of revenue. To avoid such kind of situations,
hotels generally discourage the under stay. Even hotels also
charge the AMEDEMENT CHARGES.
Cancellation
Cancellation is a situation in which guest cancel his/her room
booking, which effects increase the availability of rooms. The
guest is free to cancel the booking before a fixed time. After that
hotel will charge the cancellation as per the policy is the
reservation is guaranteed. But if the reservation is provision or
unconfirmed or unguaranteed hotel will loss the revenue for that
particular day, because the room is unsold and the room is
allotted to another guest who’s reservation is on waitlisted or
walk-ins. The timings for holding the rooms for provision or
unconfirmed or unguaranteed reservation is generally 1800 hrs.
No-Show
It is a situation in which guest make the guaranteed reservation
by paying the advance deposit, but did not turn up at the hotel on
the expected date of arrival. In this condition hotel did not allot
that particular room type to any guest and charge to the No-
Show charges. The room will be vacant and not in a condition to
sell any other guest. This will also increase the loss of room
revenue. The charges of the No-Show will be adjust by the
amount which is paid by the guest during the time of making
reservation and rest of the amount will be return to the guest.
However, no-show also result in increasing the room availability,
which effects the loss of room revenue.
TOAVOID THE LOSS OF REVENUE FROM ANY OF THE
ABOVE MENTIONED CONDITIONS/SITUATIONS
HOTELS USUSLLY PREFER OVERBOOIKNG CONCEPT.
NOTE:-
Over booking is not done on guesswork. Over booking is done
by considering the below factors:-
Past history of the data related to:-
 Cancellation information
 Under stay information
 No-show information
  Turn away information: - The number of guests who turned
away or were denied reservations due to un- availability of
rooms during those dates or the data available of the
previous years.

Activities in town:-
 Sport events: - Events like international cricket, football,
tennis matches etc will be scheduled in those dates around
the city.
 Cultural events: - Events like festivals, cultural fairs, music
shows etc will be scheduled in those dates around the city.
 Business events: - Events like trade fairs, business meets,
business seminars etc will be scheduled in those dates
around the city.
 Emergency situations: - Situations like curfew, bands etc
scheduled to be held on those dates or in that period.
Experience of the reservation Manager
The reservation Manager can tell from their experience, that how
many of the reserved guests will actually turn up.
Overbooking balances the risk of potential loss of revenue from
reservation cancellation, early departure & No-Show.
Discount Allocation/ Differential Pricing
Price is one of the major concerned for the guest while choosing
any hotel. For the hotels it is very difficult to sell each & every
room in rack rate. Therefore hotels have sales strategy/planning
to sell the maximum number of rooms at the best rate, otherwise
those rooms will be remaining unsold. To avoid the situation of
revenue loss, hotels offer Discounts.
Let us suppose the Cricket World Cup final Match is organized
in Mohali stadium ( A place near to Chandigarh) in the month of
February. This is the peak season for the hotels business.
Reason:-
 Chandigarh celebrates “Festivals of Gardens”
 During the same time marriages are also took place.
So, from the above mentioned situations, we can come to know
that large number of people will be coming to Chandigarh,
which will include:-
 People ( Indians & International Travelers) to watch Cricket
Match.
 To visit or participate in the festival of Gardens.
 To attend marriage.
Finally, now Chandigarh is having huge demands of Hotel
Rooms, because of the Peak season. In this situation hotels may
not offer any discounts on room tariff & will prefer to charge
rack rates as they are confident that the demand for rooms would
be more than the supply of rooms available in Chandigarh.
But during lean time or off season, when the occupancy is low,
the supply of rooms is more than the demand. In this situation,
hotels offer discounted rates to attract more and more guests,
otherwise the hotel can bear the loss in revenue.
Normally, discounted offer rates are as under:-
Rack Rate (no discount) offer to walk-inns during peak
season.
10% to 20% discount offer to travel agents, groups, regular
guests.
30% to 40 % discount offer to large travel agents and major
companies.
50% to 60% discount offer to very large multinational
companies, holiday planners, conference
& convention planners.
Duration Control/ Duration Restriction

