Hotel Yield Management Educational Kit INDEX INTRODUCTION GENERAL OVERVIEW 1. INTRODUCTION 1.1 The Changing Mark etplace 1.2 The Paradigm Shift 1.3 How To Measure Business Performance 1.4. The Management Problem 1.5 Yield Management Users: The Current Situation 1.6 Todays Limit In Applying Yield Management 2. WHAT EXACTLY IS YIELD MANAGEMENT 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 The Yield Management Definition The Trade-off Between Rate and Revenue The Revenue Impact Of Rate Differentiation Market Segmentation And Fencing When Do Segments Book The Information Problem Hotel Yield Management Objectives The History Development 13 13-14 14-15 16-17 17-19 19-21 21-22 23-24 24-25 25-26 26-28 29-30 30 31-32 33 33-34 35 03-12

3. PRECONDITIONS FOR THE SUCCESSFUL APPLICATION OF YM 3.1 Basic Yield Management Requirements 3.2 Yield Management Benefits In View Of Property Types 3.3 Basic Yield Management System Requirements 4. TYPICAL YIELD MANAGEMENT SYSTEM LAYOUT 5. THE YIELD MANAGEMENT CONCEPT 5.1 5.2 5.3 5.4 The Yield Management Control Dimensions Methods Of Capacity Control Yield Management Decision Support Tools Forecasting Techniques 45

35-36 38-39 39-43 44

45-47 47-49 50-53 53-56 56 56 56-61 61-62 62 63 63 64 64-65 63 66-67

6. RESERVATION CONTROLS 6.1 6.2 6.3 6.4 6.5 6.6 The Sales Control Toolbox Overbooking Physical Inventory Optimal Inventory Allocation Rate Classes Duration Control How To Manage Group Requests Managing Product Inventory

7. RESERVATION SYSTEM TOPICS 7.1 Separate And Nested Booking Classes 7.2 Virtual Nesting Structure 7.3 Hotel Yield Management: Where are we going

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8. HOW HOTEL ROOMS WILL BE BOUGHT & SOLD TOMORROW 8.1 8.2 8.3 8.4 8.5 8.6 The Communication Highways Reservation Processing: Manual versus Total Access Electronic Distribution Distribution Channels & Cost Control The Difference Between Hotels and Airlines Final Remarks Outlook 68

68 69

69-73 73-74 74 74-75 76-77 78-81

DEFINITION OF TERMINOLOGY WORKSHOP YIELD MANAGEMENT : Objective and Solution

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HOTEL YIELD MANAGEMENT HOTEL YIELD MANAGEMENT HOTEL YIELD MANAGEMENT HOTEL YIELD MANAGEMENT - A DEMAND DRIV EN DECISION SU PPORT TOOLBOX F OR THE A DEMAND DRIV EN DECISION SU PPORT TOOLBOX F OR THE A DEMAND DRIV EN DECISION SU PPORT TOOLBOX F OR THE A DEMAND DRIV EN DECISION SU PPORT TOOLBOX F OR THE LODGING INDU STRY TO IMPROV E REV ENU ES LODGING INDU STRY TO IMPROV E REV ENU ES LODGING INDU STRY TO IMPROV E REV ENU ES LODGING INDU STRY TO IMPROV E REV ENU ES Index

INTRODU CTION / GENERAL OV ERV IEW INTRODU CTION / GENERAL OV ERV IEW INTRODU CTION / GENERAL OV ERV IEW INTRODU CTION / GENERAL OV ERV IEW A silent revolution is tak ing place in the lodging & travel industry, affecting the way companies are managed and operated in a progressively deregulated economic environment. The concept of the great importance of information management relative to the traditionally leading role of operations management, accepted today in most industry sectors around the globe, is finally beginning to penetrate the lodging and travel industry too. Information & decision technologies have arrived to assist service and lodging industry decision makers in meeting the c hallenge to stay competitive, and indeed thrive, in this competitive environment by taking advantage of state-of-the-art developments in new tec hnology, operations research, and management information systems (MIS). The lodging & travel industry generally and in particular Americ an air carriers, have been motiv ated by deregulation policies and marketplac e pressures to develop new decision support systems and demand driven inventory. Management systems to improve their bottom line. Four main areas of information management applications, supported by current technology developments and a new, marketing and customer demand driven management culture, have been identified in playing a leading role in growing ac commodation book ing volume, revenues and an overall improvement of financial results: Marketing automation and product distribution through computerised reservation sys tems (CRS) and communication network s. Overall revenue growth and customer service quality improvement through Guest History and Marketing Databases. Executive information systems and customer databases to improve customer services, and to enable early problem identification and proactive distribution cost, revenue and targeted marketing management. Minimising denials and revenue loss es through yield management systems and concepts.

