The Definition of Yield Management

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Researchers and practitioners can provide various definitions of such a concept as yield management. While explaining this term, they can focus on its various dimensions; this is why there are many interpretations of this notion. Initially, yield management was applied for the needs of airline industry; this is why some it is often defined as the method that maximizes “passenger revenues by selling the right seats to the right customers” (Yu, 1998, p. 69). Nevertheless, this definition does not really illustrate the complexity of this method and its uses. Moreover, it does not show the relevance of this method to other organizations, especially hotels. Peter Jones provides a different explanation of yield management; in particular this author argues that it is a system that enables business administrators to increase the revenues of their organizations by assessing the profitability of market segments, establishing prices, giving discounts, or displacement rule (Jones, 2000, p. 88). In his book, Abraham Pizam provides a slightly different definition of yield management. According to this scholar, yield management can be regarded as the process that is aimed increasing the gross room revenues by managing the number of rooms that were sold within a given period (Pizam, 2012, p. 252). Overall, these definitions can throw light on the concept of yield management. However, they place too much emphasis on the goals of this method, namely maximization of profits. It seems that this perception of yield management is too narrow. Moreover, these explanations do not show how yield management differs from other methods that were used by hotels in the past and this is their major limitation. Yet, there are other explanations that can be very informative. For instance, according to the American Hotel and Motel Association, yield management can be defined as a “set of demand-forecasting techniques used to determine whether prices should be raised or lowered and a reservation request should be accepted or rejected” (American Hotel and Motel Association as cited in Ingold, Yeoman & McMahon-Beattie, 2000, p. 86). It is possible to say that this explanation is more informative because it shows that yield management is closely related to forecasting. Additionally, one can refer to the interpretation offered by Thomas Drier (2006) who believes that yield management are the activities that are aimed at understanding, predicting and responding to consumers’ behavior. Moreover, this definition implies that yield management strongly relies on the assessment of people’s behavior, attitudes, opinions, and values. This is the major strengths of this interpretation. Overall, these definitions show that yield management can take many forms. Various practitioner and scholars provide various descriptions and explanations of this technique. The understanding of this term is critical for hotel managers because these professionals have to find ways of increasing the profitability of their organizations.

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High fixed cost

Yield management involves several elements, one of them is high fixed costs; this issue is particular relevant to many hotels. For instance, the managers should determine whether they should sell a particular item to a client given at a certain price. This task is particularly challenging when there are many customers who want to want to use the services of hotels. Moreover, this issue is very important because very often businesses have very limited resources. Overall, there are several recommendations that researcher make. In their opinions, hotels should set prices for their room depending upon the changes in demand (Harewood, 2006). Furthermore, they suggest that hotels should establish the wide price ranges for their rooms in order to become sustainable (Harewood, 2006). In particular, they should be able sell rooms a higher price if the demand increases; in contrast, they should be lower their prices when the demand declines. Moreover, businesses administrators should pay attention to such an approach bid pricing when a certain item is sold to a client who pays the highest price (Harewood, 2006). These are the main strategies that business administrators can adopt. To a great extent, hotels can increase their profitability by designing services that are more attractive to clients. For instance, a business traveler may be willing to pay more the room where he/she can get a free access to the Internet. In contrast, tourists are more likely to pay a higher price for the room if a hotel can ensure free transportation to the beach. Thus, clients’ preferences are also critical for the increased revenues of a hotel. These are the main factors that business administrators should take into consideration while developing their pricing policies. They should pay attention to the following criteria; 1) the level of demand; 2) availability of resources; and 3) interests or preferences of clients. They should concentrate their efforts on the development of flexible pricing policies. These are the main aspects that one can identify.

