Yield Management
A technique used to Maximize Room Revenue
Used for reservations of a Perishable Commodity:
– Hotel Rooms
– Airplane Seats
– Rental Cars
– Cruise Ship Cabins
Hotels are shifting from High-Volume to
High-Profit bookings
Yield Management
As Demand exceeds Supply
Increase Rates to Maximize Profits
$
As Supply exceeds Demand
Decrease Rates to Maximize Occupancy
$
Elasticity of Demand
How sensitive is demand to a change in price?
ELASTIC
– Demand is very sensitive to price
INELASTIC
– Demand is not sensitive to price
Guest Booking Profile
Inelastic
Business
Leisure
Reservations
Elastic
100
Days before arrival
0
Yield Statistic
Actual Rooms Revenue
Potential Rooms Revenue
Potential Rooms Revenue
– Every room sold at full rack rate
– # Rooms x 365 days x Rack Rate
Yield Management Tools
Discount Allocation
• Manage discounted room rates
• Encourage upselling
Duration Control
• Place time constraints on reservations
• May reject reservation requests
Combination
• Discounts for 3 nights, but rack for 1 night
Duration Control
Minimum Length of Stay
• Reservation for a certain number of nights
Close to Arrival
• Guest must arrive before a certain date
• Limit number of check-ins on a given day
Sell-through
• Similar to minimum stay
• Sell days around a peak day
Room Discounts
Hurdle Rate
• Minimum room rate for a given day
Displacement
• Occurs when a hotel accepts group business at the
expense of transients
Wash Factor
• Deletion of group room blocks
Rooms Availability Formula
150 Guestrooms
- 5 Out of Order
- 45 Stayovers
- 50 Reservations
+ 10% No-show
+ 5 Understays
- 20 Overstays
40 Rooms Available for Sale
Forecasting Rooms Revenue
Forecasted Annual Rooms Revenue =
Rooms
Available
Occupancy
Percentage
Average
Daily Rate
Rooms Available = Total Rooms X 365 Days
Forecasting Rooms Revenue Example
100 Room Hotel
100 x 365 days = 36,500 Rooms Available
75% Occupancy Percentage
.75
$50 Average Daily Rate
36,500 x .75 x $50 = $1,368,750
Hotel Operational Statistics
Occupancy Percentage
The most commonly used operating ratio
Average Daily Rate (ADR)
Average of all room types and rates
Revenue per Available Room (RevPAR)
Measures revenue capabilities of hotel
Occupancy Percentage
Number of Rooms Occupied
Number of Rooms Available
What does rooms occupied include?
Rooms sold + comp rooms
What does rooms available include?
Use the rooms availability formula
2000 = 63.9%
Occupancy Percentage Example
Number of Rooms Occupied
Number of Rooms Available
Sold 95 rooms with 5 comps
150 room hotel with 25 out of order
95 + 5 =
100
150 - 25 = 125
=
80%
Daily Occupancy Rates
68.3
Tues
Weds
62.4
70
60
67.7
65.3
66.5
70.1
47.8
50
40
30
20
10
0
Sun
Mon
Thurs
Fri
Sat
Average Daily Rate (ADR)
Rooms Revenue
Number of Rooms Sold
Number of Rooms Sold may or may not include comps
1999 = $81.07
Average Daily Rate Example
Rooms Revenue
Number of Rooms Sold
$10,000 Rooms Revenue
Sold 95 rooms with 5 comps
$10,000
95 + 5 =
$10,000
100
=
$100
Revenue per Available Room
(RevPAR)
Actual Rooms Revenue
Number of Available Rooms
or:
Occupancy Percentage x ADR
1999 = $51.50
RevPar Example
Actual Rooms Revenue
Number of Available Rooms
$10,000 Rooms Revenue
150 room hotel with 25 out of order
$10,000
150 - 25
$10,000
125
=
$80
Hubbart Formula Approach
“Bottom-up”Approach

Begin with desired profit based upon expected Return on
Investment (ROI)

Calculate pretax profits, fixed charge, management fees, &
operating expenses

Estimate other departmental income

Determine the required rooms department income

Add expenses to get rooms department revenue
Room Revenue / Rooms Sold = Average Room Rate
Hubbard Formula
Item
Desired net income
Pretax income
Interst expense
Income before interest & tax
Est. depreciation & insurance
Income before fixed charges
Undistributed operating expenses
Calculation
Amount
Investment x ROI
2,500,000 x .15 = 375,000
$375,000
Pretax income =
net income
1 -t
Pretax income =
375,000
1 - .4
Principal x int. rate x time
7,500,000 x .12 x 1
$900,000
40% of income before interest & tax
$1,525,000
$610,000
60 % of income before fixed charges
$2,135,000
$1,281,000
Required operated depts revenue
Department income excluding rooms
Less: Food & beverage
Plus: Telephone loss
$3,416,000
5% of required operated depts revenue
2% of required operated depts revenue
Rooms dept. income
Rooms dept. direct expenses
($170,800)
$68,320
$3,313,520
54,750 x $10
$547,500
Rooms revenue
Required average room rate
$625,000
$3,861,020
Room revenue
Room sold
$3,861,020
54,750
$70.52
Hubbard Formula Figures

Owner Investment = ???

Principal Loan Amount = ???

ROI = 15%

Tax Rate = 40%

Annual Interest Rate = 12%

Depreciation & Insurance
= 40% of income before interest & taxes

Undistributed Operating Expenses
= 60% of income before fixed charges
Hubbard Formula Figures

Other department gains & losses:
F&B = 5% of required operated depts. revenue
Phone = 2% of required operated depts. Revenue

Annual rooms sold = ???
Depends on your occupancy percentage

Rooms department direct expenses
= $10 per room sold