Apart from serving the identical customer groups, lodging and passenger transport providers have on e major problem in common: they produce and offer a fixed inventory of perishable products which cannot be stored, if uns old at a specific point in time, to a variety of customer groups with different purchasing behaviour. These services are typically sold at different rates or tariffs under different book ing conditions to different market segments, through a variety of distribution channels, to cope with demand swings and market trends.

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A TYPICAL SITU ATION A client calls the hotel reservation office, requesting a discount rate single room from next Wednesday night through Friday. The question is: does the reservation offic e accept that reservation or not? If it was the last single room available, it would not like to accept this reservation, IF it projected that between now and Wednesday night there was the likelihood of a booking request from a rack rate transient customer for the same arrival day and number of nights. Neither would the reservation department want to accept that discount reservation, IF it could anticipate a late-booking request from a customer, who would like to s tay from Wednesday through Sunday, since this customer also represents a greater revenue. In fact, a dis counted rate for a longer stay may be significantly more revenue than a shorter stay at rack rate. How does the hotel reservations manager know, how many reservations to take for what type of rooms at what rates or for what arrival and departure dates? THAT'S YIELD MANAGEMENT! YIELD MANAGEMENT DEF INITION The term "Yield Management" has been coined in the airline industry and its objective is to manage the product inventory (seats on a given flight, rooms for a given night) in such a way as to maximise revenue . In the airline context, "Yield" is expressed in cents per passenger mile, which is not a very useful definition to be used for non-airline s ervice providers . Yield Management should ac tually be called "Revenue Management" or "Inventory Control", sinc e it is revenue, not (airline) yield to be maximis ed. Yield or revenue management is not really new to Hoteliers, since physically identical rooms have been sold for higher prices during high season and for lower prices during low season and weekends for generations. This was done by more or less experienced staff with a varying talent to anticipate overall demand at certain days, weeks or periods of the year for a limited supply of rooms.

Yield management (or revenue management) is an economic discipline appropriate to many s ervice industries in which market segment pricing (price differentiation) is c ombined with statistical analysis to expand the market for the service and increase the revenue "yield" per unit of capacity. It is the set of demand forecasting techniques, optimisation models, and implementation procedures which collectively determine which reservation requests to accept and which to reject in order to maximis e revenue . The principles of yield management had their origins in the airline industry, but have also taken hold widely throughout the rest of the travel industry. Almost all major lodging c orporations, airlines, cruise lines, car rental and passenger railroad firms are practising more or less sophisticated yield management methods, maintain inventory control systems and have either developed their own software and hardware configurations in conjunction with corporate CRS or are currently developing their own systems or screening the market for available integrated or stand-alone yield management software. WHEN IS ITS U SE APPROPRIATE ? The intelligent use of yield management principles can be used to increase bottom line profitability in any service industry possessing the following characteristics: Demand for the service can be divided into distinct market segments and price elasticity varies among the customer segments.

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The capacity supply is relatively fixed and it is costly or impractical to add or subtract inventory in the short run. The inventory is perishable and cannot be stored to be sold at a later date.

The marginal cost of selling an additional unit of inventory is low. The service is ordered in advance of its delivery / consumption. Demand for the service fluctuates and cannot be predicted with a high degree of certainty. The physically (not commercially) identical product can be sold to different market segments for different prices under different booking conditions. Clearly, hotel rooms fit that product / service profile.

