Historical Perspective 

The approach of forecasting by segment began in the airline industry - where it is common to forecast the demand for different fare products. Airline fare products are designed with specific market segments in mind. Fare products generally carry restrictions (e.g., Saturday stay over, 14-day advanced purchase) that are designed to limit eligibility to specific targeted market segments. These restrictions, also referred to as �fences,� are designed to 

Advanced Market Segmentation 

Rather than forecast by market segment or rate product, the best practice in yield management goes further and forecasts by the value of each rate. For example, if a hotel has five retail rate products, each with single and double occupancy rates, a system should forecast the market�s willingness to pay each of those rates. 

If the hotel uses a �best available rate� approach to quotations, all 155 retail requestors would be offered and sold at a $219 retail rate. A hotel using the �top down� approach to rate quotation would sell a variety of retail rates, all at or above $219. 

If Entitlement Rates are added to this example, the following table results: 

1. Retail callers requesting a single-occupancy rate will be quoted the Corporate rate of $299. 
2. Retail callers requesting a double-occupancy rate will be quoted the Discount 1 rate of $259. 
3. Callers from Cyberware Inc. will be quoted their negotiated rate of $299. 
4. All callers from companies associated with the Volume Accts A rate of $249 will be able to make a reservation. 
5. All other discount and volume account rates will be closed. 

Indexing to the Competitive Environment 

All hotel revenue management systems optimize based on the relationship between forecasted demand and remaining capacity. Some other industries also incorporate competitive data in their calculations. These industries, such as airlines, have reliable access to competitive pricing data. Astute hotels in our industry traditionally �shop� competitors by making telephone inquiries in the guise of reservation requests. With the advent of web-based booking engines, it is possible to �shop� competitors electronically. In some markets this works well. In other markets, web rates are not representative of rates available via other distribution channels. 

Nevertheless, whether done electronically or by telephone, hotels do shop one another. Revenue management solutions should provide a mechanism for adjusting rate availability in real time based on the findings of these shopping calls. Competitor pricing can have an effect on both your hotel�s demand and on the market�s perception of the value of your rates. If available competitive rates for a specific stay pattern are higher than yours, some portion of competitive demand will �spill� and appear as demand for your hotel. In addition, your rate of $219 may appear as a real bargain as prospective guests shop around and find no rates in comparable hotels for less than $299. 

Consider the last example. Your lowest available rate is $219, which compares (perhaps too favorably) to competitive accommodations that are all priced at $299 or more. If you raised your minimum rate to $269, you would realize a $50 increase in margin on all sales and would likely lose little demand because your hotel is still price positioned well below the competition. 

Tools like Opus 2 Revenue Technologies� TopLine� Prophet provide a straightforward method to index your rate availability to competitive rates. We use a concept called the Rate Threshold and provide for simple and direct user control. In the above example, the hotel would raise the rate threshold to $269 and all stay patterns passing through that day would be appropriately affected.  This mechanism allows your hotel�s rate availability to reflect not just supply and demand conditions, but also its proper price positioning in the market. 

Full utilization of the Rate Threshold capability requires a synergistic capability in the hotel�s reservation systems. Without this extension: if you raised your Rate Threshold to $269, all rates between $219 and $268 would be closed. With the extension you can specify that certain rates (e.g. Volume Accounts A) not be affected. The rationale behind this decision is based on the fact that the Volume Account A demand is needed by your hotel to sell out. You don�t want to turn it away and encourage it to go elsewhere. 

Indifference Rates 

Every rate product has an �indifference rate� schema that may vary in large or small amounts from the corresponding quoted rates. The indifference rate is a measure of the real financial or strategic value of a particular rate. As an example, if your hotel sells a weekend rate of $159 that includes breakfast, the indifference rate might actually be $149 for single occupancy and $139 for double occupancy. These indifference rates reflect the estimated cost of the breakfast at $10 per person. 

It is not uncommon for a hotel to intentionally give an indifference rate that is not based on financial calculations but has an underlying strategic justification.  Suppose your hotel is located in a state capitol. The rate product associated with the government segment has a low rate that would often be closed during weekdays in peak demand seasons. Since the government segment exhibits significant demand during the lower-demand season, you decide to intentionally give the government rate product an inflated indifference rate. You justify this in hopes that providing greater availability to your rooms during times of high demand will encourage loyalty that will keep government guests coming when demand is low. 

Indifference rates in a yield management system gives you the ability to customize the apparent value of particular rate products for yield management purposes. This is important both to accurately reflect the real financial value of rate products and to assign a strategic value when appropriate. 

The Question of "Yieldability" 

Yield management systems should support three states of yieldability: 
 

The third of these three yieldability statuses allows the hotel to enter into �last room availability� contracts and still yield manage them from a stay pattern standpoint. In other words, when system optimization closes Tuesday one-day stays to allow Tuesday�s remaining capacity to support longer stays, last room available rates would also be closed for a Tuesday one-day stay pattern.  Therefore, rate products that fall outside the control of other yield management systems can be controlled by stay patterns. 

In order to implement this yieldability feature, yield management systems should further refine the rate value forecast into separate forecasts for each rate value by yieldability status. In this way, the systems also optimizes the mix of fully yieldable and stay pattern yieldable demand. 

Personalization of Yield Management 

A market segment approach to hotel yield management opens or closes entire segments or rate products at one time. The approach recommended in this article controls rate availability at the value level - a far more refined and precise approach. One future vision of hotel revenue management goes even further. It speaks to a day when each guest is a market segment of one and the availability of rates for a requested stay would depend on a guest�s past history or forecasted future with the hotel or brand. 

One can imagine lower room rates being available to guests with a history of dining in the hotel when compared to those that dine out. Similarly, requestors who demonstrate ongoing hotel or brand loyalty might have lower rate requirements than others without such a history. 

Forecasting and optimization at the market segment level runs counter to this vision of one-to-one revenue management - a strategy which many believe is the ultimate future of hotel yield management. OPUS 2 is working with the Fidelio OPERA development team as well as other PMS and CRS vendors to make this capability available to the industry. 

In Summary 

1. Yield management systems have progressed to provide solutions with greater flexibility by forecasting and optimizing at the rate-product level, which is far more granular than at the market segment level. 

Here are some examples: 

• A rate product can be opened in one room type and closed in another. In most implementations based on market segments, this is lost. 
• A rate can be opened for double but closed for single occupancy. In most implementations based on market segments, this too is lost. 

3. Support of indifference rates enable yield management to occur on the basis of the real financial value of rate products and also to assign a strategic value when appropriate. This is more granular and precise than older technologies that stop at market segments. 

4. Support of three yieldability statuses at the rate-product level allows �last room availability�

Eric Orkin has been consulting and developing software for the hotel industry since 1973. Eric formerly headed Eric B. Orkin Associates, Inc., which evolved into OPUS 2 Revenue Technologies, Inc, a subsidiary of MICROS® Systems, Inc. 

Eric is well known in the industry as a pioneer in hospitality yield management systems and is considered by many to be its\ leading expert. He is a graduate of  the Cornell Hotel School and the Wharton School of Finance. He was a tenured professor at the University of New Hampshire before becoming immersed in hotel consulting and software development. He maintains his ties to academe through guest lecturing at major universities.