Tourism Economics Essay Example for Free

Tourism Economics Essay Overview According to Dr. Warren H. Lieberman (1993), yield management or revenue management is the practice of maximizing profits from the sale of perishable assets by controlling price and inventory and improving service.   Sheryl E. Kimes of Cornell University, in turn, defines yield management as the control of customer demand through the use of variable pricing and capacity management to enhance profitability.   Finally, Kevin Donaghy, et. al. put forward in 1995 that yield management   is a revenue maximization technique which aims to increase net yield through the predicted allocation of available capacity to predetermined market segments at optimum price. Yield management (YM) has become widely accepted and used by capacity-constrained hospitality and tourism organizations in order to achieve optimum resource utilization and ensure wealth maximization.   Ã‚  For the use of this paper, we shall focus on the hotel industry. Yield Management Hotels Yield management in hotels, as Lieberman (1993) concisely puts, is the use of   information, historical and current, in combination with policy supports, procedural supports, and statistical models, to enhance a hotels ability to carry out a number of common business practices and thereby increase both its revenues and its customer-service capabilities.[1] Hotel capacity is not part of the institution’s inventory, and thus continuous operation without occupancy translates to overhead and opportunity costs.   The yield management approach allows the management to avoid these costs by providing a rational and systematic framework for management decisions.   Huyton et al. (1997) argues that the hospitality and tourism industries of the 90s are best remembered for their adaptation and refinement of yield management systems. Preconditions of YM Kimes (1997) identifies five preconditions for the successful application of YM.   These are: Fixed capacity Hotels are capacity-constrained, i.e., their main products or goods cannot be classified in their inventory. These products or goods are perishable. Capacity can be changed by increasing the number of rooms, for instance, but this entails significant capital outlay, which is discussed next. High fixed costs Adding incremental capacity to a hotel is very costly and time-consuming.   These resource constraints (fund allocation process, planning and construction time, etc.) lead to the fact that capacity cannot be adjusted rapidly. Low variable costs The cost that hotels incur by booking a guest in a room that would otherwise be vacant is classified as a low variable cost. Time-varied demand Due to high fixed costs, hotels cannot match their capacity easily to correspond to peaks and troughs in demand.   Donaghy, et al. (1995), bolstering Kime’s explanation, argues that hotels can benefit during demand fluctuations or variations.   They can do this by controlling capacity when demand is high and relaxing that control when demand is low. Reservation systems are very beneficial in efficient demand management as products and goods are allocated prior to consumption. Similarity of Inventory Units As a general rule, YM systems operate in a situation where inventory units are similar.   Hotel rooms are basically similar. Ingredients of YM Differential pricing is one of the foremost ingredients of YM.   As a prerequisite, hotels must be able divide their customer base into distinct market segments, in order to apply the principles of differential pricing. A manager will be more confident in his/her decisions regarding the acceptance or denial of reservations when he/she is familiar with their organization’s booking and demand patterns. A sound forecasting system for peaks and troughs in demand, based on good knowledge of sales and booking data is essential in the manager’s task of effectively aligning supply and demand.   YM, according to Kimes (1997), is essentially a form of price discrimination[2]. The YM systems being used by hotels and airlines rely on opening and closing rate bands. Logically, periods of low demand prompt the service operator to offer discount prices. Conversely, periods of high demand will normally see the closing off of these discounts.   Ã‚  Offering multiple rates, on a different note, may enable the manager to align price, product and buyer in a profitable manner achieve a greater net yield and therefore. Another essential YM ingredient is overbooking. Overbooking levels are systematically set using historical data, present developments, and forecasted activities that are directly or indirectly related to the business operation of the hotel. As a final ingredient in a good YM system, an effective management information system should be present to handle the substantial amount of information needed for the construction of effective management decisions. YM approaches in the hotel industry Donaghy et al. (1995) discussed three basic YM approaches to the hotel industry in consonance with Kimes.   These are: Rate Controls Under this approach, there are two methods being practiced.   The threshold curve approach or the control chart method deals with opening and closing rate classes. This method makes use of the booking curve as a base. The bid price system is the second method, and it is based upon algorithms.   Put simply, it is a shadow process of the capacity constraint. Availability controls The availability controls approach is based upon the guests’ minimum and maximum lengths of stay.   It isolates arrivals, which, in turn, are managed by manual and/or computerized systems. Allocation approaches Originally, this approach made use of the expected marginal seat revenue (EMSR).   