yield management a technique used to maximize room revenue used for reservations of a perishable...
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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
Yield Statistic
Actual Rooms Revenue
Potential 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 Occupancy Average
Available Percentage Daily Rate
Rooms Available = Total Rooms X 365 Days
Forecasting Rooms Revenue Example
100 Room Hotel100 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 PercentageThe 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
95 + 5 = 100 =
150 - 25 = 125
80%
Daily Occupancy Rates
47.8
62.467.7 68.3 65.3 66.5 70.1
0
10
20
30
40
50
60
70
Sun Mon Tues Weds Thurs Fri Sat
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 =
95 + 5 = 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 =
150 - 25 125$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 FormulaItem Calculation Amount
Desired net income Investment x ROI $375,000
2,500,000 x .15 = 375,000
Pretax income Pretax income = net income $625,0001 - t
Pretax income = 375,0001 - .4
Interst expense Principal x int. rate x time $900,0007,500,000 x .12 x 1
Income before interest & tax $1,525,000Est. depreciation & insurance 40% of income before interest & tax $610,000
Income before fixed charges $2,135,000Undistributed operating expenses 60 % of income before fixed charges $1,281,000
Required operated depts revenue $3,416,000
Department income excluding roomsLess: Food & beverage 5% of required operated depts revenue ($170,800)Plus: Telephone loss 2% of required operated depts revenue $68,320
Rooms dept. income $3,313,520
Rooms dept. direct expenses 54,750 x $10 $547,500
Rooms revenue $3,861,020Room revenue $3,861,020
Required average room rate Room sold 54,750 $70.52
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
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