Ma rk et Se g m e n ta tio n Ma rke t Se g m e n tatio n Ma rk et Se g m e n ta tio n Ma rke t Se g m e n tatio n : Demand can be segmented into business and pleasure segments using discount rate restrictions. F ixe d Ca p a city F ixe d Ca p a city : F ixe d Ca p a city F ixe d Ca p a city Hotels have a fixed number of rooms and cannot add 100 rooms when a major convention is in town. Pe rish a b le In ve n to ry Pe rish a b le In ve n to ry Pe rish a b le In ve n to ry Pe rish a b le In ve n to ry: Hotels cannot sell last night's unsold rooms today. Lo w Ma rg in al Co s t o f Sa le Lo w Ma rg in a l Co st o f Sa le : Lo w Ma rg in a l Co st o f Sa le Lo w Ma rg in al Co s t o f Sa le The marginal cost of cleaning and making up a room plus incremental supplies and utilities is low relative to the additional revenue, generated by a unit sale. Ad v a n ce Sa le s Ad v a n ce Sa les Ad v a n ce Sa le s Ad v a n ce Sa les : Reservations for rooms are accepted days, weeks and months in advance (even years for major conventions). U n ce rta in ty o f De m a n d U n ce rta in ty o f De m a n d U n ce rta in ty o f De m a n d U n ce rta in ty o f De m a n d : The demand for hotel rooms exhibits regular seas onal and day-of-week patterns, but cannot be forecasted precisely for any particular night. Ra te Diffe re n tia tio n Ra te Diffe re n tia tio n Ra te Diffe re n tia tio n Ra te Diffe re n tia tio n : Different, demand driven inventory controlled rates, combined with segment-specific booking restrictions (fencing), are at the core of modern Yield Management applications.

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HOW DO ES YIELD MANAGEMENT WORK ? The first step in a hotel yield management program is to carefully define the various segments of the market for rooms served and their book ing behaviour . Ways can then be designed, allowing hotel management to charge different prices to different market segments (under specific booking conditions). The objective is to expand the market and increase the hotel revenue potential by charging higher prices to those market segments which are little responsive to changes in price level and lower prices to those which will respond more strongly to a price reduction by increasing their purchases by a large enough amount to more than offset the revenue reduction resulting from the discount. In the travel industry, the business segment of the market can be expected to be less sensitive to price than the leis ure segment. Travel companies offer discounts to the leisure segment of the market, book ing well in advance of departure. Late booking business travellers are largely precluded from taking advantage of these discounts through the imposition of advance purchase, length-of-stay requirements and/or other booking restrictions. In the harsh world of perishable value and fixed supply the revenue maximisation objective becomes more operational when divided in two: when demand exceeds supply, yield management dictates decisions to maximise the average rate received for guest rooms. When supply exceeds demand, the objective shifts to the optimisation of revenue by raising occupancy, even at the expense of average rate .

YIELD MANAGEMENT CONTROLS A hotel yield management system maximises revenue (or net revenue) by controlling reservation (room) inventory in the following ways: 1. Ca p a city Ma n a g e m e n t :

For each class of rooms, a statistically supported total number of reservations is acc epted in exc ess of actual physical supply of rooms in order to offs et the effects of early check -outs, c ancellations and noshows between now and arrival date. This effectively trades off the risk (and cost) of some oversales versus the added revenue of reducing s poilage (rooms which go unoccupied after res ervations were closed out). On arrival day a more common form of capacity management takes place: the number of walk -ins to accept is being determined, based on expected cancellations an no-shows for that day. Capacity management (or s elective overbooking) will usually vary by room class, i.e. it might be economically advantageous to overbook more in lower classes of rooms knowing that upgrading to higher classes of rooms in an acceptable solution to an overs ales problem . The amount of overbooking to be done in this context is, of course, dependent on the demand for the higher rate class of rooms. In more sophisticated systems, the amount of capacity management may als o be influenced by availability of rooms at sis ter hotels or competing hotels. The instrument of overbooking is easier to manage for airlines, since c ustomers can more easily be compensated by upgrading, free travel vouchers or by being offered a seat on another flight. In the hotel business, a customer might get lost this way forever, so authorisation and overbook ing levels should be on the very safe side, taking local occupancy levels of competitors into account.

