Introduction
Revenue management is one of the most studied areas in the service industry. Yield management, one of the major tools in revenue management, is conceptualised as the skilful management of both demand and supply in an attempt to balance inventory and pricing. The balancing maximises the revenue generated from each and every available unit (Koide & Ishii, 2005). The technique is important in increasing the sales volumes, thus increasing the profitability of a business. In addition, yield management involves the application of sound decision making mechanisms and marketing strategies.
The industries where yield management is commonly applied are characterised by a fixed supply of products. In spite of the fixed supply, the industries are faced by an irregular and shifting demand for products. By closely studying the demand patterns in the environment, firms are able to set prices to their advantage. Rise in demand of products prompts the firms to raise the cost of their products, while a fall in demand of products prompts firms to decrease prices in an attempt to attract more customers (Wirtz, Theng & Patterson, 2001). The high prices charged during the high demand seasons cushion the firms against losses during off-peak seasons. Most service delivery companies over-emphasise on the implementation of these revenue management strategies with the aim of making profits. At times, the companies disregard the possible negative effects of the strategies on customer-company relations.
The author seeks to address the issue of yield management in the hotel industry. In the recent past, many people have adopted the opinion that yield management affects the quality of services offered by many business organisations in the global market. The perception is one of the most important conditions in the hotel industry. Marketing strategies can, however, be devised to reduce the negative effects of yield management on a firm. Room rates and occupancy is also discussed in the paper. The writer goes further to address the various strategies adopted to deal with overbooking, as well as how to cope with cancellations without necessarily compromising on customer satisfaction.
Yield Management in the Hotel Industry
Scholars have neglected the possible effects of revenue management strategies on customers. Yield management is one of the most applied techniques in revenue management. The aim is to enhance profitability in service delivery, regardless of the market demand for given products. Short-term revenue growth strategies can lead to customer-company conflicts, thus ruining a company’s long-term sales strategies. Businesses operating in the hotel industry are the most affected by the implementation of yield management techniques. In some cases, customers may feel alienated by the strategies adopted by the firm (Jauncey, Mitchell & Slamet, 1995). Most companies in the hotel industry over-emphasise on the policies aimed at maximising profits without examining the potential conflicts likely to arise as a result of the application of the revenue management strategies. The trend is as a result of focusing on the short-term growth while totally disregarding long-term negative effects tied to the practice. Such negative effects include the loss of future customers.
The adoption of selling strategies aimed at maximising profits often strains the relationship between customers and companies. One of the most commonly used strategy is the pricing of products based on market demand. The practice is common in the hotel industry, where the price of room services is often irregular. The price of booking a room depends on the number of customers demanding for similar services. When there is high demand for the product, the hotel companies raise the room charges. The reason for this is that a large number of people are willing to pay for the service. Low demand for the product prompts the companies to lower their prices to attract customers (Wang & Bowie, 2006). Customers may feel discriminated against or unappreciated in some cases. The uncertainties associated with the setting of prices discourage customers from visiting the company’s premises.
Restricting the capacity of the business to address the needs of only the preferred customers, as a selling strategy, may be injurious to a company. Customers may feel unappreciated or unfairly treated (Harewood, 2006). Capacity restriction mechanisms that may be used include, among others, reserving capacity for the highest paying customers and hiking of prices with respect to the willingness of the customers to pay for the services. Under such circumstances, only the highest paying customers are provided with the services.
Overbooking is a common phenomenon in the hotel industry, with companies encouraging customers to continue booking even after the capacity is exhausted. Hotels use the practice to cover for cancellations. However, customers who are denied room as a result of overbooking may feel discriminated against (Wirtz et al., 2001). Discounting during low seasons and hiking prices during high seasons may also discourage customers as a result of price uncertainties.
Though the practice will enable a hotel to gain maximum profits as a result of selling their products to the highest paying customers, the company will face the risk of losing future potential customers. The future customers may at one point feel discriminated against by the company. The use of the yield management techniques by a company may be perceived as lack of customer appreciation. The control of inventory may be perceived as a possible change in service delivery. Customer-company relationship must, as a result, be nurtured to enhance success in the long-term.
