Yield Management by Distribution Channel

An Important Aspect of a Hotel's distribution Strategy

By Bhanu Chopra - Founder & CEO at RateGain

27 September 2017
Chopra

The hospitality industry is one of those industries where the people running the show of hotel business cannot lay back and earn easy revenues. Revenues of a hotel may fluctuate like weather depending upon a number of factors like demand, competitor rates, climatic conditions, security & political situation, holiday season, events etc. Revenue managers are always on their heels to ensure that the hotel operates at maximum occupancy throughout the year. Every empty hotel room is a loss of revenue as the operational cost of running a hotel remains broadly the same for 50 customers or 100 customers.

Yield management is a variable pricing strategy based on the theory of supply and demand: guests pay different prices for the same room, depending on a variety of factors like time of booking, demand, and supply, the occurrence of any important event, competition pricing, etc. Therefore, hotels change their rates accordingly to get more incremental value.

In simple words, yield management can be termed as the practice of extracting the most revenue from each room under given circumstances. In this article, we will discuss about the importance of the distribution channel in yield management.

The primary factor that drives yield management in the market is demand. As per the demand rule, hotels slash prices in times of low demand to increase the number of bookings to break even operational costs. However, the real game is when the demand is high. That is when hotels have both their hands in honey as they sell the inventory at marked up prices. This practice lets hotels earn handsome revenues on every booking and help them make up for low revenues in times of low demand.

There are various occasions when a hotel can sell inventory for inflated prices. For e.g. weekends see more turnout than weekdays (for non-business hotels) and it is the other way round for business hotels. Similarly, extended weekends see a huge rush as compared to normal weekends. Keeping such instances in mind, including competitor pricing, hotels tweak their room prices according to a surge in demand. More the demand, the higher the price and vice- versa.

Yield management has been the backbone of the hotel management for long. In yesteryears, yield management was only linked to revenues. It was primarily the onus of sales and marketing departments of the hotel to sell rooms at the highest rate undermining the injuries it could inflict on the long-term revenue and reputation of the hotel. More the revenue, higher the yield. Achieving the highest rate was considered yield optimization.

Hotel's eminence amongst the competition was based on the highest price it could clinch for a particular room. While price leadership brought fame and sense of premium-ness to the hotel, it also impacted the volumes of bookings. The resulting price resistance from the customers reduced the volume of bookings considerably reducing the net revenue. Price resistance is the phenomenon when the customer perceives the goods or service to be overpriced in comparison to the value delivered by it. In the race to sell the rooms at higher prices, hotels ended up making losses due to less number of bookings although the price may be high.

However, today various yield management tools and tactics help revenue managers decide the optimum price of a particular room on a particular day. Therefore, before hotels markup price, they should book enough rooms to take care of their operating costs and safely achieve break even.

How easy it may seem, ensuring high occupancy rates via effective management of inventory is a very intricate process, especially now when the world is flooded with competition, technology has become best of friends with everyone, and the consumer is spoiled for choice. The Internet has taken the hospitality industry by a storm, where a majority of hotel bookings is done via the internet/online route. Reports quote that more than 148.3 million people use the Internet to make room reservations for their vacations, tours, and business travel.

Hoteliers cannot overlook the role of OTAs here, given the fact that they have been successfully driving a major chunk of online hotel bookings in the current business scenario.

As there are hosts of online channels to market and sell hotel inventory, it is important to choose the right ones for your hotel, basing your choice on a variety of factors like the commission OTAs charge, the volume of business that they could fetch, their reach, etc.

An OTA directing more bookings and business for the hotel, but charging massive commissions (which typically ranges 15% to 30%) might not be a cost-effective option, as the profit margins go very low. Hence, it makes all the sense for the hotels to define an effective online distribution strategy for better yield management. However, you have to keep few things in mind to get it right. Let us find out.