2. Disco u n t Allo ca tio n : Page 6of 81

For each class of rooms, reservations are requested at v arious available rates discounted from rack rate. The primary objective here is to protect enough remaining inventory for sale at a high rate satisfy the projected demand for rooms at that rate between now and arrival date. This process is repeated for each rate level from rack rate on down. This requires a food demand forecasting capability, a nested inventory structure, and a good stochastic optimisation technique to determine how much inventory to protect for each room class and rate category . A secondary objective of limiting discounts is to encourage "buy-ups ", this requires a good estimate of price elasticity or probability of upgrading. 3 . Du ra tio n Co n tro l : Duration control places limits on which reservation request to accept in order to protect sufficient space for multi-day reques ts which may represent more net revenue value to the hotel. For example, if Wednesday is close to selling out but other nights are not, a hotel may want to protect the last few rooms on Wednesday for reques ts for Tuesday through Thursday or Wednesday through the weekend, even at a discounted rate, rather than accept reservations for Wednesday only, because the multi-day reservations represent more total revenue to the hotel. Before setting those booking limits, though, the true "values" of reservations requests must be determined in full view of up-line or down-line displacements, i.e. if Tuesday, Wednesday, and Thursday are all close to capacity, then accepting a Tuesday through Thursday reservation at a dis counted rate may not produce as high an expected contribution to the net revenue as holding out for individual night's reservations at close to rack rate. 4 . Gro u p Av a ila b ility : Another important factor in yield management systems for hotels is controlling availability to conventions and groups. This includes providing group booking limits as well as suggestion alternative group space in terms of size, rate, room class, or specific dates. The group optimisation process needs to take the net peripheral (F&B etc.) revenue into account, generated in addition to rooms revenue by accepting a group. Paradoxically but logically, optimal group rates usually rise with the size of the group for all periods, where there is demand from mark et segments, willing to accept higher rates, since the probability of transient, higher value guest displacement rises with the size of the group. 5 . Su p p ly Co n tro l : Since hotel firms typically offer several products (e.g. basic, intermediate, and premium), a multiple product nesting structure is more appropriate, where shared inventory is us ed to automatically "upgrade" customers when the high valued product is not going to sell out. Thus, there is really a two-dimensional inventory nesting structure - by product and the rate class. This type of a structure c an significantly improve utilisation and overall revenue. Hotel Management can't change the total number of available rooms short term, but c an manipulate a given inventory of rooms of different types and rate class es by reassignment of room to varying product categories. Example: double room for single use, executive type to group or discount class. Hotel Yield management does not change prices offered of the number of rooms available. It only determines the maximum amount of each product to sell for what rate or through which booking class under what booking conditions in order to maximise revenue. Yield Management does not generate demand. It only forecasts, accepts, rejects or redirects demand. POLICIES, STRATEGIES & TACTICS Page 7of 81

to

Good and timely demand forecasts on their own are not good enough. Systems and procedures must be in place to take advantage of these predictions. Hotels needs rate setting policies, promotional packaging, appropriately trained staff, yield oriented incentive programmes and automated systems designed to maximise yield to realise its full potential. Some of the following policies are in effect in many hotels today. Wh e n d e m a n d is h ig h : Wh e n d e m a n d is h ig h : Wh e n d e m a n d is h ig h : Wh e n d e m a n d is h ig h : Restrict or close-off availability of low rate categories and low yield packages. Require minimum lengths of stay. Only commit rooms to those groups prepared to pay top rate. Wh e n d e m a n d is lo w : Wh e n d e m a n d is lo w : Wh e n d e m a n d is lo w : Wh e n d e m a n d is lo w :

Make special (inventory controlled) promotional rates available when usual rates meet with customer resistance. Seek group business from companies or market segments known to be rate sensitive. Promote "limited availability" low cost packages to the local transient market. These tactic s work. But it is nearly impossible for management to stay on top of the situation. Whilst burdened with innumerable other responsibilities, it must continuously update forecasts for individual arrival days for months or even longer time periods into the future, modify tactics, inform other departments and monitor the applic ations and revenue results of thes e tactics. PRACTICAL REQU IREMENTS In order to implement a yield management program there are a number of practical prerequisites which must be met first. 1. Acce ss to Da ta In order to forecast demand and valuate room inventory, the following current and historical information and data, commonly ex tracted from the reservation system and / or property management system, must be available: De m a n d : De m a n d : De m a n d : De m a n d : Arrival date Departure date (book ed and actual) Date of booking Date of cancellation / no-s how Number in party Room c ategory code Rate class code Page 8of 81