The purpose of yield management

It should be noted that researchers interpret the goals of yield management in different ways. In many cases, it is believed that this set of methods is primarily aimed at increasing the profitability of an organization. This is why such notions as yield management and revenue management are used as the same notions. Yet, it seems that this approach overlooks many dimensions of yield management. Some scholars argue that the main objective of yield management is to increase guest room rates especially at the time when the demand is very high and increase occupancy rates when the level of demand is low. However, other researchers do not support this perception of yield management. For example, Alessandro Cento believes that the goal of this method is to increase the operating revenues of an organization since revenues is one of the most important performance indicators (Cento, 2008, p. 33). Certainly, other scholars also attach importance to revenues; yet, they take a different approach when describing the objectives of yield management. For instance, David Petzer (2006) believes that managers should create “the best possible combination of tourists in groups and tourists travelling by themselves that will lead to the highest possible number of rooms being occupied and the highest possible average price for rooms” (Petzer, 2006, p. 452). This interpretation stresses the activities of a manager and the way in he/she achieve their goals. It seems that each of these objectives should be kept in mind.

It is believed that yield management can be divided into two parts; in particular, one can speak about pricing strategies and inventory management. These two elements are closely interrelated, especially when they are used by hotel managers. First of all, one should pay attention to inventory management which is mostly supposed to determine how rooms should be allocated especially under the circumstances when the level of demand can fluctuate. Apart from that, one should focus on the pricing strategies of hotels. The task of managers is to charge the best price for a room, and this task can be very difficult. First of all, this price should appeal to a client who should believe that this price corresponds to the quality of the services (Glaesser, 2012, p. 452). However, at the same time, the pricing policies of hotels should help them increase their profitability. Managers should take into consideration the duration of stay that can be fixed or variable. Furthermore, the duration of stay can be predictable or unpredictable. Various organizations use different strategies when setting prices for their products (Petzer, 2006). For example, hotels are organizations in which the duration of stay is predictable and variable. These are the main factors that affect the decisions of many managers working in the hospitality industry.

Thus, one can that yield management has to achieve several objectives. First of all, this method should help businesses develop the most effective pricing policies. Secondly, these techniques are supposed to increase the loyalty of clients to an organization. Additionally, these tools should help managers to increase the efficiency of their hotels, especially if one is speaking about their use of resources. These are the main objectives that one identity. On the whole, the use of yield management should not be reduced only to revenues because this understanding of this concept is very limited.

Market-based pricing strategy

Modern hotel managers take into consideration such factors as demand, the competition within the industry, and the need for flexibility while developing their pricing policies. In most cases, businesses reject a model that takes into account only the operational costs of an organization (Pride & Ferrell, 2011, p. 633). The problem is that this approach to pricing is not effective for increasing the profitability of a company. Additionally, it does not take into account the value of a product or service for clients. This is why business administrators give preference to market-based pricing strategies. As a rule, these professionals adapt the prices of their organizations to the changing demand. This is one of the approaches that they take. Additionally, in many cases, they can charge customers different prices for the same rooms. This technique is called discriminatory pricing (Cunningham & Froschl, 1999, p. 154). So, it is vital to understand how this strategy can be applied by hotel managers. Furthermore, their pricing strategies often reflect the practices adopted by the major competitors. To some degree, this policy is adopted by many hospitality institutitions. The main principle underlying the work of hotel managers is that their services of hospitality organizations are perishable products that should be sold within a certain period (Harewood, 2006). This idea is closely tied to the principles of yield management. These are the main questions that should be discussed in this section.

Competition-based pricing

Each organization has to take into account the prices that are set by their major rivals in order to remain competitive. Very often, companies decide to enter the so-called price wars hoping that this approach can give them competitive advantage over others. Furthermore, in this way, they try to create barriers that prevent new businesses from entering the market (Gurbuz, 2011). However, this strategy is only partially applicable to the needs of hospitality industry (Gurbuz, 2011). First, it should be taken into account that this model can yield only short-term results, because companies will have to reduce their prices on a regular basis, and in the future, their profitability will only decline. This is why the decision to enter a price war can be suicidal for an organization, especially if it is a hotel (Gurbuz, 2011, p. 10). This policy is effective only in those cases when the clients of a business are very price-sensitive people who place much attention to the price, rather than the quality of products or services (Crane, 2009, p. 142). Moreover, businesses that are engaged in such activities are less likely to develop innovative solutions or offer better products (Crane, 2009, p. 142). This is the key drawback of competition-based pricing. Certainly, it is possible to give some of the bonuses of the clients. For example, many hotels can give discounts to their returned clients, and this policy can be quite successful because many clients do appreciate the ability to save their costs. (Crane, 2009, p. 142). These are the most factors that managers should consider while developing these pricing policies of their hotels. The most important argument is that price differentiation cannot be the only source of competitive advantage for any firm at least for a long time. These hotels may not become sustainable for a long time, mostly because they will not be able to meet the needs of customers. This is why business administrators should focus on the improvement of their services.

