Yield Management Why How and Intervention

By Wm. May
Published: 12/05/17 Topics: Comments: 0

Vacation rental rates are the most misunderstood skill of expert vacation rental managers. They escalate owner income, but may be perplexing to owners or even ignored.

 

Not many years ago, lodging rates were simple and easy for guests, managers and owners to comprehend. Higher in the high season, lower in the low season and in-between other times.

 

But in recent years, sophisticated Inns, Resorts and Vacation Rentals have adopted the practice of "Yield Management" to set rates and revise them constantly, which is known as "Dynamic" rates, due to the fluctuations.

 

The goal is to achieve the highest possible rates in the highest seasons, modest rates in shoulder seasons and to lower rates in slow seasons, in hopes of attracting guests who would normally not travel then.

 

Lodging is like what the grocery business calls "perishable inventory." Fruits and vegetables not sold quickly become worthless when they rot. Lodging rooms and homes become worthless each day they do not rent.

 

UPS AND DOWNS AND UPS

 

Decades ago, airlines were going bankrupt due to uncertain demand for seats. Some days planes flew full and other days mostly empty. With fixed costs and total income limited, they could not make ends meet.

 

Over time, they learned to increase rates for desirable dates and routes and lower them for less desirable dates and routes, which enticed flyers to fill the empty planes. Rates were raised and lowered daily, sometimes hourly, for future flights.

 

It is not too great a statement to say "Yield Management" increased income without increasing costs. None of this would have been possible without sophisticated software that made changing rates fast on thousands of flights and seats.

 

In time, giant hotel chains embraced Yield Management. Even Disney theme parks adopted variable prices to encourage visitors to come when they had room in the property.

 

As Yield Management became standard procedure for lodging, some guests objected because they wanted rates to stay flat and low. But luckily, consumers embraced the new pricing practices, because they could save money by planning ahead or pay more for the dates they preferred.

 

COMPARABLES AND ALGORITHMS

 

The foundation of Yield Management is based on the old cliché most of us learned in school called "Supply and Demand." In short, if many people want to buy a product of limited supply, the seller can increase the price. But if few or no buyers want to buy, the only way to attract purchases is to lower the price.

 

At a young age, none of us questioned that logic. However, determining the demand for lodging is difficult because guests may book the property days, weeks, months or even years in advance. That makes it necessary to project demand in advance. Most properties set rates 13 months or longer.

 

Demand for those future dates is based on many seemingly predictable factors, such as day of the week, seasons, holidays and even weather predictions. Changes in gas prices, airline rates and lodging taxes upset rates.

 

But rates are also affected by what competitive lodging operators and even lodging properties in other geographic destinations do. If they lower rates, managers must decide whether to match prices or lose bookings. If rates jump up, pumping up the rate quickly avoids selling nights too cheaply.

 

Lastly, the trends for overall demand can be upset by macro factors, including the general economy and catastrophic events such as 9-11 disaster and the 2008 recession. Those cannot be predicted, but good math requires fast response to those changes.

 

HOW IT WORKS

 

After incorporating supply and demand into a complicated formula, many factors can be employed by smart managers. Those include day of week, holidays, seasons, special events, etc.

 

The end results in what might be called a "Per Unit Per Day" (PUPD) Pricing system. Every unit may have a different rate for every day of the year. And every rate for every future date may change every day or even more often. Changes seldom jump dramatically on any given day but over time, the trend will be decidedly up or down.

 

Although software and artificial intelligence is essential to manipulating rates so rapidly, the system also requires constant surveillance and personal intervention when research indicates rates that are outside a reasonable range. This all takes time and expertise. Managers have a larger view of local and regional trends than owners.

 

That knowledge allows for overrides to be incorporated that affect all units, or just a single unit, for either a day, a week, month or longer. For example:

 

Base rate to establish comparability

Early purchase discounts

Last minute discounts or premiums

Mid-week discounts or weekend premiums

Discount or premiums for "orphan" dates

Adjustments for length of stay

Weekly & Monthly rates

Minimum rates midweek or weekends.

 

And all of these variables are compiled with the overall trends, local knowledge and the ever-changing mathematically suggested rates.

 

PRIDE OF OWNERSHIP

 

Although Dynamic rates produce more net income for owners, they produce a problem that confounds lodging managers.

 

Of all the devices in a casino, the big money makers are slot machines. But why? No gambler gets rich playing the slots. Often they are low stakes and winnings are comparatively low. But people love them and are enamored with watching the numbers roll up and on - always hopeful for the big score.

 

Dynamic Rates can have the same effect on some home owners. They become addicted to watching their calendars, bookings and those ever-changing rates. That leads to a problem summarized as, "Damned if you do, and damned if you do."

 

Every owner wants to believe that their vacation rental home will be the most popular, because they love it and surely guests will love it, too. They see their home as better than others in the area, and most perfectly outfitted and desirable. They love to see high rates, but are discouraged when they see their beloved home set lower at other times.

 

Setting rates high will please the owner, but too high will produce lower profit. Setting rates too low will make owners unhappy, even if produces more income. So how is the manager to react to owner rate suggestions?

 

When faced with that dilemma, managers have only one good option - and that is to educate owners with the science and math that rules lodging rates in today's world. To ask they allow managers to use their expertise to balance all those factors to produce the highest possible income for owners.

Author: Wm. May – Volunteer, Vacation Rental Association
Blog #: 0570 – 12/05/17