Yield management in Yield management in Hyatt HotelsHyatt Hotels

OOn a flight to Goa, two passengers were discussing n a flight to Goa, two passengers were discussing about the price they paid for the flight and hotel. They about the price they paid for the flight and hotel. They were amazed at the price difference as one of them were amazed at the price difference as one of them was charged 6800 INR for a round trip airfare and was charged 6800 INR for a round trip airfare and

30000 INR for a hotel and the other 4600 INR for the 30000 INR for a hotel and the other 4600 INR for the airfare and just 18000 INR for the same hotel. The first airfare and just 18000 INR for the same hotel. The first passenger had booked his flight and hotel only one day passenger had booked his flight and hotel only one day

in advance while the other a month in advance. in advance while the other a month in advance. How How can the same airline or hotel manage profit by charging can the same airline or hotel manage profit by charging so discriminately? so discriminately? The answer to this amusing question The answer to this amusing question

is is “Revenue Management” “Revenue Management” . .

Yield Management is a method Yield Management is a method of selling:of selling:

the right inventory the right inventory toto the right customer the right customer atat the right time the right time atat the right pricethe right price..

Yield Management Yield Management Qualifiers of HyattQualifiers of Hyatt

Perishable Inventory Variable Demand, Fixed Capacity Sales via Reservations Multi-Pricing Capability Low Variable Costs Pricing is a Powerful Drive

Introduction Introduction

Hyatt hotel corp. was founded in 1957.Hyatt hotel corp. was founded in 1957. Its HQ at ChicagoIts HQ at Chicago It possesses 111 hotels and resorts and It possesses 111 hotels and resorts and

more than 55,000 guestrooms in 44 more than 55,000 guestrooms in 44 countries.countries.

Annual Revenue of Hyatt is $3.4b.Annual Revenue of Hyatt is $3.4b.

Determinants of demand of HotelsDeterminants of demand of Hotels

Tourist arrivals to India increasedTourist arrivals to India increased - - Tourist growth rate @14%Tourist growth rate @14% Average length of stay in the country is highest Average length of stay in the country is highest

in the world i.e. 31.2days.in the world i.e. 31.2days. Indian Govt. plans to boost the travel & Indian Govt. plans to boost the travel &

tourism industrytourism industry Abolishment of air travel tax of 15%Abolishment of air travel tax of 15% Reduction in the aviation fuel to 8%Reduction in the aviation fuel to 8% Campaigns Campaigns

• MNCMNCs are growing rapidly in India.s are growing rapidly in India.

Bookings at Hyatt

Sales via Reservations Hyatt makes reservations in advance Weeks and Months ahead Many reservations also made

at the last minute

Multi-Pricing Capability

Market Segmentation Published Price List (available online or

telephonically )

Low Variable Costs Fixed:

Construction Costs, Admin Personnel Variable:

• Service Provider

• Room Cleaning, Products

Financial Impact

Before YM

$100K Revenue

$10K Profit (10%) After YM

$105K Revenue (+5%)

$2.5K Increase in Profit

25% Increase in Profit

Strategy of Hyatt ?Strategy of Hyatt ? Two fare classes : Two fare classes : full price full price and and discount pricediscount price. . The hotel has 210 rooms available for oct 29 (assume that oct The hotel has 210 rooms available for oct 29 (assume that oct

29 is a Monday night). It is now the end of september, and the 29 is a Monday night). It is now the end of september, and the hotel is beginning to take reservations for that night. The hotel hotel is beginning to take reservations for that night. The hotel could sell out all 210 rooms to leisure travelers at the discount could sell out all 210 rooms to leisure travelers at the discount price, but it also knows that an increasing number of business price, but it also knows that an increasing number of business customers will request rooms as March 29 approaches and customers will request rooms as March 29 approaches and that these business customers are willing to pay full price. that these business customers are willing to pay full price.

To simplify this problem, Hyatt Hotel assumed that leisure To simplify this problem, Hyatt Hotel assumed that leisure demand occurs first and then business demand occurs. Hence demand occurs first and then business demand occurs. Hence it decided how many rooms it was willing to sell at the leisure it decided how many rooms it was willing to sell at the leisure fare or in other words, how many rooms shall it protect (i.e., fare or in other words, how many rooms shall it protect (i.e., reserve) for the full price payers. reserve) for the full price payers.

If too many rooms are protected, then there may be empty If too many rooms are protected, then there may be empty rooms when March 29 arrives.rooms when March 29 arrives.

If too few are protected, then the hotel forgoes the extra If too few are protected, then the hotel forgoes the extra revenue it may have received from business customers.revenue it may have received from business customers.