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Price-Discrimination

Another strategy that is often used by hotel managers is price discrimination. This policy is premised on the principle that customers have different needs and purchasing power (Glaesser, 2012, p. 452). Therefore, companies should set different prices when working with these people and by adopting this approach they can increase the number of clients and improve profitability (Glaesser, 2012, p. 452). For instance, customers, who do not have a high income level, should be able to use the services of hotels at a lower price. However, they should face several restrictions when making reservations. In particular, they have to book their rooms only in advance. Additionally, these people may not be able to book rooms during weekends. One should also remember that the clients, who buy the services at a lower price, may not be able to choose rooms with scenic views. This is how this model is adopted by hotel managers in many countries (Ng, 2008). In contrast, the clients, who pay a higher price, should have several privileges that should make their experiences more fulfilling (Ng, 2008). For instance, these people should be able to book rooms very close to the date of arrival. Moreover, these people should be allowed to choose the rooms with the best view on sea, ocean, or scenery. This issue is of great importance to many leisure travelers. Overall, this strategy is widely adopted in many hotels. The main benefit of this model is that it enables businesses to meet the needs of people with different income levels (Glaesser, 2012, p. 452). In most case, the clients of these organizations are satisfied with their services. However, this policy can be successful if the hotel hires well-trained employees who know how to find an approach to different clients. These workers have to treat different customers with equal respect and attention. If this requirement is not met, a hotel may not be able to gain the loyalty of their clients. This is one of the issues that should not be overlooked by managers who choose price-discrimination as their major policy.

Dynamic pricing

The pricing policies of many hotels often reflect the level of demand for their services. This model can be effective provided that an organization can quickly respond to the changes in the market (Chen, 2009). This is the main challenge of demand-based pricing. Furthermore, businesses must be able to estimate the changes in the market. Pricing is closely related to risk management practices adopted in many hotels. In this case, the main problem is that hotels cannot accurately predict how many customers will want to use their services within a particular selling period. This issue can be partially resolved by adopting information technologies that can provide more information about the behavior of clients. Moreover, this problem can be partly addressed by looking at seasonal changes in demand. The main advantage of dynamic pricing is its flexibility since this strategy can help businesses to derive some revenues at those moments when a business or even the entire economy passes through a period of crisis (Talluri & van Ryzin, 2005, p. 175). This is the main strength of this model. The main task of hotel managers is to ensure that the prices of their organization correspond to the level of demand.

Segmentation

The managers of hotels pay close attention to such a concept as segmentation while using yield management. There are several types of segmentation, namely geographic segmentation and price segmentation. One should pay attention to the two types of clients, namely business travelers and leisure travelers.

Geographic segmentation

Geographic segmentation is critical for many hotel managers, especially for their understanding of customer’s behavior. This approach is premised on the assumption that people coming from the same geographic regions may have similar buying preferences or attitudes (Smolyaninova, 2007, p. 15). In particular, market researchers can classify their target markets in terms of such criteria as region, country, city or even neighborhood of a particular city (Smolyaninova, 2007, p. 15). This division of the target market can be of great relevance to hospitality industry. For example, hotel managers can focus on such criteria as climate conditions, regional customs, or the availability of transportation in order to predict the future decisions of clients or their expectations (Smolyaninova, 2007, p. 15). These questions are extremely important for hotel managers because the attractiveness of a certain tourist destination depends on the differences in climate, scenery, or culture (Bennett & Strydom, 2001, p. 69). Hotel managers should remember about these differences, if they communicate with different clients. This is the main benefit of geographic segmentation. It is possible to argue that geographic segmentation is probably the simplest ways of classifying customers. This is the reason why it is adopted by many business administrators.

