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 Days before arrival 1000 Reservations Business Leisure Inelastic Elastic

Yield Statistic Actual 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 OccupancyAverage AvailablePercentageDaily 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 = 100= = %

Daily Occupancy Rates

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 $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$10,000= $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

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