Difference Between Yield Management and Revenue Management

There are so many terminologies in the hospitality industry, even the best of us can’t keep up with it all sometimes. One thing that usually leaves many hoteliers beguiled is understanding the difference between Yield Management and Revenue Management.

You know you’ve heard both terms before but, you have no idea what they mean or how they differ from each other? Then, you’re in the right place.

This article answers the question ‘what yield management?’ and how it differs from revenue management. We also explain why both techniques are so helpful for hotel owners and others working in hospitality.

What is Yield Management?

Let’s rip the band-aid right off by defining what Yield Management is. In simple terms, yield management is a strategy based on selling to the right customer, at the right time, for the right price.

The airline industry was the first to use a yield management strategy to manage supply and demand for flights. However, its use in the hospitality industry, especially in hotels, makes it relevant today.

Yield management is a pricing strategy whose goal is to generate maximum revenue from a perishable inventory such as hotel rooms, airline seats, etc.

The concept is based on understanding, anticipating, and influencing your guests’ behavior to maximize your establishment’s revenue or profits.

Companies adopting this process influence the demand for their products or services by adjusting their price.

The increase or reduction in the price of products and services helps the companies determine the future demand with higher accuracy. Hence, this process allows the companies to better production and sales planning.

Under What Type of Demand is Yield Management Most Effective?

Yield management is most effective under the following conditions:

• Fluctuations and unpredictability in demand.
• There are as many market segments as there are customers. In other words, you can position each customer in terms of price and time.
• Relatively high fixed costs and low variable costs.
• Inventory of capacity is perishable like hotel rooms, airline seats, music concert tickets, sports event tickets, television air time, etc.
• Products can be sold in advance or just in time.

Who Uses Yield Management?

Any type of business can apply yield management strategies.

• Businesses that have a fixed number of products to sell at any given time
• The product’s value is time-constrained, meaning that after a specific date or amount of time, the product loses value
• Different customers are willing to pay different prices for the same product or number of products

Some of the common industries where yield management strategies are applied include:

• Hotel rooms
• Airline or bus seats
• Rental cars
• Sporting, event, and music venues
• Restaurants (think special seating for events)
• Pretty much everyone in hospitality!

What is Yield Management in Hospitality Industry?

In the hospitality industry, yield management is all about selling certain fixed, time-limited resources, such as hotel rooms for different prices, based on the time of year, the level of demand, the number of rooms already sold, and a wide range of external factors besides.

The same product (i.e. a hotel room) can be sold to two different customers for entirely different prices because of the number of variables involved in the process.

Because of this, some hoteliers refer to it as ‘the art behind the science of room supply and demand’.

What is Yield Management System?

Many different types of yield-management systems exist, but most require the same sort of information.

Requirements of a sound Yield Management system include:

• Your hotel booking patterns and information on how reservations are made for a particular day.
• Historical demand information of your hotel available by market segment. This information must also be broken down by the time of the year and the day of the week.
• A clearly stated overbooking policy.
• An idea of the effect of price changes.

You will need an information system such as a property management system to obtain all the information listed above.

What is Revenue Management?

Revenue Management is an economic discipline appropriate to many service industries in which “market segment pricing” such as Yield management, is combined with statistical analysis to expand the market for the service and increase the “revenue” per unit of available capacity.

It involves using performance data and analytics, which help hotel owners more accurately predict demand and other consumer behaviors.

As a concept, revenue management is a spin-off of Yield management but a little more sophisticated. It’s no longer just about room sales but about packages, amenities, and services, including upgrades, dining, food & beverage, as well as entertainment spend per guest.

Under What Type of Demand is Revenue Management Most Effective?

Revenue management is most effective under certain types of demand conditions. These include:

1. Variable Demand: When demand fluctuates significantly over time, such as seasonally or weekly, revenue management can help optimize pricing and inventory allocation to maximize revenue.
2. Perishable Inventory: When the product or service has a limited time to be sold before it becomes worthless, like airline seats, hotel rooms, or event tickets, revenue management is crucial to ensure optimal sales within the time frame.
3. Segmentable Markets: When customers can be segmented based on willingness to pay, revenue management can use different pricing strategies for different segments to maximize revenue.
4. Fixed Capacity: When the supply cannot be easily increased, such as in airlines or hotels, revenue management helps in allocating the limited capacity to the highest-paying customers.
5. High Fixed Costs and Low Marginal Costs: When the initial cost of providing the service or product is high, but the cost of serving an additional customer is low, revenue management can enhance profitability by optimizing the price and sales strategy.
6. Advanced Booking: When customers book services or products in advance, such as flights or concert tickets, revenue management can adjust prices over time based on demand forecasts.

Who Uses Revenue Management?