Additionally, researchers believe that geographic segmentation is critical for understanding the needs of clients (Bowie & Buttle, 2012, p. 10). For instance, people from Northern regions of a country can set different expectations for hotels (Bowie & Buttle, 2012, p. 10). Furthermore, geographic segmentation can help managers determine what customers are most valuable for the organization. This issue is particular important for many hotels, especially when the majority of guests come from a particular country or region. This is why the employees of this hotel should be able to speak a particular language such as English, German, French, or Russian. In this way, these organizations can gain competitive advantage over other rivals and even charge a higher price. Thus, one can say that geographic segmentation does have some practical implications for hospitality organizations.

However, one should be bear in mind that geographic segmentation has several weaknesses. In many cases, this approach overlooks the cultural differences within a particular country (Holloway, 2004, p. 103). For instance, the residents of the same city may have different ethnic, cultural, or religious backgrounds. Additionally, hotel managers can focus too much attention on a particular geographic region or country, but they can overlook the needs of other customers. This is one of the main problems that hotel managers should be aware of. Overall, geographic segmentation should not be the only way of looking at current and potential customers, because it does not enable managers to look at the differences among people who come from the same region. Nevertheless, this tool can sometimes be very useful.

Price segmentation

Price segmentation is one of the techniques that are widely adopted by hotel managers (Maxwell, 2008). This technique means that the prices of an organization are determined by the behavior of clients, the characteristics of services, and the nature of business transactions (Stiving, 2011). These are some of the techniques that business administrators use nowadays. This model was initially adopted by manufacturing companies; for example, these businesses allowed their customers to purchase products at a lower price if these people bought large quantities of products (Maxwell, 2008). However, modern hotels have also adopted this approach. One of the most important criteria for hotels is schedule and timelines that clients have to meet (Stiving, 2011). For instance, these organizations can charge a lower price in those cases, when clients made reservations beforehand (Crossley & Jamieson, 1997). In contrast, they can charge a higher price if a person makes a last-minute booking (Crossley & Jamieson, 1997). There are several rationales for this policy. First of all, those customers, who have to adhere to a certain schedule, are more ready to pay a higher price for a room in a hotel. This issue is particularly important when one speaks about business travelers who have to meet the timelines set by their companies. In contrast, those people, who make reservation beforehand, should be allowed to save their costs. This policy is advocated by various hotels that can be located in different countries.

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Certainly, there are other criteria for price segmentation; for instance, one can mention the time of purchase, the duration of a person’s stay (Crossley & Jamieson, 1997). However, schedule is probably the most important criteria because a client, who makes a last-minute reservation, creates many inconveniences for the employees of a hotel. This is why it is quite justified that these people should pay more. Such approach appeals to clients with different income levels. The main strength of this price segmentation technique is that hotels can meet the needs of different clients and receive appropriate compensation for it. Currently, this policy is widely adopted in the hospitality industry.

It should be taken into consideration that this form of price segmentation can be particularly effective when hotels have to meet the needs of leisure travelers and business travelers (Crossley & Jamieson, 1997). However, this model may not be useful when the target audience of a hotel is homogeneous. For example, the profitability of many hotels depends primarily on leisure travelers, rather than business travelers. This is another peculiarity that should not be overlooked by people who follow the principles of yield management. On the whole, hotel managers should assess the strengths and weaknesses of price segmentation, before adopting this policy in their organizations. Businesses administrators should remember that the increase of revenues should not be made at the expense of customers whose loyalty can be more valuable for any hotel. Yield management is not aimed only at increasing profitability of an organization; yet, it is also supposed to enhance the loyalty of clients. This is one of the main arguments one can make when we discuss the use of price segementation.