Actual rate paid Commission expense Food & Beverage (peripheral) revenue charged to room Ca p a city: Ca p a city: Ca p a city: Ca p a city: The number of saleable rooms by room category Ra te s: Ra tes : Ra te s: Ra tes : The current rates by rate class (per room category) After the completion of a Yield Management Audit, the assembly of the necessary databases in order to perform forecasting research and to develop optimisation models is usually the first major task in the development of a yield management system. RESERV ATION SYSTEM CONSIDERATIONS Automated systems have an edge, but they must be properly programmed. With the best of intentions , even major hotel groups still get it wrong. Until recently, some systems closed rates on a sc hedule according to the number of rooms left to sell . Someone calling when there were 200 rooms left was automatically quoted the lower rates than the person inquiring a week later when only 50 rooms remained. Though this sounds reasonable, a more complete approach needs to look at other factors such as forecast demand , the time remaining to sell the unsold rooms, and the impact of one day on its neighbouring days of the week . Only then resultant quotations can truly foc us on maximum revenue. The reservation system and the local property management sys tems are the electronic stores in which all sales and cancellation activity occur. Sales to the various customer types (market segments) can and should be controlled in the reservation system. Due to the potentially large volume of controls and the impact on res ponse time, the reservation system usually is the single mos t limiting factor, influencing the performance of a yield management system. Most reservation s ystems in the lodging industry maintain independent product and rate class c ontrols , allowing to limit the number of discount sales, but no nested inventory controls. This can result in closing of higher value rate classes, while discount classes are still available for sale. This is certainly inc onsistent with the revenue max imisation objec tives of yield management. The inflexibility of computerised CRS or PMS stands often in the way of maximising revenue. On a multi-day stay these s ystems will typically quote in one of two ways: They will display only thos e rates that are available o the day of arrival. They will display only thos e rates that are available on all the days included in the stay. Both approaches undermine the yield management objec tive. Neither provides the reservation agent with appropriate rates based on the aggregated demand for all the days involved in the stay. The implementation of a yield management system my require significant modifications to a hotel's CRS and PMS. These changes may be more costly and time consuming than the development of the decision support system proper.

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Too many PMS users still erase most valuable past transaction data (e.g. guest history), necessary for effective yield management, regularly from their hard discs, without storing them on nowadays lowcost devices for later analysis . Apart from database development and data storage, necessary adaptations or changes usually have to be made in the following tow areas: Data Exc hange (between the PMS / CRS and the YMS. Internal controls (mechanisms in the CRS through which yield management dec isions are carried out). Traditional hotel reservation systems have not been designed to accommodate yield management applications (inventory nesting structures ) and usually offer only a very limited number of booking classes, causing loss of potential revenue. PROCEDU RES & PERF ORMANCE CONTROL When hotels undertake a formal planning procedure, all too often the approach used is "last year plus X %". This method feels safe, but can be compared to driving a car by looking in the rear view mirror. It tends to perpetuate the past, both those things that worked and those that did not. Planning must begin with a vision, and then be made operational with detailed strategies for attaining results. It is not uncommon to read plans that have contradictions and interdepartmental conflicts unintentionally built in. For the sales department to achieve room night goals it will need to use function rooms for meetings and exhibits. This undermines the ability of the banquet department to realise its F&B targets. The result may well be conflict and dissension. Without true yield management, fully supported by senior management, departmental "tunnel-vision" and isolated budget orientation can be very detrimental to overall hotel revenue. Tactical plans need to be more than a list of activities, assignments and completion dates. They should read like military plans with "if this, then that" statements, all pointing the direction of increased revenue. In short, what is needed is a cohesive set of strategies, totally supported by inventory control tactics for all eventualities, with the ability to respond rapidly shifting market conditions. Employees naturally conc entrate on those activities that have the greatest impact on their performance assessment criteria. Experience has shown that reservation agents monitored on average call duration produce short calls, often by offering discounted rates. Those receiving regular feedback on their individual revenue contribution increase both up-selling and the conversion of enquiries to reservations. Similarly, many training and performance monitoring systems sabotage yield. As an example, when a sales Manager's effectiveness is measured by the number of roomnights sold, he or she receives an implicit message that every room-night, regardless of the market conditions of the days actually book ed, makes the same contribution to the company's income statement. It should be clear that a group paying $ 70 when demand is low is worth more to a hotel than a group paying $ 100 during peak season, when the hotel fills up anyway for high rates. Traditional meas ures (roomnights, occupancy) often miss the revenue maximisation mark. Regular and germane feedback provides direction and priorities to employees, extends encouragement and enables yield management techniques that would otherwise be impossible. Feedback on the effect of the tactics employed leads to their continual refinement and renewal. Statistical track ing of the results of different capacity / rate allocation strategies and ac tual yield Page 10of 81

management system performance allow management to measure the return on investment into the system and the effectiveness of the yield management department. What is needed is a method for measuring performance that fosters decisions in alignment with the principles of yield management.

A BRIEF SU MMARY 1. Ob je ctiv e s Maximise customer revenue or profit. Set res ervation availability based on value. Adjust minimum available price based on daily demand. Limit exposure to market share erosion or revenue dilution.

