The Truth About Yield Management Pt. 4 – The Numbers, Continued

The Numbers
The Numbers

Let’s look at another yield management scenario, this one around increasing rates as occupancy increases.

As a general principle we want to charge more per booking as our calendar fills up. This is just basic supply and demand. The more scarce or unique something is, the more valuable it is. Obviously we want to stay within what the market will bear, while capturing as much of the revenue as we can.

Let’s say our base rate is $100 a day for a given unit. (That’s just rent, no charges.) The most revenue we can bring in during the month for that unit would be $3,000 (30 days @ $100 dollars a day), which would require having every day booked. Not impossible, but not easy either depending on time of year, the specific attributes of that unit, etc.

What happens to the revenue if we implement a yield management strategy based on occupancy? We’ll keep it simple and raise the daily base rent by 15% once we hit 60% occupancy for the month, and then raise the daily rate by another 15% for each 10% occupancy gain thereafter.

When we hit 60% occupancy the rent becomes $115 a day. (A 15% increase over the $100 rate.)
When we hit 70% occupancy the rent becomes $130 a day. (A 30% increase over the $100 rate.)
When we hit 80% occupancy the rent becomes $145 a day. (A 45% increase over the $100 rate.)
And so on up to 100% occupancy.

So what does this do for our revenue potential? If we manage to book 100% of our availability we take in $3,450 in rent, a 15% increase over what we would have otherwise received. Further, we only have to hit ~90% occupancy in order to make the same amount of rent revenue that we would have needed 100% occupancy for with the original model. This also suggests that booking up all of our inventory too soon prevents us from maximizing the revenue potential on that inventory. (Ex. If we are at 100% occupancy 4 months out, we have no inventory available for the traveler that decides to plan their trip 30 days before the arrival date and is willing to pay a higher rate to make their stay happen.)

The bottom line is that if you rent a unit at $100 a day and a customer would have paid you $115 a day, you lost $15 a day. Yield Management strategies can help prevent this from happening by taking advantage of supply and demand to help ensure you get the maximum amount of revenue for your inventory. There are all kinds of adjustments that could be made to the above scenario to maximize revenue. (Ex. We could have increased the rate by 20% when we hit 60% occupancy, and then 50% when we hit 80% occupancy, and done this across multiple units.) For this example I wanted to keep things simple and straightforward to avoid confusion.

Now let’s play devil’s advocate and say “But people always shop around online, we don’t want to lose business to someone else because our prices are too high.” True, the internet has taught people to shop around and expect discounts, but scarcity can also be a powerful motivator. In tandem to a strategy like the one above, you would also want to make sure to keep an eye on your competitions inventory and possibly adjust the strategy based on total market demand. But, just because your competition has quite a bit of availability doesn’t mean you can’t charge a higher rate for yours. They may have lower quality units, their prices may be too high already, they may not be doing a great job at marketing or showcasing their inventory, or a number of other things that would contribute to a lack of occupancy. If you slowly raise the rates as demand increases, you have a better chance of not pricing yourself out of the market.

Next – Customer Segments