Why Hyatt is Why Hyatt is appropriate for the practice of yield appropriate for the practice of yield

management ?management ?1.It is expensive or impossible to store excess resource1.It is expensive or impossible to store excess resource(they cannot store tonight's room for use by tomorrow night's customer).(they cannot store tonight's room for use by tomorrow night's customer).2.Commitments need to be made when future demand is uncertain (they must 2.Commitments need to be made when future demand is uncertain (they must

set aside rooms forset aside rooms forbusiness customers - "protect" them from lowpriced leisure travelers - before business customers - "protect" them from lowpriced leisure travelers - before

we know howwe know how many business customers will arrive).many business customers will arrive).3.The firm can differentiate among customer segments, and each segment has 3.The firm can differentiate among customer segments, and each segment has

a different demanda different demandcurve (purchase restrictions and refundability requirements help to segment the curve (purchase restrictions and refundability requirements help to segment the

market betweenmarket betweenleisure and business customers. The latter are more indifferent to the price.).leisure and business customers. The latter are more indifferent to the price.).4.The same unit of capacity can be used to deliver many different products or 4.The same unit of capacity can be used to deliver many different products or

services (rooms are essentially the same, whether used by business or services (rooms are essentially the same, whether used by business or leisure travelers).leisure travelers).

5.Producers are profit-oriented and have broad freedom of action (in the hotel 5.Producers are profit-oriented and have broad freedom of action (in the hotel industry, withholding rooms from current customers for future profit is not industry, withholding rooms from current customers for future profit is not illegal or morally irresponsible.illegal or morally irresponsible.

Predictors tracked at Hyatt to determine Predictors tracked at Hyatt to determine

duration of demand cycle.duration of demand cycle. How best How best to plan for high demand?to plan for high demand?

one day (varies by hour) one day (varies by hour) one week (varies by day)one week (varies by day) one month (varies by day or by week)one month (varies by day or by week) one year (varies by month or by season one year (varies by month or by season

or reflects annual events)or reflects annual events) some other periodsome other period

Causes of these cyclical Causes of these cyclical variations?variations?

employment schedules employment schedules wage and salary payment dates wage and salary payment dates school hours and vacations school hours and vacations seasonal changes in climate seasonal changes in climate occurrence of public or religious occurrence of public or religious

holidays holidays natural cycles, such as coastal tides or natural cycles, such as coastal tides or

phases of the moonphases of the moon

Demand Levels are changed Demand Levels are changed randomly due to :randomly due to :

day-to-day changes in the weather day-to-day changes in the weather health events whose occurrence cannot be health events whose occurrence cannot be

pinpointed exactlypinpointed exactly accidents, fires, or even criminal activitiesaccidents, fires, or even criminal activities natural disasters, from earthquakes to natural disasters, from earthquakes to

storms to mud slides and volcanic eruptionsstorms to mud slides and volcanic eruptions

Patterns and Determinants of DemandPatterns and Determinants of Demand: Predictable Demand : Predictable Demand Patterns and Their Underlying Causes Patterns and Their Underlying Causes

dayday weekweek month month yearyear otherother

billing or tax billing or tax payments/refundspayments/refunds

pay dayspay days school hours/holidaysschool hours/holidays seasonal climate changesseasonal climate changes public/religious holidayspublic/religious holidays natural cycles natural cycles employmentemployment (e.g., coastal tides)(e.g., coastal tides)

Predictable Cycles

of Demand Levels

Underlying Causes of

Cyclical Variations

Hotel Room Demand Curves by Hotel Room Demand Curves by

Segment and Season Segment and Season

Bh = business travelers in high season

Bl = business travelers in low season

Th = tourist in high season

Tl = tourist in low season

Bh

Bh

Bl

Bl

Th

Th

Tl

Tl

Price per room night

Quantity of rooms demanded at each price by travelers in each segment in each season

Note: hypothetical example

Variations in Demand Relative to Capacity (Variations in Demand Relative to Capacity (Fig Fig 9.1)9.1)

VOLUME DEMANDED

TIME CYCLE 1 TIME CYCLE 2

Maximum Available Capacity

Optimum Capacity (Demand and Supply Well Balanced)

Low Utilization (May Send Bad Signals)

Demand exceeds capacity (business is lost)

Demand exceeds optimum capacity (quality declines)

Excess capacity (wasted resources)

CAPACITY UTILIZED

Use marketing strategies to smooth out peaks, fill in valleysUse marketing strategies to smooth out peaks, fill in valleys Many firms use a mix of both approachesMany firms use a mix of both approaches

Recommendations Recommendations

Booking hotel reservations onlineBooking hotel reservations online Online travel booking through “Branded Online travel booking through “Branded

Website”Website” Sliding scale pricing Sliding scale pricing Tie up with Transportation service providers like Tie up with Transportation service providers like

buses , cabs to bring customersbuses , cabs to bring customers Doing extra benefits of stay in hotel during lean Doing extra benefits of stay in hotel during lean

period to be different than other hotels and period to be different than other hotels and attract more customers.attract more customers.