He further explains that it allows the allocation of inventory to price in order to develop booking limits for different categories[3] (Donaghy et al., 1995).   Bedrooms can be booked at the maximum rate as long as they are available.   However, they but may be restricted at lower discounted prices.   Revenue maximization for a given demand and capacity constraint is the focus of this approach.   Donaghy et al., quoting Yeoman and Ingold (1997), proposed an equation for yield management: Yield management : a chaos paradigm x rationale / normative decision model = logical incrementalism. The equation simply means that in an economic and political environment influenced by chaos theory, YM contributes to better decision-making processes. Importance of YM in the Hotel Industry The analysis of actual costs the factor that ultimately influences profitability is a requirement of yield management in its capacity management.   Following a logical pattern, decisions are more likely to generate more efficient yield-focused capacity management methods when they take account of and are based on cost of sales. Of course, the importance of forecasted demand, booking demand patterns and overall historical data cannot be undermined.   This is the main reason why yield is a crucial factor in adding `value to managing capacity. The yield segmentation process (YSP) is one such method that accomplishes this.   By incorporating incurred costs, YSP ultimately adds value to managing capacity.   Cross (1997) identifies segmentation as one of the steps in yield management. The YSP, put simply, aims to determine how much a customer is willing to pay.   By determining accommodation value of targeted audiences, YSP becomes instrumental in identifying a hotel’s target consumers for a given time period. A hotel manager derives answers from the YSP provides using a comprehensive segmentation of market segments, existing and potential. Because of this, practitioners are provided with reliable information and are therefore better-equipped for decision-making, specifically in the following aspects: price structures, preferable target markets (within the context of yield value), potential profit/yield per market segment, actual costs of supporting each market segment and decision-making mechanisms for targeting new market segments. Hoteliers, not unlike most sectors of hospitality industry already analyze their market in their own ways, varying in degree or method of analysis. A manager’s capacity-management methods are not greatly modified when a yield-focused approach is incorporated.   Their analysis of decision factors are enhanced and therefore value is added through:   Delivery products or services that dynamically meets the needs and wants of clearly defined market segments   Shift in increased revenue results and focus from capacity utilization maximization (translating to overall revenue) for every segment to profit maximization within each segment. A comprehensive market segmentation performed by a team qualified hotel personnel is required to achieve these aims.   This team should utilize all resources and make use of all the expertise found in the organization. To illustrate, this requires participation from the hotel’s various departments: sales and marketing, rooms inventory, front desk, finance, accounting, conference and banqueting, and of course, the senior management. Based on the pooling of expertise from the said departments, the management is supplied with essential data on which sound decisions would be based. Yield management can be applied to a wide array of business processes. Successful integration and application will result in higher satisfaction levels for customers, and consequently greater revenues for the hotel. However, substandard integration and application will probably lead to lower customer satisfaction levels and loss of revenue and profit. It is not enough merely to say that a hotel practices yield management. The real question to be addressed is â€Å"how is yield management being practiced?† By addressing this, the hotel will be able to find out what it could do better.   Furthermore, the hotel, through experience and refinement, will be able to identify the additional benefits it could derive from yield management. A successful yield management program continuously evolves according to the needs of the organization using it. Various tools and performance measures have been designed to assist hotels to quantify the benefit streams arising from specific yield-management actions. It must be stressed that yield management is not a computer system.   Moreover, on a more simple definition, it is not a set of mathematical techniques.   Ã‚  To reiterate, yield management is a method or approach to increase revenues and improve service by being agile, dynamic, and responsive to market demand. It is a way of doing business.   It is no question that computer-based tools are very instrumental in achieving higher levels of success for a yield-management program. In this age, the gamut of yield management’s benefits cannot be achieved without the aid of technology-based tools.     These tools facilitate several intrinsic processes of hotel business: demand forecasting, reservation cancellation, and recording/analysis of no-show activity.   This gives the hotelier better foundation on which to base decisions such as: Determining when to restrict discounts Estimating the displaced revenue of transient demand Recommending and controll reservation availability based on particular lengths of stay and rate Applying YM methods appropriately, a hotel can achieve better effectiveness in its business operations.   