Marketing Strategies Proposed to Reduce Customer Conflicts
The use of fenced pricing is viewed by many as one of the most effective ways of dealing with customer conflicts. Under the selling strategy, customers are segmented into groups based on their behaviour, their needs, as well as their ability to pay for services. Through the technique, a hotel can effectively classify customers based on their purchasing power. The company may chose to offer certain priorities to some customers, while withdrawing the same from some, based on their willingness and ability to pay (Lee-Ross & Johns, 1997). The price fences should be fixed, logical, and easily understandable by customers to bring about a sense of equality.
Price bundling is another preferred means of preventing consumer conflicts. The practice involves presenting or offering two or more products to customers as a single product (Lockwood & Jones, 1993). A hotel company can effectively use the technique to discount or hike prices. The extra services offered are often given at a relatively low or no price at all. The auxiliary benefit is offered together with the core product, usually a hotel room. The price of the room is slightly increased to shield the company from losses as a result of the auxiliary benefit. The practice, when adopted in the hotel industry, is often as a result of the perishable form of services offered by the businesses. During off-peak seasons, the companies are forced to operate below capacity. As a result, they resort to imposing their services on customers at reduced prices to meet their fixed costs.
Categorising is an important means of reducing customer-company conflicts. Categorising is used to justify differences in prices of the same commodity. Categorisation, according to booking classes, is one of the most common forms of ‘categorising’ in the hotel industry. Under categorisation, different classes are formulated (Gamble & Smith, 1986). Categorising is applicable in hotels offering sport, theatre, and other forms of entertainment. The setting of prices is as a result of the sitting arrangement, with those occupying front seats being charged a considerably higher fee than the rest. Categorisation of customers into such groupings will justify the differences in the pricing of similar products. Categorising mechanisms should be presented to the customers upfront to help them make sound decisions. The categories should also be perceptible to promote a sense of equality.
Use of highly published prices in the hotel industry would also go a long way in the reduction of instances of customer-company conflicts. Firms operating in the hotel industry are, therefore, required to set the prices they intend to charge for their services. The companies are not expected to hike the prices of their services irregularly. The set price will act as the highest price likely to be charged on the product (Weatherford & Kimes, 2001). Firms may, however, grant discounts to their customers by announcing price cuts during times of low demand to increase occupancy. The discounts are also a sign of appreciation to customers. The practice helps the company in the application of yield management techniques, while at the same time addressing issues related to customer satisfaction.
The use of availability policies as a loyalty program will go a long way in the reduction of customer-company conflicts. Regular customers should be given the first priority in the delivery of services. To award customer loyalty, the management should accord loyal customers with special treatment as a sign of appreciation (Noone & Renaghan, 2003). Reduced prices for regular customers serve as an effective means of awarding customer loyalty. To implement the policy, some hotels have introduced a bonus points system, where regular customers have more points. Such customers are accorded special treatment during booking. Such loyalty programs will encourage the customers to seek out the services of the company in the future, thus enhancing the profitability of the firm in the long term.
Properly defined recovery programs are vital in the reduction of customer-company conflicts. Overbooking does not necessarily make the hotels unfaithful to their customers. The manner in which the management responds to cases of over-commitment determines customer satisfaction. Advance notice should be given to allow the affected customers to seek alternative reservations. Customers likely to incur losses as a result of a mistake committed by a hotel business should be adequately compensated for any damages caused (Saunders & Thanhill, 2003). Substitute services should be availed to customers in the event that they cannot be served with their original request. Customers and employees should be educated on the advantages of overbooking to make the practice more acceptable.
A Company operating in the hotel industry should segregate customers to reduce customer-company conflicts. The practice is made possible through the differentiation of services (Wirtz et al., 2001). Familiarising customers with benefits likely to be accrued from a certain change in service delivery will help them to adapt to the changes. Companies in the hotel industry should operate at their optimal capacity to allow room for flexibility in service delivery. The practice will allow a company in the hotel business to respond to emergencies or unforeseen changes in demand (Mauri, 2007). The hotel industry is one of the most unstable sectors of the economy.
Room Rate and Occupancy
Decisions on prices of products impact greatly on a hotel’s profitability. Take, for example, the case of Mecca Hotel. The hotel has a capacity of 300 rooms. The hotel has 60 percent occupancy annually. A slight increase in occupancy will result to considerable rise in annual revenue. A 1 percent increase will translate to an increase of almost 1100 in the hotel’s room nights, which is a 1.7 percent rise in profits. A 0.1% increase in occupancy leads to an increase of about 100 room nights, which will translate into a 0.88 percent increase in profitability. If the same hotel operates on a daily average rate of 130 and a 10 percent profit margin, the 60 percent occupancy rate remains constant. A 75% increment in annual profitability leads to 12.5 percent increase in profits.
