Integrating Decisions & Systems
Special Report: 
Yield Management System Measurement
By Dr. Ravi Mehrotra, IdeaS, Inc., June 1999 
When a hotel with an installed yield management system experiences in its first year a healthy growth in revenues from bookings, compared to the previous year when it did not use a system, who or what should get credit for the improved revenue performance? An argument can be made that the system really delivered benefits. However, the Sales & Marketing Department can claim that the new advertising campaigns and direct mail brought in greater volume. The Guest Services Department may claim higher guest satisfaction ratings generated considerable repeat business. The hotel’s management team may point to the fact that the property was operating in a much improved local economic environment. 

Considering all of these factors - and the activities enacted to affect revenue performance - one could even ask whether or not the yield management system is actually delivering benefits. 

Consequently, measuring the impact of the yield management system is essential to correctly attribute what revenue increases are a result of the system or are a result of other factors. 

Plus, true system measurement is required for hotel owners and executives, who need to justify the purchase of the system, precisely understand return on investment, and prove system impact for a rollout. In the hospitality industry, there have been many approaches and technologies offered to provide yield management benefits. Likewise, there have been many attempts to help hoteliers see and understand what their yield management systems are doing for them. 

Successful measurement can only occur when the hotel measures its performance working with the yield management system, and compare it to the revenue performance it would have received without the system, everything else being equal. Let’s take a look at five of the more well-known measurement approaches. 

1. Historical Revenues Trends Analysis 

The hotelier plots daily revenues from the past several years, and searches his or her findings for any type of trends. Spikes from the statistical noise produced from seasonality and demand fluctuations are smoothed to determine stable patterns. The patterns are used as a basis for making future projections, which are expected to grow at a steady rate. By comparing the future projections with any deviation from the projections, the amount of deviation, in theory, may be tied to the system. 

However, this approach fails to account for the impact of new events that happened after the system was installed - new marketing campaigns or the introduction of a web site, for example - which were not done in the past. 

It still makes it impossible to see what revenue change is due to the system or to other factors. 

2. "After the Fact" Review 

A process is used to estimate what the unconstrained demand would have been or may have been. The process considers demand “on the books” and, after there is no more hotel capacity, it attempts to figure the amount of demand turned down. 

With this information in hand, the hotelier speculates that, if he or she accepted the best business mix after the fact, how much revenue would have the property generated. 

That amount is compared to the actual amount of revenues. This difference or “gap” offers a possible measure for improvement. The “gap” before the system install is weighed against the “gap” after the system installation. The difference perhaps illustrates the system’s impact. Simply, this approach only teaches the hotelier how to be wiser after the event, instead of making the best decisions for future booking opportunities. If you made investment decisions, in the stock market, for example, solely after the fact, knowing how prices fluctuated, and realizing when would have been the best time to buy and sell, you still would not enjoy optimum return because the decisions did not factor future volatility and uncertainty. 

This approach can not separate what the system is doing and what is being affected by changing market conditions and other factors. 

3. Comparison of Hotels Within Comptetitive Set 

In an attempt to estimate the yield management system results, revenues from a period after system installation are compared to a similar period last year prior to installation. To consider the effect of extraneous factors on revenues, the comparison is tracked against any demand fluctuations from a similar hotel (without the yield management system) in the same competitive set, and/or with nearly the same demographics. 

Hotels and resorts pride themselves in their uniqueness. So it is impossible to imagine two hotels that would experience identical affects from the extraneous factors, and it is highly unlikely they would share the same pricing strategies directed or the same marketing mixes. 

4. Computer Simulation in Controlled Environments  

It is vital that the system measurement is conducted in such a manner as to isolate the changes in market conditions and the business environment. One of the first places where this type of system measurement with isolation was attempted was in a controlled environment, using computer simulation. 

In this case, a yield management practice with basic demand data is deployed. First, booking decisions from the yield management practice are based on simulated human decisions, which result in bookings accepted and not accepted. 

Next, the booking decisions are based on yield management system decisions. Again, bookings are accepted and not accepted. 

Accepted bookings from both decision scenarios translate into revenue, and the compared revenues between the two illustrate how the yield management practice may deliver results. 

However, how can computer simulation understand truly how the humans would have acted? Humans are not efficient at executing on "first come and first served." Even if the measurement shows benefits in a controlled environment, how can the hotelier be assured that there will be benefits in the "real" world. 

It is impossible to predict in a controlled setting how the users would interact with the system. 

4. True Scientific Measurement 

If demand does increase due to marketing programs or an improvement in economy after the yield system installation, occupancy will increase, and there will be more sold-out nights. 

But what if there is no increase in demand compared to last year, while an effective yield management practice is put into place? As a result of the yield management system, it is anticipated that there will be a reduction in the number of turn downs multi-night stays. And the proper overbooking of rooms leads to a decrease in the amount of empty rooms on sold-out nights. 

Thus, occupancy will increase through the better yield practice. The scientific measurement approach is the tool with which it can be precisely determined whether the occupancy increased because of the yield management practice or due to marketing programs or improved economic conditions. It begins by identifying periods where the system does not restrict the hotel or resort in accepting bookings. This starts the process by which a look at what is occurring in the marketplace and in the local economy is gained. 

Scientific measurement isolates the impact of the marketing programs and economic factors from the impact of the yield management solution. It shows what room revenue increases can be attributed to the yield management solution. 

IDeaS, Inc. 
3500 Yankee Drive, Suite 350 
Eagan, MN 55121 
Phone: 651-905-3200 
Fax: 651-905-3299 
e-mail: info@idealyield.com 
Web site: http://www.idealyield.com

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