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.
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.
Now let’s look at the same unit where they have decided to implement some yield management strategies.
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.
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.
There are a number of strategic levers that must be considered for yield management to be most effective. You don’t want to raise or lower your rates based on a gut feeling, or pull a number out of the air. As I mentioned in the last post, I’ve often heard yield management referred to as blanked discounting. But remember that yield management is presenting the right service to the right customer at the right time for the right price.
The following data points can help you determine the best way to utilize yield management for your business.
Calendar – the time of year the booking is for plays a major role in yield management. Many businesses do this already by increasing their rates in their high season and lowering them in the shoulder and off seasons.
Clock – the amount of time between when the booking is made and the arrival date. You may choose to charge more during peak booking season where arrival is 90 days from check-in on average, and offer a reduced rate if the booking is made 3 days before arrival when the chances or renting that unit are a lot lower.
Capacity – the number of stays that are booked already. Supply and demand should greatly inform what you charge for a particular stay.
Cost – the amount that you charge based on the above three factors.
Customer – the most important C. Without customers you wouldn’t have a business. The key here is that not all customers have the same needs or characteristics. A family taking their yearly vacation is going to have different needs and a different budget than the lone traveler that decided to get away for the weekend at the last minute.
Finally, we could add another C to the mix; Cover, as in “cover your costs”. You want to make sure, especially if you are offering a reduced rate, that your costs are all covered. None of us go into business to lose money.
These factors all come together in various ways to help you determine what you should be charging a customer at any given time for their stay. Of course pricing is just one component of the customer relationship. You also have to make sure that you are providing a quality product/experience and delivering value.
One of, if not the topic I think is most misunderstood in the vacation rental industry is yield management. I’ve seen it spark heated public debates about discounting and margins, as well as get dismissed as “something hotels do”.
So what is it exactly?
I like how Glenn Withiam of Cornell University, a school that has been studying yield management for decades, defines it. He says that yield management is “the umbrella term for a set of strategies that enable capacity-constrained service industries (like vacation rentals, hotels, and airlines) to realize optimum revenue from operations.” (Emphasis mine.)
He goes on to say that “The core concept of yield management is to provide the right service to the right customer at the right time for the right price.” (If you care to read the entire paper, which is very good, you can do so here.)
The right service. To the right customer. At the right time. For the right price.
So, if you charge more in the summer season than you do in the winter season (or vice versa if you are in a winter destination) then you are doing yield management. Some travelers are willing to pay a higher rate during peak travel times and you are using that to your advantage to optimize your revenue.
Another way to describe yield management would be to say that it is taking advantage of supply and demand in order to maximize revenue.
None of the above sounds like blanket discounting or something that only hotels can do. And, if you are lucky enough to have vacation rental software with the capability to handle these scenarios, you can set it up to do all of the heavy lifting for you.