Room rate is the rental income gained from each paid for and occupied room. Occupancy, on the other hand, is slightly different. It is a percentage of the number of units occupied at a particular period of time. Occupancy in hotels is computed using a specific formula. It is determined using the number of rooms already paid for in a particular hotel and the number available within the same period. The two variables are the most important in determining the amount of revenue generated by the hotel over a given period of time (Sanjay, 2009).
Managers are required to generate as much revenue as possible from the available space to increase profitability (Fabio, 2008). Large companies are more likely to realise more profits compared to smaller ones in terms of revenue generation. Occupancy and room rates, often determined by the demand for a company’s product, vary from time to time. If a company is able to wisely manipulate the two variables to their advantage, more profits may be yielded. Likewise, hotel companies that fail to effectively manipulate the two variables may find themselves incurring huge losses or fail to benefit from situations that would otherwise have generated more income for the company. The companies lower their room rates to attract more customers to the business (Heike, 2004). The prices charged during this period are aimed to at least cater for the company’s fixed costs to avoid running into losses.
It is possible to measure the effectiveness of a company’s yield management mechanisms by expressing the revenue generated as a percentage of the potential revenue that would otherwise be realised should there be full utilisation of space. The companies can adopt various strategies to improve profitability. When the demand for rooms is high, hotels should avoid selling their products at discounted prices (Netessine & Shumsky, 2002).
Hotel managers must be prepared to deal with variations in demand. In some cases, hotels attempt to have different product packages at different prices. The practice brings about market segmentation. With market segmentation in place, it is easy for the hotel management to apply yield management techniques, since demand across the various segments can be monitored accurately (Liberman & Yechiali, 1998). Hotel managers should not only be equipped with knowledge on sales techniques, but also means of profit maximisation.
Overbooking and Cancellation
Overbooking is done to avoid penalising customers who cancel their reservations (Wirtz et al., 2001). Overbooking is the situation where companies encourage customers to make reservations beyond their maximum capacity. Cancellations, on the other hand, refer to situations where customers already booked in hotels do not show up at the agreed time. Most hotel companies operating in the world today encourage their workers to engage in overbooking practices. Overbooking in hotels, as a yield management tool, is aimed at cushioning the hotel companies against unforeseen cancellations by customers. Though the practice ensures maximisation of profits as a result of maximum utilisation of space, the practice can negatively impact on the company in the event that the firm is unable to honour its promise to customers who may otherwise feel inconvenienced.
Overbooking, at some point, is advantageous to both customers and hotel companies. Through overbooking, the company incurs minimal or no losses as a result of cancellations (Badinelli, 2000). The customers are also advantaged in that they are not heavily penalised in the event that they cancel their reservations. The absence of hefty fines is as a result of the availability of more customers to compensate for the cancelled reservations. Failure to penalise customers as a result of cancellations is likely to maintain their goodwill. In addition, the customers are more likely to make future reservations with the company.
Overbooking, on the other hand, can be disadvantageous to both the hotel companies and the customers. For this reason, overbooking must be implemented with care to avoid severing the ties between the company and customers. In the event that booking is dishonoured by the company as a result of overbooking, hotels are required to compensate their clients as a sign of goodwill (Lovelock, 2001). Customers whose bookings are not honoured may desist from seeking the services of the company in the future, thus putting the company’s future profitability at risk. Customers may be inconvenienced as a result of overbooking, making them incur huge losses. Both cancellation and overbooking go hand in hand, since overbooking is a company’s attempt to cushion itself against losses likely to be brought about by cancellations.
Overbooking is noted to work best in the hotel business. In most cases, hotel bookings are done by tour operators. The operators make hotel reservations on behalf of their clients. In the event that the clients cancel their reservations with the tour operator, the cancellation is likely to not only affect the tour operator, but also the hotel where the clients were booked in (Ojasalo, 2001). Overbooking seeks to cushion hotels against losses caused by such occurrences. The practice, therefore, works better in the hotel industry as compared to the touring agencies’ business. The agencies are often affected by such factors as non-arrivals, late arrivals, and flight cancellations.