Leisure travelers

When using yield management, business administrators focus on different types of customers and their needs. If one is speaking about hospitality industry, one should pay attention to leisure travelers who are often the most valuable clients of hotels. It is important to understand what kind of things these people value. When speaking about leisure travelers, one can say that their main goals are recreation and entertainment (Abdelghany & Abdelghany, 2009, p. 142; Yeoman, McMahon-Beattie & Sutherland, 2001). It should be noted that these tourists usually make travel plans in advance. Usually, they do it at least a month before arriving at a hotel (Jones, 2012). This is their major difference from business travelers. Furthermore, one can say that they want to forget about their daily problems, workplace conflicts, or challenges that they could face in the past. It should be mentioned that these clients can have different expectations. Some of them may want to stay at a room with only basic accommodations. Such preferences are typical of people who like active tourism. However, in many cases, these people expect a hotel to offer them entertainment opportunities, food or beverages facilities, and so forth (Chon & Maier, 2009, p. 105). Additionally, these customers pay much attention to the destination in which a hotel is located. They focus on the availability of natural or cultural sites and the transportation services provided by a hotel. These people are more likely to pay a higher price, provided that a hotel can offer them these opportunities.

It is possible to say that the use of yield management can be effective provided that business administrators understand the behavior of leisure travelers. One of the trends that can be identified is that leisure travelers are usually more price-sensitive that business travelers (Gattoma, 2003, p. 64). Moreover, these people can travel with their children; this is why they can pay more, if a hotel has a playground for children. This is another factor that should be considered by hotel managers because in this way they can earn extra revenues for their organizations and attract new clients from different countries.

Overall, this discussion suggests that leisure travelers can be very diverse in terms of their needs and values. The most important aspect is that these people do not want to be disturbed by anything. These people expect hotels to take care of their needs. If business administrators and hotel employees can meet their expectations, they can significantly increase the profitability of their organizations. In most cases, leisure travelers can be the most profitable segment of the market. However, their role of these customers depends upon the location of a hotel. Mountain or seaside resorts depend mostly on leisure travelers, while hotels located in urban areas are dependent on different clients (Magee, 1998). Thus, hotel managers should determine what kinds of clients are most profitable for their companies.

Business travelers

Business travelers can be viewed as another important segment of the market. These clients differ from leisure travelers in several ways. At first, it is vital to remember that the travel expenditures of businesses can equal billions. Although these customers are not in the majority, they bring more than fifty percent of the revenues (Woodside & Martin, 2008, p. 186). This is why the needs of these people should not be overlooked. They can significantly increase the revenues of any hotel. It should be kept in mind that at least 14 percent of these clients have to take international trips, and they usually prefer to stay at the same hotel if their needs are met (Woodside & Martin, 2008, p. 186). It is possible to distinguish several requirements that these people set. First of all, they want to be connected to their business partners, friends or colleagues. This is why free Wi-Fi connection is one of the criteria according to which they choose among different hotels (Woodside & Martin, 2008, p. 186). This preference is closely related to the goals of yield management because hotels can adopt such an approach as discriminatory pricing when working with these customers (Callan & Kyndt, 2001). Furthermore, these people attach much importance to such an aspect as the location of a hotel (Callan & Kyndt, 2001, p. 319). They are more like to pay a higher price if the hotel is located near the city center. This information is also important for predicting the behavior of these customers. Finally, these people prefer to stay in the hotels in which there are conference halls (Callan & Kyndt, 2001). This opportunity is of great importance of many organizations, and they can pay more to those hotels can support their professional activities. This is another peculiarity of these customers.

Hotel managers should know about several characteristics of business travelers. They are less sensitive to price changes, especially in comparison with families. Secondly, these clients can make last-minute bookings, and they can accept a higher price. Furthermore, they can cancel their reservations. However, unlike leisure travelers, they can accept the fines which are imposed as a result of these cancellations. By meeting the needs of these clients, hotels can significantly increase their profitability. In this case, they do work only individuals, but also with organizations that are willing to achieve their business goals. Therefore, business travelers can be critical for the profitability of hospitality industry. The use of yield management can facilitate interaction between clients and business travelers.

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