Yield Management - Its Time Has Come

By Steve Murch, Escapia Chairman

"Yield management is the single most important technical development in transportation management since we entered deregulation."
    – Robert Crandall, former Chairman/CEO, American Airlines

Yield management, now a pervasive and accepted practice in nearly every segment of the trillion-dollar worldwide travel market, has recently generated considerable interest and varied opinions within the vacation rental industry.

I wanted to take a minute to share some of my thoughts on why we here at Escapia think it’s such an important topic, and why, even though we've got a pretty good lead in the industry for yield management tools today, we'll continue to invest and innovate in for you.

What Is Yield Management?
Yield Management, broadly defined, is the practice of influencing consumer behavior, generally through pricing, in order to maximize the overall profit (or yield) from a fixed, perishable resource over time.

Wikipedia notes that three critical ingredients for yield management to work are:

• Fixed resources
• Perishable inventory
• Customer willingness to pay different rates at different times

For all practical purposes, I'd add a fourth:

• Tools to easily manage rate changes and updates throughout the distribution channel and product lifecyle – from the internal backoffice through all sales channels used. 

This is because it's simply not manageable to constantly adjust rates based on supply/demand without some degree of automation.

We've certainly got the first three elements in the vacation rental industry.  And with EscapiaONE's IntelliRate engine, you have the fourth.

I believe the stage is set for more sophisticated yield management to start gaining more and more adoption in the vacation rental industry; this is due to a variety of market factors.

Consumers Expect It
From the consumer’s point of view, it’s become not only logical but expected that the  premium beachfront lodging on Maui booked for April should carry a premium, especially if it's the last one left.  And it's also expected that the inner cabin on a cruise that’s only 60% booked and sailing tomorrow should be a steal of a deal.  It's expected that those rates can (and often do) change, right up until booking is confirmed.

Even in most grocery stores, it's expected that seafood is more expensive when it is fresh off the truck than when there are too many to sell-out and they are nearing their perish-point.  At hotels, deals are expected when occupancies are low, and premium pricing is expected when demand is likely to outstrip supply.   (The Hotel Marketing Association's perspective on yield management indicates that they, too, believe its time has come, as indicated by their widespread adoption of REVPAR, revenue-per-available-room, and not occupancy, as the primary financial performance statistic.)

In fact, yield management is now so common in the travel industry that the converse -- that is, static pricing for airline seats, rental cars, or lodging throughout the year, regardless of demand or availability -- now would seem somewhat absurd.  Can you imagine United Airlines issuing a yellow-pages-thick printed directory of their prices every January?

These consumer expectations carry over into the vacation rental industry.

Yes, there was a time, last seen about the time JFK was in office, when static pricing ruled the day in all segments of the travel industry.  But even when it was the norm, I'd argue that it wasn't because it was the best economic strategy to maximize profits and also customer satisfaction; it was simply a product of necessity. 

Today, those constraints are gone, and new opportunities are presenting themselves.

Static Past, Dynamic Future

Until the 1960’s, sales channels for travel, like travel agents large and small, were highly fragmented (many points of contact), they were geographically dispersed (expensive to reach), and before computerization arrived, they were highly reliant upon static media like color brochures (making it very expensive to change).  The net result of these conditions was that pricing schedules were extremely static.  Travel providers set the rate only a few times a year.  Then, they sat there, regardless of the conditions over time.

Today, with over half of all U.S. travel purchased online, every single one of those factors has changed.  Yet there are some in our industry who essentially say "no worries, continue to do as you've done, even though the underlying factors have experienced seismic shifts, and even though the vacation lodging substitutes and competitors in your region are adjusting their strategies".  I don't understand that position, and it's not the one I'd recommend.

Today, airlines are the classic example of yield management; major hotel chains spent much of the late 90's implementing such strategies. 

You see this every day as a customer.  If you’re staying over a Saturday night, you’ll likely get a cheaper ticket, because the airlines and downtown hotels are each guessing you’re likely a leisure traveler.  If you leave on a Monday and return on a Wednesday, the airlines are generally going to charge you more than lengthier stays, because they've come to the conclusion that you're probably traveling on business.  If you book very close-in to your departure, you’re often going to spend more for airline tickets (if the flight is nearly full) and rental cars.

Airlines and hotels have entire revenue management teams very analytically focused on increasing their yield.

But guess what?  You're doing yield management, too.

It Shouldn’t Be Controversial.  You’re Already Doing It!
Don’t believe in yield management?  Here’s something that may surprise you -- I'd assert that 100% of vacation rental managers already do some form of yield management.