Revenue management is used by a variety of industries, particularly those where the key characteristics of variable demand, perishable inventory, and fixed capacity are present. These industries include:

1. Airlines: Airlines use revenue management to adjust ticket prices based on demand, booking patterns, and other factors to maximize revenue from each flight.
2. Hotels: Hotels use revenue management to optimize room rates and occupancy levels, adjusting prices based on factors like seasonality, local events, and booking trends.
3. Car Rentals: Car rental companies adjust prices based on demand, location, and time of booking to maximize the utilization and profitability of their fleets.
4. Entertainment and Sports: Concert venues, theaters, and sports arenas use revenue management to set ticket prices that maximize attendance and revenue, often using dynamic pricing strategies.
5. Restaurants: Some restaurants, particularly those with limited seating and high demand, use revenue management to optimize table turnover and pricing, especially during peak times.
6. Cruise Lines: Cruise lines use revenue management to optimize cabin pricing and occupancy, considering factors like destination, season, and booking lead time.
7. Telecommunications: Telecom companies use revenue management to optimize pricing plans and promotions, balancing network capacity and customer demand.
8. Retail: Retailers use revenue management to adjust prices dynamically based on factors like inventory levels, competition, and customer demand.
9. Golf Courses: Golf courses use revenue management to adjust tee time pricing based on demand patterns, weather conditions, and other factors.
10. Public Transport: Some public transportation systems use revenue management to optimize pricing based on demand, time of day, and seasonality.

What is Revenue Management in Hospitality Industry?

Revenue management in the hospitality industry involves the strategic use of pricing, inventory control, and demand forecasting to maximize revenue from perishable assets like hotel rooms, event spaces, and other services. 

Here are the key components and practices involved in hospitality revenue management:

1. Demand Forecasting: Predicting future demand based on historical data, market trends, and other influencing factors. This helps in understanding booking patterns and planning pricing strategies.
2. Dynamic Pricing: Adjusting room rates in real-time based on demand fluctuations, competitor pricing, and other market conditions. The goal is to sell the right room to the right customer at the right time for the right price.
3. Inventory Management: Allocating the right number of rooms to different segments of customers, such as corporate clients, leisure travelers, or groups, to maximize overall occupancy and revenue.
4. Market Segmentation: Identifying and targeting different customer segments based on their booking behaviors, preferences, and willingness to pay. Tailoring marketing and pricing strategies to each segment.
5. Distribution Channel Management: Optimizing the use of various distribution channels, such as direct bookings, online travel agencies (OTAs), and global distribution systems (GDS), to maximize reach and profitability. Ensuring that room availability and pricing are consistent across channels.
6. Length of Stay (LOS) Controls: Implementing minimum and maximum stay requirements during high-demand periods to maximize room utilization and revenue.
7. Special Offers and Promotions: Creating targeted promotions and packages to attract customers during low-demand periods or to incentivize longer stays.
8. Competitive Analysis: Monitoring competitors' pricing and occupancy strategies to adjust one's own approach and remain competitive in the market.
9. Technology and Tools: Utilizing revenue management systems (RMS), property management systems (PMS), and other analytical tools to gather data, automate pricing decisions, and monitor performance.
10. Performance Metrics: Tracking key performance indicators (KPIs) such as RevPAR (Revenue per Available Room), ADR (Average Daily Rate), and occupancy rates to assess the effectiveness of revenue management strategies and make necessary adjustments.

Why is Revenue Management Important?

For hotel owners, hotel revenue management provides the ability to make the most out of a perishable inventory of hotel rooms, allowing them to maximize the amount of money the business generates. Essentially, it will enable decision-makers to make informed, data-driven choices rather than relying on instincts or guesswork.

Like many other businesses, Hotels have fixed costs, which need to be paid regardless of rooms sold and the money generated from their guests. Therefore, hotel owners can ensure their costs are met, and their prices and services are dynamically optimized through a revenue management strategy.

What is Revenue Cycle Management?

Revenue Cycle Management (RCM) refers to the process of identifying, collecting, and managing the practice’s revenue from payers based on the services provided.

Although also utilized in the hospitality industry, the RCM is a process that is most common among health practices such as hospitals, clinics, etc.

Find out more about RCM.

Why is Revenue Cycle Management Important?

A well-designed RCM system tracks patient care and simplifies

the billing and collection cycles by registering, appointing, scheduling, and processing the payment.

Revenue cycle management links administrative data like a patient’s name, insurance provider, and other personal information along with the treatment received by a patient.

It bridges the gap between the business and clinical sides of healthcare.

To implement the RCM system, an establishment needs software that can automate the procedures involved and reduce the time between offering a service and receiving payment by interacting with other health IT systems like electronic health record systems and billing systems.

Find out more on the importance of the RCM system.

What is Revenue Management in Hotels?

In the hospitality industry, revenue management can be defined as selling the right rooms to the right customers at the right time for the right price and through the right channel, creating optimal revenue and cost-efficiency.