Occupancy
120

100

80

60
Occupancy

40

20

0
Mon Tue Wed Thu Fri Sat Sun

Fig 1 Occupancy status in Downtown Hotel

 Occupancy
120

100

80

60
Occupancy

40

20

0
Mon Tue Wed Thu Fri Sat Sun

Fig. 2 Occupancy status in Resorts

Duration Control is another tool of yield Management. For

Example, a hotel may refuse
Reservation request for one night, even the rooms are available,
reason accepting such a
Reservation will block occupancy on adjacent days. Hotels
which are located in the
Heart of the city having less occupancy in weekends and having
high occupancy in
Weekdays as shown in Fig 1. And wise versa is fig 2 as an
example of Resorts.

YIELD MANAGEMENT PROSPECTS

Yield management is a comparatively new concept. It has the following

prospects in the future:

One-to-one revenue management

  Sophisticated hotels will move to one-to-one revenue management, where
each individual will be a market segment in himself/herself.
 In the future, technology will support calculating the total customer value
and the potential total customer spend, based on history and future potential
from demographics, to determine what rate and what availability should be
offered to a potential guest.

Total customer value integration

 The future of revenue management will include a focus on the Revenue Per
Available Guest(RevPAG) and the total customer value.
 The next generation of revenue management systems will create offers
based on the value or the potential value of each individual guest.

Function room yield

 Forecasting and yielding of function space will be a focus in the future for
hotels.
 Many large hotel companies and revenue management systems are working
to develop effective models in this area.

Cost of business analysis

 Different revenue streams and channels do not yield the same profit, even
when the rate is exactly the same.
 In the future, channel cost will be incorporated into rate and inventory
decisions for each channel individually.

Goal alignment

 The goals of the entire hotel team, from the property or hotel level to
corporate, need to be aligned for revenue management to reach its full
potential.

Automation

 There is a gap between the sophistication of the revenue management

practice and the technology avalaible to support it.
 Adoption of the new avalaible technologies and the use of minds to
manipulate them expertly would help achieve ultimate success.
STATISTICAL REPRESENTATIONS OF REPORTS

Hotel Statistics Report

The Hotel Statistics report lists occupancy statistics, RevPAR,
ADR, and a brief revenue analysis for yesterday. It also
includes period-to-date and year-to-date data for the current
yearas well as the previous year.

· This report contains the following information for the

date requested:

o Rooms Available to Sell - the total number of

rooms minus out of order rooms.
o Stay Over Rooms - rooms that were occupied on
the previous night by the same reservation as the
current date. A single guest must be “in house”
subsequent nights of the stay the guest remains “in
house” in the same room.
o Total Revenue Rooms - both day use rooms and
stay over rooms that had room revenue charged to them.
o Comp Rooms - rooms that were used but had no
room revenue charged to it.
o Total Non-Revenue Rooms - total number of rooms
that did not have room revenue charged to them (comp
rooms).
o Total Occupied Rooms - the combined total or
revenue rooms plus non-revenue rooms.
o Occupancy % of Total Available Rooms- equal to
the total of rooms sold divided by rooms available to
sell.
o Occupancy % of Total Rooms - equal to the total
number of rooms sold divided by the total number of
rooms. This includes out-of-order rooms.
o Average Daily Rate Stay Over Rooms- the total
room revenue divided by stay over rooms.
o Average Daily Rate for Total RevenueRooms -
reflects the total room revenue divided by revenue
rooms.
o Average Daily Rate for Total Occupied Rooms-
shows the total room revenue divided by the total rooms
sold.
o RevPAR - the total room revenue divided by rooms
available to sell.
o Room Revenue (Non Exempt From Taxes)- rooms
that have been posted as revenue and are not tax exempt
or tax posted.
o Room Revenue (Exempt From All Taxes)- rooms
that have been posted as revenue and are tax exempt or
will not be tax posted.
o Total Room Revenue - the total revenue from
rooms, tax exempt AND not tax exempt.