The truth is, every time you give that last minute caller a small discount (even if it’s ad-hoc), or increase the price for your highest-quality home when that golf tournament comes to town, or discount a short 3-day stay because you've got a "gap" to fill, you’re doing a form of yield management.  You may be doing it ad-hoc, you may not automate it, and you may not publish your last minute deals to a wide market, but you are doing yield management.

Even if you're simply setting the run-of-the-mill “high season/low season” rate structures you are doing yield management, only on a very course, infrequent level. 

If dividing up the year into just two parts of the year (high season/low season) can give you more control and profits, it seems logical that the more granular the level of automated control, the finer your ability might be to influence consumer behavior and maximize your overall yield (shoulder seasons, last minute, gap-filling stays, etc.), assuming other more significant forces like consumer aversion or hassle of managing multiple rates aren't at work.

Seen in this way – as a continuum of rules and controls -- the debate can be seen as centering primarily on to what degree price changes should be made (i.e., how frequent and with what variability), and whether or not there is value in using software to automate it for you. 

Some of us think there's considerable long-term value to eventually adopting pricing plans that are sensitive to daily (or even hourly!) changes in real world market conditions -- particularly supply and demand.  Some feel the period of price change is best set less frequently, say at three months, six months or more.  But regardless of where you sit on that continuum, I think it's pretty hard to argue that you'll stay in that place forever, or that your software ought not be capable of handling your evolving needs.

Behavioral Psychologists Say You're Probably Leaving Money On the Table Today

Indeed, software and tools can help provide objective insight to overcome some pricing or management biases that apparently impede our ability to maximize revenue. 

In 2006, a group of behavioral economists conducted a study which strongly suggests that suppliers of perishable goods (such as lodging) more often than not have human biases that cause them to leave money on the table vs. an optimal pricing plan:

We study a problem of selling a fixed number of perishable goods over a finite and known horizon.  After presenting a procedure for computing optimal decision policies and some numerical results on a simple heuristic policy for the problem, we describe results from two experiments involving financially motivated subjects. The experiments reveal that decision makers employ policies of the same form of the optimal policy. However, they show systematic biases to demand too much when they have many units to sell and too little when they have few to sell, resulting in between 8 and 11% revenue losses.

         -- J Neil Bearden et al., 2006 Study on Yield Management [pdf]

2009 Is Not 1969.
As mentioned above, forty years ago, static pricing was a necessity, due to the way lodging and travel was marketed by the channel.

And let's be honest, it did create a comfortable routine.  The vast majority of leisure travel shopping was done either by phone (usually with someone looking at a printed piece of paper on one or both ends), or face to face, in a travel agent’s office.  Suppliers communicated their product and pricing through paper, and could do so on a routine, expected basis.

Today, all that’s changed.  Consumers shop differently.  Your competitors (whether you consider them hotels, timeshares, other vacation rental companies, RBO's, or other vacation lodging options in your area) are changing their rates constantly.

Suppliers sell differently, and through different channels.  Competition is more easily surfaced and pricing is more transparent (and comparable across competing products) than ever before.  The pace is picking up, and we're not done yet.

More than half of all travel bookings are done online.  Even more important, perhaps, more than 80% of all U.S. leisure travel decision making is done online, even if the ultimate sale is consummated offline.  My experience as VP at Expedia.com earlier this decade, starting and running its Vacation Package business, taught me that you can never underestimate the price sensitivity of the value-conscious leisure traveler.  Surprisingly, this was true even at the higher ends of our vacation package offerings.  We'd often drop the price just by 3% or 4%, and notice a significant (more than compensating) uptick in overall revenue as a result. 

For the vast majority of leisure travelers, rates and perceived value matter a great deal.  Today's consumers can instantly compare multiple sites and products to figure out if they're getting a better deal, and they do.  You should assume that before or after they visit your site, they are visiting competitive or substitute choices in your market (or in a comparable market).  How do you stack up?

The good news for our industry is that consumers are highly accustomed to the idea of pricing inquiries changing day to day – even hour to hour – when they book airline tickets, rental cars, and hotels.  There may be some owner education there, but the good news there is that owners are travelers too, and see this kind of yield management every day.

What Is Software's Role?
At Escapia, we believe you should have easy, powerful tools to do what you need to do to run your business the way you want to.

First, the right software can provide very useful data.  You need the reports and analysis from your business (and industry) to make great decisions. 

Then, you need tools that help you take those decisions, and implement them in your business.

All the pricing, availability adjustments and marketing distribution can be done from your property management software dashboard.  And with EscapiaONE, with a single change, all of your channels – from your own inbound reservation desk to your website to your 3rd party distribution sites – get updated instantly.  

Imagine a system smart enough to automatically place the soon-to-perish inventory that you choose into a last-minute deals area, without any manual work on your part. That's just one thing Escapia can do for you today.