The rates of cancellations vary across different market segments and across different seasons. Adverse climatic and weather changes have, for instance, been known to be major causes of cancellations (Liberman & Yechiali, 1998). Cancellations may also result from unforeseen changes in the environment. Such changes include, among others, outbreak of war or other forms of insecurities. Cancellations brought about by such factors cannot be fully blamed on the client. Diplomatic matters, as well as trade sanctions, may also interfere with travel timetables of clients, leading to cancellations (Lovelock, 2001).
Overbooking may result to the loss of goodwill from customers. In such a situation, long-term occupancy rate is likely to be negatively affected (Wirtz et al., 2001). However, failure to practice overbooking is equally disadvantageous to a company. Cancellations will lead to losses in terms of a company’s revenues. Customers may have to pay fines for cancellations, which may discourage them from seeking the services of the company in the future. Customers and employees should be enlightened on the advantages of overbooking for them to own the practice.
Conclusion
Yield management is a form of revenue management aimed at maximising the profits of a firm. The technique is often employed in the service industry, especially in the hotel business. The availability of perishable services in the industry prompts hotel managers to come up with means of maximising sales. Yield management techniques are, however, employed with regard to the demand for the products offered by the company. With increased demand in the market, companies increase the cost of their products to gain maximum profits. Decreased demand for products, on the other hand, prompts the companies to lower the cost of their products. The aim of such low prices is to attract customers. Yield management techniques, however, affect customer satisfaction and may lead to the loss of some clients.
References
Badinelli, R. (2000). An optimal, dynamic policy for hotel yield management. European Journal of Operational Research, 121(3), 476-503.
Fabio, J. (2008). Yield management, dynamic pricing and CRM. Journal of Services Marketing, 22(6), 465-478.
Gamble, P., & Smith, G. (1986). Expert front office management. International Journal of Hospitality Management, 5(3), 109-114.
Harewood, S. (2006). Managing a hotel’s perishable inventory using bid prices. International Journal of Operations & Production Management, 26(10), 1108-1122.
Heike, L. (2004). PEP-A yield-management scheme for rail passenger fares in Germany. Japan Railway & Transport Review, 38(54), 1-5.
Jauncey, S., Mitchell, I., & Slamet, P. (1995). The meaning and management of yield in hotels. International Journal of Contemporary Hospitality Management Emerald Article, 7(4), 23-26.
Koide, T., & Ishii, H. (2005). The hotel yield management with two types of room prices, overbooking and cancellations. Production Economics, 93(94), 417-428.
Lee-Ross, D., & Johns, N. (1997). Yield management in hospitality SMEs. International Journal of Contemporary Hospitality Management Emerald Article, 9(2), 66-69.
Liberman, V., & Yechiali, U. (1998). On the hotel overbooking problem: An inventory system with stochastic cancellations. Management Science, 24(11), 1117-1126.
Lockwood, A., & Jones, P. (1993). Applying value engineering to rooms management. International Journal of Contemporary Hospitality Management Emerald Article, 2(1), 27-32.
Lovelock, C. (2001). Services marketing: People, technology, strategy. New York, USA: Prentice Hall.
Mauri, A. (2007). Yield management and perception of fairness in the hotel business. International Review of Economics, 54(2), 284-293.
Netessine, S., & Shumsky, R. (2002). Introduction to the theory and practice of yield management. Uniform Transactions on Education, 3(1), 23-56.
Noone, B., & Renaghan, L. (2003). Integrating customer relationship management and revenue management: a hotel perspective. Journal of Revenue and Pricing Management, 2(1), 7-21.
Ojasalo, J. (2001). Key account management at company and individual levels in business-to-business relationships. Journal of Business & Industrial Marketing, 6(3), 199-218.
Sanjay, K. (2009). Yield management: getting more out of what you already have. Ericsson Business Review, 1(2), 17–19.
Saunders, M., & Thanhill, A. (2003). Research methods for business students. Harlow, USA: Prentice-Hall.
Wang, X., & Bowie, D. (2006). Revenue management: The impact on business- to-business relationships. Journal of Services Marketing, 23(1), 31-41.
Weatherford, L., & Kimes, S. (2001). Forecasting for hotel yield management: Testing aggregation against disaggregation. Cornell Hotel and Restaurant Administration Quarterly, 42(1), 63-4.
Wirtz, J., Theng, J., & Patterson, P. (2001). Yield management: Resolving potential customer and employee conflicts. Operations Research, 43(1), 1-33.