The Truth About Yield Management Pt. 3 – The Numbers

The Numbers
The Numbers

So far we have just talked about strategy and theory around yield management. What happens when we put this into actual practice?

Let’s look at a simple example. Below is a theoretical, though realistic, calendar for a unit. To keep the example simple we’ll say that this agency only takes 5 night stays, and the rent calculates out to $100 a night. They are not booked at 100% occupancy, but they’re doing pretty well. So far they have booked $1,500 in rent for this unit, of which they will get a percentage.

Scenario_1

Now let’s look at the same unit where they have decided to implement some yield management strategies.

Scenario_2

The agency has decided that they will take stays that are less than 5 nights, but they’re going to charge a premium for them. So they increase the rent to $700 for a 3 night stay and $650 for a 4 night stay. They also decide to offer a reduced rate on last minute bookings instead of letting the unit sit empty, so they grab $425 for a 5 night stay that was booked a day or two before arrival.

In this scenario they’ve increased their occupancy to 90%, and they bring in $3,275 in rent, of which they will get a percentage. (That’s just rent, that doesn’t include any money that they will make off of charges.) They have also managed to raise their average nightly rate to $121 and increase their average booking amount to $546. This is powerful information they can share with the owner of the unit as proof he/she is making the right decision in keeping their unit with this agency.

How about one more? Let’s see what could happen if they only offer a reduced rate for last minute bookings and those bookings are only for a few nights.

Scenario_3

Even in this scenario the agency still brings in more money than they otherwise would have. Even though they reduced the rate by 15% and accepted a shorter stay than they would have preferred, they still manage to net $3,200 in rent which is $1,700 more than they would have gotten had they left things as is. They increased their occupancy to 90% so they can now charge a premium on that last 10% if they choose to, and they increased their average nightly rate to $118. Even though their average booking amount dropped slightly to $457, they still take in an additional $1,700 of which they will get a percentage.

Just to put a cherry on top, let’s see what happens if this agency has really low margins. Let’s say they only get 5% of the rent, whereas most agencies get between 10%-20%. Even at 5%, they still come out with more using yield management strategies.

In the first scenario ($500 for a 5 night stay, no yield management) they would net $75. (5% of $1,500)

In the second scenario (where they’ll take shorter stays at a premium, or offer a reduction at the last minute) they would net $163.75 (5% of $3,275), more than double what they would have received under the first scenario.

And in the third scenario (only offering last minute deals) they would net $160 (5% of $3,200), again, more than double what they would have received under the first scenario. It also bears repeating that this doesn’t include any money they will take in from charges (reservation fees, etc.), of which they will now have more because they took in more bookings.

These are just examples so bear in mind the specific offerings need to match your particular business dynamics. Maybe you only do this for certain units to avoid wear and tear on units where the owners are prone to complain. You may only choose to offer a last minute deal if you are less than 90% booked. The point is that you can grab additional revenue by presenting the right service to the right customer at the right time for the right price.

Finally, in order for these strategies to be effective you will need to leverage all of the avenues at your disposal to drive traffic and get your customers attention. (Distribution channels, marketing to past guests, etc.) The right service at the right time at the right price isn’t effective if the customer never sees it.

Next – The Numbers, Continued