2. Co n tro ls Overbooking Discount rate allocation Duration control Group optimisation Supply control

3 . Ap p lica tio n s Yield management techniques apply to a variety of situations, where: Many customer types (segments) compete for a limited supply of inventory (product / rate / duration). Where demand is uncertain and supply is limited and / or inflexible. And where unused inventory of perishable products looses its value and cannot be "stored" as in the manufacturing industry. Cu rre n t a p p lica tio n s in clu d e : Airlines Car Rentals Cruise Lines Financial Institutions Hotels Railroads Telecommunications Tour Operators

4 . Bas ic Syste m Req u ire m e n ts : A reservation sys tem A dec ision support system

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A database of past reservation and occupancy information, including the pattern of reservation build-up prior to arrival date A s ystem to forecast the demand for reservations between now and arrival date / departure time by rate class / room type, based on historical demand data An optimisation model to determine which combination of expected reservation reques ts and authorisation limits results in the greatest expected revenue A monitor an performance control system OU TLOOK The development gap between airlines and the non-airline YMS users, such as hotels, will not be overcome quickly, since generally speaking, many potential hotel users will have to develop or purchase latest generation property management and central (computerised) reservation s ystems, a communication infrastructure and, where necessary, interfaces first, in order to make full use of the revenue enhancement potential of state-of-the-art yield management applications. Since only a company specific part of the total booking transaction volume currently passes through hotel CRS, hotel yield management systems will, with some exceptions, most likely be property based for the foreseeable future, since all guest transactions (in digital format), including reservations, needed for demand forecasting and optimal inventory allocation, are normally captured on-site by property management s ystems. Some yield management s ystems already consider length of stay (duration control) in determining reservation request value and therefore availability. Furthermore, greater detail in forecasting is required than in the airline industry. In addition to demand, room supply forecasts need to be developed, since cus tomers arrive and depart throughout the day, a real-time decision support system is required to control availability to walk-in demand and additional stays. Investments in high-tech solutions, though, will only pay off, if a major part of the total funds invested in a Yield Management Program is earmarked for continuing human resource development and the creation of a company specific Yield Management Culture.

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1. INTRODU CTION 1. INTRODU CTION 1. INTRODU CTION 1. INTRODU CTION Index 1.1 THE CHANGING MARK ETPLACE

Du rin g th e p a st d e ca d e , a v e ra g e p ro fita b ility o f th e lo d g in g , tra v el a n d p a ss e n g e r tra n sp o rt in d u s trie s h a s d e clin e d a n d is in su fficie n t in co m p a riso n w ith o th e r s e cto rs o f th e se rvice e co n o m y.

Ap a rt fro m risin g co s t fo r fin a n cin g , e n e rg y, p e rs o n n e l a n d o th e r o p e ra tio n a l e xp en se s, so m e o f th e m a in re a so n s fo r lo w p ro fita b ility a re th e fo llo w in g :

Th e g ro w in g g a p b e tw e e n su p p ly a n d d e m a n d fo r h o te l ro o m s (at cu rren t m a rk e t p rice s ) in m o st d e stin a tio n s (o v ersu p p ly ). Ou td a te d cra fts o rie n te d m a n a g e m e n t m e th o d s. Hie ra rch ica l m a n a g e m e n t stru ctu re . GM's w ith F & B, n o t m a rk e tin g b a ck g ro u n d . Bu d g e t d riv e n , n o t b y m a rke tin g o p p o rtu n itie s. U n d e rd e ve lo p e d o r o u td a te d in fo rm a tio n m a n a g e m e n t a n d s ys te m s in fra s tru ctu re . Sys te m s d e p a rtm e n ts re p o rt to F in a n ce , n o t Ma rke tin g . La ck o f m a rk e t in te llig e n ce (re se a rch /a n a lys is ). La ck o f s e g m e n t d e m a n d fo re ca stin g ca p ab ilitie s . In s o m e re g io n s, d e stin a tio n s a n d m a rk e t se g m e n ts, o v e rb u ild in g h a s cre ate d d ra stic o v e rsu p p ly o f ro o m s, d e p res sin g a ve rag e o ccu p a n cie s, ra te s a n d y ie ld s. Du rin g th e 8 0 ie s, th e No rth Am e rica n lo d g in g in d u s try lo s t so m e 12 b illio n U S $s . Se lle rs Mark e t Th e ra te s (in re a l te rm s) is h isto ry . o f th e g o o d o ld d a ys w ith s tro n g d e m a n d , re a so n a b le s u p p ly, h ig h