  1. Accurate Demand Forecast - Yield management is based on the principle of supply and demand. In periods of high demand, revenue managers have the elasticity to take the room prices up in an attempt to maximize revenues. Conversely, when demand for rooms is on a down side, prices too take a down slope, which helps in attracting a large number of guests through specially discounted prices. Whether the demand would be high or low, if predicted well in advance, can really be a bonus for hotels, i.e., an accurate forecast could help the hospitality players to plan effectively and respond to changes in demand with optimal room rates. Certainly, forecasting is one of the most important drivers of any Revenue Management Optimization approach or in simple words Yield Management.
  2. Work With the Right Mix of Online Channels - With OTAs taking the center stage, hotels have to be prepared, though unwillingly, to let go of big commission cheques in their names, thus parting away with a significant part of their profits. Making it necessary to select the right set of online channels and effectively manage rates across all these channels. This is an essential element of a robust yield management strategy, which would define the achievement of hotel's online distribution and would boost online bookings largely. Certainly, there are certain strategies that hoteliers can employ in order to get the most profitable OTAs to work as partners. Go with the ones who take less, commission, commit more bookings, invest rightly in marketing, have widespread reach, including international reach, etc. Having the right mix would safeguard that the hotel attracts more and more visitors and enjoys more and more revenue.
  3. Direct Bookings vs. OTAs - Direct hotel bookings are of course, the preferred mode of selling rooms by hotels, for all the reasons discussed above. By strengthening their own brand booking platforms, hoteliers can enjoy undivided revenues and therefore add more and more to their profit kitty. Conversely, to drive direct bookings, hotels need to adopt a portfolio of smart approaches, which include ensuring best rates on the hotel website, having a mobile-optimized website and booking engine, supporting multiple languages, implementing SEO strategies, etc. Define a winning strategy for your hotel to drive direct, commission-free bookings. Direct is the way to go!
  4. Smartly Allocate Your Inventory Online - The biggest worry of a revenue manager in the technology led world is allocation of room inventory across different channels. How many channels should they take on board? Of course, there is an anxiety of sometimes doing more or perhaps less. A channel manager can be of great help in such situations, as he could ensure that all the rooms are booked through a pooled inventory model, eliminating likelihoods of overbooking or under booking.
  5. Know Your Consumer - Travelers worldwide are glued to the Internet for all things related to booking their travel, including researching about their stay and finally making bookings online, all to be done in a quick and easy way. Hoteliers can understand consumer behavior better by analyzing the search patterns of the tech-savvy traveler, especially the millennial traveler. Offering special packages customized to their needs and preferences, hotels can profit by catching their attention. A better understanding of these well-studied travelers of today, knowing their purpose of travel can also help you manage your inventory in a better way.

    Whether they are leisure travelers, business or both, all entail a different strategy. Leisure travelers are often price-sensitive and general manager/revenue managers, therefore, have to works to create different value-add packages for them, adding free benefits and amenities like breakfast, Wi-Fi, free local pickups, etc. Business travelers require high connectivity (through mobile phones and other devices) to be in constant touch with their colleagues and clients. By ensuring speedy Wi-Fi services, and offering other special amenities and loyalty programs, hotels can win the loyalty of these sections of travelers and make them return to your hotel every time.

Taking care of all these points and more, hospitality players can successfully allocate inventory across different channels and ride high on growth and profits. It has been proved that hotels practicing yield management ultimately perform better in their financial books too. Increasing complexity of electronic distribution poses a challenge in the absence of right tool and strategy. The right way and approach are to find a correct balance between each channel's rate and distribution cost.

From the above discussion, we can conclude how the hotel industry is gradually shifting from short-term revenue approach to long-term sustainable approach to revenue generation. It highlights how multi-dimensional approach to yield measurement is very different from price driven unidimensional approach practiced in yesteryears. Who knows in coming times, we may witness more factors being to measure yield, which may outline more focus areas for the hoteliers to work upon.

Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com
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Bhanu Chopra

Bhanu Chopra, aged 40, is an India-based young and dynamic entrepreneur, currently the CEO of RateGain, an IT solutions, a company he founded in 2004. Mr. Chopra has a masters degree from Indiana University Bloomington, USA in Finance and Computer Science. Mr. Chopra started his career at Deloitte Consulting serving several Fortune 500 companies in Chicago. He is currently the CEO of RateGain, a company he founded in 2004. Prior to setting up RateGain, he co-founded Riv Consulting. He started RateGain in response to the increasing popularity of Online travel agencies (OTAs) like Expedia and Orbitz in the west, when he identified the business need of these OTAs to compare rates across their competitor websites. Mr. Chopra has been profiled on the Young Turks program of CNBC-TV18 and was shortlisted as a finalist for the "Red Herring 100 Asia" Awards 2008 and again recognized as a great entrepreneur for his active participation & involvement as a part of “iSpirit’s” Podcast series where he shared his views on transforming India into a hub for new generation software products. Mr. Chopra is a sought after speaker in the travel and hospitality technology space. He has been speaker/ panelist at various HSMAI events, Hotel technology Conference, China Low Cost Airline Summit, Independent Hotel Show etc. He is also a contributor to publications like ‘Entrepreneur’ and ‘The Economic Times’. Mr. Chopra is a visionary, achiever and a great leader. With his great passion and remarkable dynamism, he has taken RateGain to great heights. Today he guides the development of RateGain’s service offerings and delivery methodologies. Mr. Chopra can be contacted at bchopra@rategain.com