The results include the following:   Effective pricing or hotel rate structure Prudent limitations on the number of reservations for each room during any time frame, founded on the expected incremental profitability of each reservation. High adaptability of reservation policies leading to well-informed decisions on inventory-control actions Effective and profitable negotiations for volume discounts High responsiveness in providing guests/customers with the product or service they want or may want, coupled with profitable complementation of other hotel services/facilities. A generally healthier revenue generation from current and potential businesses Appropriate empowerment of reservation agents, thus making them more effective business arms. Limitations of YM in the Hotel Industry After establishing the applicability and approaches of YM in the hotel industry, we now discuss the arguments for YM’s limitations as compared to the applicability to the industry that pioneered the use of YM – the airline industry. Multiple night stays An airline seat’s use is limited to a day and a night. Hotel rooms, on the other hand, are booked on an entirely different basis. Hotel guests may arrive on off-peak or low-rate days and stay multiple nights, possibly through some peak or high-rate days. This situation translates to a dilemma regarding the appropriate rate for each guest. Multiplier effect A hotel’s accommodation is but one of the revenue-generating functions of the establishments.   Restaurants, health and wellness facilities, banquets, conference halls, and leisure facilities contribute significantly to the hotel’s profitable operations.   A hotelier is thus prudent to mind all the establishment’s revenue-generating functions and departments and ensure that they become complementary to each other. Lack of a distinct rate structure Hotels seldom have rate restrictions that airlines impose on their passengers. To illustrate, travelers who have paid regular rates are hindered from some benefits appropriated to those passengers who have availed of leisure rates. Decentralization of information Kimes (1997) states that hotel bedrooms in group hotels are often booked at rates below expected â€Å"because the central reservation system is not linked in the unit hotels property management system†. Conclusion The effectiveness of a yield management system is based on the depth of the understanding of the necessary ingredients, preconditions, limitations and decision-making variables of an industry. Flexibility and system adherence are indispensible requirements of any proposed system.   With these conditions in mind, the yield management system is optimized managing capacity profitability. Profit enhancement is the bottom line for YM. In hotel industries, this translates directly to the simultaneous improvement of occupancy and rate. Focusing on either one as a separate goal only   optimizes capacity utilization.   Capacity utilization optimization does not necessarily optimize yield. Yield management systems, applied correctly, can manage capacity profitably in hotels and most tourism and hospitality industries, if not all. Capacity management and yield management must not be confused with each other.   Capacity management refers to the efficient use of available space with the fundamental aim of improving overall revenue.   YM, in turn, also strives for the efficient use of available capacity.   However, its focus is on profit optimization rather than revenue optimization. Yield management is not a panacea for a hotel’s ailing business operations.   It is not a way of luring customers to pay higher rates or for them to simply spend more while in the hotel.   It is a continuously evolving process that, if applied correctly, can increase a hotels revenues and at the same time, be responsive to its market’s demands, enabling it to deliver effectively the goods and services best suited to the wants and needs of its customers.   How well yield management works for a hotel depends on how well the program is designed and implemented. BIBLIOGRAPHY   Belobaba, Peter. â€Å"Application of a probabilistic decision model to airline seat inventory control†. In Operations Research, 37:2. 183-197. 1989 Cross, Robert. Revenue Management.   New York: Broadway Books. 1997 Donaghy, Kevin. and McMahon, Una. â€Å"Managing Yield: A Marketing Perspective†. In Journal of Vacation Marketing, 2:1, 655-662. 1995 Donaghy, Kevin, McMahon, Una and McDowell, D. â€Å"Yield Management: An Overview†. In International Journal of Hospitality Management, 14:2, pp. 139-150. 1995 Donaghy, Kevin, McMahon-Beattie, Una., Yeoman, Ian. And Ingold, Anthony.   Ã¢â‚¬Å"The Realism of Yield Management†. In Progress in Tourism and Hospitality Research 1:4. 187-195. 1998 Huyton, Jeremy, Evans, P, and Ingold, Anthony.   Ã¢â‚¬Å"The legal and moral issue surrounding the practice of YM, Viewpoint†. In International Journal of Contemporary Hospitality Management, 9: 2,3. 84-87. 1997. Kimes, Sheryl. â€Å"The Basics of Yield Management†. In Cornell Hotel and Restaurant Administration Quarterly, 30:3. 14-19. 1989 Kimes, Sheryl. â€Å"Yield Management: An Overview†. In Yield Management, Strategies for the Service Industries. (Eds) Yeoman, Ian and Ingold Anthony., London: Cassell. 3-11. 1997 Kimes, Sheryl.   â€Å"The Strategic Levers of Yield Management†. 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In Cornell Hotel and Restaurant Administration Quarterly, 34:1,   34-44. 1993 [2] Sheryl Kimes. â€Å"Yield Management: An Overview†. In Yield Management, Strategies for the Service Industries. Yeoman, Ian and Ingold Anthony (eds). London: Cassell. 3-11. 1997 [3] Kevin Donaghy and Una McMahon. â€Å"Yield Management: An Overview†. In International Journal of Hospitality Management, 14:2, pp. 139-150. 1995