Consumers are accustomed to this type of selling tactic in hospitality, such as fluctuating flight and hotel room prices. Although this is a common practice, it takes a lot of data and strategy to maximize revenue management.

Revenue management requires data on past revenue, past consumer purchase behavior, past pricing strategies, market demand, and more to predict future income based on future pricing strategies. However, acquiring and analyzing this data can be difficult and time-consuming. In addition, each dataset comes from a different source, meaning they have to be standardized and integrated.

What is Revenue Management Software?

Essentially, a Revenue Management System, or short RMS, is a software solution, which allows you to carry out important revenue management tasks more efficiently and effectively. It will use data from your hotel and the market at large to help you make more informed decisions.

Typically, a good Revenue Management System will use the data and its algorithms to carry out a real-time analysis of the state of the market, and demand, to calculate ideal room rates. As a result, most crucial hotel revenue management decisions can be carried out from a single, centralized dashboard.

A Revenue Management System makes it easy to adjust prices across various distribution channels without logging in to each of those different systems individually. As a result, key performance indicators, such as revenue per available room (RevPAR), can be improved, increasing the hotel’s top and bottom lines.

Some property management systems offer an RMS included in their packages, and this is more cost-effective than implementing software that only provides RMS features.

Differences Between Yield Management and Revenue Management in the Hotel Industry?

The Hotel Room is The Main Focus of Yield Management

The basis of yield management within the hotel industry is selling the right room to the right customer at the right time, for the highest possible amount, to maximize revenue and profit from room sales. Generally, this means increasing prices during high demand and decreasing prices when demand is low.

Revenue Management goes beyond room sales and involves packages, amenities, and services, including upgrades, dining, food & beverage, and entertainment spend per guest.

Revenue Management Has a Broader Focus

It also considers the revenue generated from other aspects of your hotel business, such as restaurant sales, bar sales, room service, and spa bookings.

Revenue management strategies are more likely to consider other factors, such as the costs associated with specific distribution channels. As a result, it tends to be more heavily reliant on data gathering and analysis, and it may also require input from different departments within the property.

Yield Management is Highly Tactical

To get the most from yield management, hotels need to embrace a tactical pricing approach and other aspects of selling hotel rooms. An excellent example is identifying the best restrictions to apply to the sale of those rooms. This helps to maximize the amount of money generated over time.

For example, one restriction that may be applied to a hotel room booking is the maximum length of stay. In some situations, it may be more beneficial to use a strict limit to the duration of the stay. In contrast, in others, such as periods of low demand, it may be better to offer greater flexibility to encourage longer stays.

Revenue Management is More Broadly Strategic

When it comes to hotel revenue management, the best results will be achieved by being more broadly strategic, giving consideration to different elements of the business, and using a wider range of key performance indicators.

Some of these indicators include metrics like RevPAG (revenue per available guest), RevPAR (revenue per available room), and GOPPAR (gross operating profit per available room).

Yield Management Eliminates Pricing Errors

Nowadays, hotel managers can use a hotel revenue management program to utilize a yield management strategy, eliminating pricing errors. In addition, since prices are chosen based on demand forecasting and not expected booking behaviors, human error can be effectively eliminated.

Revenue Management Enables Competitive Pricing

Revenue management makes it easy for hotels to have a competitive edge by creating a standard pricing strategy. This not only draws customers but also gives the hotel an edge over its competitors. Revenue management is quite pervasive that hotels that do not implement it can find it hard to compete in the marketplace.

Key Takeaways 

Through this article we have seen that, management and revenue management are strategic approaches aimed at maximizing revenue, yet they differ in scope and application. 

Yield management is primarily focused on dynamic pricing and inventory control, responding to demand fluctuations to optimize revenue from perishable inventory and fixed capacity. 

This approach is common in industries like airlines and hotels, where the goal is to sell the right product to the right customer at the right time for the highest possible price. On the other hand, revenue management encompasses a broader set of strategies, including demand forecasting, market segmentation, and distribution channel management. 

It integrates various analytical tools to optimize overall revenue, considering both short-term gains and long-term profitability. In essence, while yield management hones in on pricing and inventory tactics, revenue management adopts a comprehensive view to enhance overall business performance and customer value.

To learn more about how property management softwares can help with your yield management and revenue management, schedule a call with us right now!

References

1. Kimes SE. The Basics of Yield Management. Cornell Hotel and Restaurant Administration Quarterly.1989 30(3):14-19.
2. Kimes SE. Revenue Management: A Retrospective. Cornell Hotel and Restaurant Administration Quarterly. 2003;44(5-6):131-138.
3. Robert Klein, Sebastian Koch, Claudius Steinhardt, Arne K. Strauss, A review of revenue management: Recent generalizations and advances in industry applications, European Journal of Operational Research,

https://www.sciencedirect.com/science/article/abs/pii/S0377221719305272?via%3Dihub; Volume 284, Issue 2, 2020.