Bu ye rs Ma rk e t To d a y w e e xp e rien ce a d yn a m ic a n d a g g re ssiv e ly co m p e titive co n s is tin g o f a n e ve r la rg e r n u m b e r o f d iffe ren t m a rke t s e g m e n ts (cu sto m ers) a n d p la ye rs in th e d istrib u tio n ch a in . Ma rke tin g Sa le s Th e term s: and w e re n o t b e in g vie w e d a s im p o rta n t m a n a g e m e nt fu n ctio n s in o u r in d u stry a n d a jo b in o p era tio n s o ffe re d b e tte r ca re e r o p p o rtu n itie s . Page 13of 81

Co p in g w ith th e ch a lle n g e, to d a y 's lo d g in g in d u stry is fin a lly sh iftin g its fo rm e rly m a in e fficie n t d ay -to -d a y o p e ra tio n s fo cu s o n p ro d u cts, to w a rd s stra teg ic a n d ta ctica l m a n a g e m e n t p rio ritie s o f: Ma rk e tin g Sa le s Distrib u tio n De m a n d fo re ca s tin g Pricin g In ve n to ry co n tro l Re ve n u e m a n a g e m e n t

In te rn a tio n a l tra ve l a n d to u rism h a s g ro w n to b e a g lo b a l p h e n o m e n o n an d d w e lls o n ly w h e re m o ve m e n ts o f b o d ie s a n d in fo rm a tio n is n o t re s tricte d b y reg u la tio n s, p o licie s o r d e -fa cto m o n o p o lie s. Th e a cce le ra tin g sp e e d o f m a rke t p e n e tra tio n a n d eco n o m ic im p o rtan ce o f in fo rm atio n te ch n o lo g y u tilis a tio n is o n ly u n d e rsta n d a b le o n th e b a ck d ro p o f a m a jo r in te rn a tio n a l s h ift in e co n o m ic p o licie s . Ca ll it p riv a tis a tio n , lib e ra lis a tio n , d e re g u la tio n o r sta n d a rd isa tio n ; w h a t is b o ils d o w n to is e a sie r a cces s to m a rk e ts , cu s to m e rs , p ro d u cts a n d in fo rm a tio n .

1.2 THE PARADIGM SHIF T Index Wh a t h ap p e n e d to th e Sw is s Wa tch Ma n u fa ctu rin g in d u stry ? We s e e th e a d v e n t o f a n e w b re e d o f e n tre p re n e u rs w ith a g lo b a l v is io n a n d e q u ip p e d w ith th e la te s t g e n e ra tio n o f in te llig en t te ch n o lo g y, m u ltim e d ia a n d in tera ctive co m m u n icatio n ca p a b ilitie s, co m p u te r re se rva tio n a n d in v e n to ry co n tro l sy ste m s . Th e y a re lea v in g th e ir m a rk s a n d s h a p e th e tra ve l a n d a cco m m o d a tio n m a rk e tin g e n v iro n m en t o f th e n in e ties a n d b e y o n d . Th e g ro w th o f a u to m a te d in v e n to ry co n tro ls (YMS), MIS/EIS-a p p lica tio n s, b u s in e s s rep o rtin g ca p a b ilitie s a n d ele ctro n ic p ro d u ct d istrib u tio n is re v o lu tio n is in g th e tra v e l a n d lo d g in g in d u stry.