Pricing Should Be Used To Optimize Your Revenue

Yield management isn't always about discounting.  It's about increasing overall yield, which either means greater occupancy, greater average daily rates, or both. 

Your revenue is a function of a lot of very important things (your service, the quality and location of the homes, geography, marketing, etc.).  But certainly two of the most important variables that determine your revenue are the decisions you make that influence your occupancy levels and your rates.  If you can get a traveler to book and pay a discounted percent off your rack rate when that lodging would have been vacant, you're generally increasing your yield.  Put another way, 80% of something is a whole lot better than 100% of nothing.  You can impose rules and business decisions that limit price erosion, such as providing a discount only to last-minute travelers, or to those that stay longer with you.

Yield management is about raising prices at the appropriate time (when supply is constrained, for instance) and/or lowering prices in times when supply far outstrips demand.  An important consideration is that you don't want to train customers to all purchase at the lowest possible price.  Economists suggest that the best way to counteract that is to use rules to put "fences" around certain customer groups.  For instance, offering a last-minute discount is a great example of segmenting consumers, since those who would choose to wait for a deal are giving up the opportunity for maximum selection, and their top choice of home might very well be booked by the time the deal is available.

A logical question to ask, at all times, is “What should my rates be, at this very moment in time in order to maximize my overall revenue?” “What should my pricing rules be, in response to today’s market (demand and supply) conditions?” 

And then, once you've answered that, you need to answer it at all times.  That is, you need to ask, “Operationally, how do I translate those rules into action?”

Rate setting is not something to do just once or twice per year.  It's something that should respond to market conditions.

Importantly, at Escapia, we're not advocating one set of rules over another.  Your rules are your rules, and they depend upon many factors.  Only you can, and should, decide them.  If you are only comfortable with a few static rate periods, that’s great.  (I’d argue that you’re probably leaving serious money on the table, but that’s OK.)  If you want maximum flexibility, you need a system that can take "the state of the world" as input (for instance, your current reservation data), and act upon it in a way that's meaningful to your guest prospects and owners.

In designing EscapiaONE, our product team wanted you to have the tools to access data through powerful reports to develop/design your rules, and then easily "teach" your property management system your rules.  In a nutshell, that’s what yield management is.  Determine your rules, create the rules via IntelliRate, and EscapiaONE™ does the work for you, throughout your entire sales channel.

Set Up The Rules The Way You Want To
For instance, you might want to experiment with a pricing strategy that says:

• Anyone who books within 21 days of the lodging is helping me get revenue when I might not normally get it.  I’m going to give them an X% discount.
• Anyone who stays more than 4 nights gets an extra night free.
• If my overall occupancy is greater than 80% for a certain period, then increase the rates for any remaining unit by 10%.
• During the winter period, price these homes at $X, $Y, and $Z, but for Christmas week, it goes up by 20%.

Written this way, these are rules that might be easy to write on paper, but often aren't so trivial to implement in real life.  Some of them are what we computer-people call "stateful", meaning, they depend upon the state of the world at that particular time.  With competing property management systems, you could drive yourself crazy constantly updating your rates based on the state of the world as it exists at that moment.

But the right software can help.  I see it a bit like the “Inbox Assistant” style message filtering rules that are so common in email programs:  (e.g., “file any email with “Reservation Inquiry” in the subject line into the following folder”, “play a sound when a booking confirmation notice arrives”, etc.). (See our Yield Management overview for more.)

Your Rules Are Your Rules
At Escapia, we don’t pretend to know the precise rules that are best for you.  We also think you may have different rules for different properties, and we've given you that control.

We do see it as our job to equip you with the best decision-making system (and data) for determining what those rules should be, and then “teaching” them to your software, so you don’t have to constantly update your rates, or logging into multiple systems to distribute them to your travel distribution network.  That’s what EscapiaONE is all about – enter the data once, and it flows everywhere.

Is Yield Management Right For You?
Yes.  You’re already doing it, and so is your competition. The question, I believe, is, to what degree do you expect to further fine-tune your yield management control, and when.

We believe that only you can and should answer that question, but we want to provide you the right tools to offer the right price to the right customer at the right time, regardless of the pricing plans you decide to employ.

Comments

[Mike]

Great post. I'd go as far to say that not only "100% of vacation rental managers already do some form of yield management" but RBOs are doing it too ... and doing it well.

Sounds like some folks in the industry are balking at the idea of yield management based on the tone of your post but I think it's just the business-speak that is causing a stir. Yield management, as you mentioned, is quite intuitive, consumers expect it, and many are doing it.

Kudos to Escapia for putting out tools to help automate it.