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It p ro v id e s su b sta n tia l b en e fit to in d ivid u a l p ro p e rtie s a n d h o te l g ro u p s m a rk e tin g e ffe ctive ly a n p ro fita b ly th ro u g h th e se n ew sa le s a n d co m m u n icatio n ch a n n e ls in a h ig h ly co m p e titiv e e n v iro n m e n t. U n til re ce n tly, au to m a te d d is trib u tio n sy ste m s w e re p rim a rily u s e d to s e rv e th e n e e d s o f a irlin es d is trib u tin g to th e b u sin e s s o r co rp o ra te s e cto r. Th e lo d g in g in d u stry , h is to rica lly d o m in a te d b y in d ivid u a l p ro v id e rs a n d sm a ll o r m e d iu m size g ro u p s, h a s o n ly re ce n tly b e e n a b le to fu lly ta ke a d v a n ta g e o f a u to m a te d d istrib u tio n a n d re s e rva tio n s co n tro l o p p o rtu n itie s . It is re a lis in g , th a t ACCESS to in v e n to ry is p a rt o f th e p ro d u ct a n d cu sto m e rs g e t tire d o f tra d itio n a l re se rv a tio n s p ro ce ss (liste n in g to th e m u s ic ...). Ma n y h o te ls still re ly o n w h o le sa le rs, p a ck a g e to u r o p e ra to rs , m a rk e tin g co n so rtia o r o th e r th ird p a rty v e n d o rs to w h o m th e y h a ve d e le g a te d a ll o r p a rts o f th e n e ce ss a ry s ale s , m a rk e tin g a n d d istrib u tio n m a n a g e m e n t fu n ctio n s . Th e y h a ve lo st co n tro l o ve r m a jo r p a rts o f th e ir in v e n to ry (a n d m a rg in s) an d th u s o ve r th e ir d es tin y . Th e im p o rta n ce o f m ark e tin g , in fo rm a tio n , in ve n to ry a n d d is trib u tio n m a n a g e m e n t re la tiv e to th e tra d itio n a lly le a d in g ro le o f o p e ra tio n s m a n a g e m e n t is fin a lly b e in g a cce p te d b y lo d g in g a n d tra ve l in d u s try le a d e rs.

CHANGING MANAGEMENT OBJ ECTIV ES Ne w m a n a g e m e n t te ch n iq u e s, in fo rm a tio n an d d e cis io n s u p p o rt te ch n o lo g ie s h a v e a rriv e d to a ss is t h o s p ita lity in d u stry d e cisio n m a ke rs in m e e tin g th e ch a lle n g e to s ta y co m p e titive . Wh a t is n e e d e d in to d a y's o ve rcro w d e d m a rk etp la ce is a re o rie n ta tio n to w a rd s a rev e n u e d rive n a n d d e m a n d o rie n te d d e cisio n m a kin g p ro ce s s to o p tim is e cu s to m e r a n d ra te m ix. Ho w ca n h o te l m a n a g e m e n t m e a s u re th e re ve n u e a n d cu s to m e r lo ss ca u s e d b y s e llin g o u t in ve n to ry a t d isco u n t ra te s e a rly to m a xim is e o ccu p a n cy a n d n o t b e in g a b le to d e m a n d a t a n y ra te s ervice clo s e to a rriv a l d a y ?

Su re ly, th e ra te d iffe re n tia l m u ltip lie d b y th e n u m b e r o f d e n ie d h ig h yie ld b o o k in g s h a s b e e n lo s t, b u t a ls o ra ck ra te g u e s ts to co m p e tito rs a cro ss th e stre e t. Ho w ca n h o te ls m a n a g e m e n t k n o w , w h a t d e m a n d a n d re su ltin g re v e n u e s a re a t risk , w h e n ta k in g d e cisio n s to d a y w ith a n im p a ct o n fu tu re a rriv a l d a ys , so le ly b as e d o n e xp erie n ce, p ro fe ss io n a l in tu itio n a n d b u d g e t g o a ls ?

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YIELD MANAGEMENT CONCEPTS AND TOOLS HAV E BEEN DESIGNED TO IMPROV E AND SU PPORT BOTTOM-LINE ORIENTED DECISION-MAK ING

1.3 HOW TO MEASU RE BU SINESS PERF ORMANCE Index

Wh en ra tes w e re firm a n d ca p a city fo r sa le lim ite d , b u s in e ss s u cce ss w a s e a s ily fa vo u rite , a n d d e ep ly in g ra in e d b e n ch m a rk d e te rm in e d b y th e lo d g in g in d u s try's :. OCCU PANCYOCCU PANCYOCCU PANCYOCCU PANCY MAX IMU M REV ENU E At s ta b le fixe d a n d ra isin g o ccu p a n cy le ve ls th e m a in o b je ctiv e o f h o te l m a n a g e rs. co s t, a fu ll h o u s e

re p re se n te d

Tra n sla te d to th e re ta il in d u s try, th is w o u ld m e a n to m e a su re co m m e rcia l s u cce ss b n u m b e r o f cu sto m e rs e n te rin g th e s h o p , n o t re v e n u e p e r s q u a re m etre . th e Th e fo llo w in g s ta te m e n t p re v a ils in p re ss re le as e s, re p o rts to sh a re h o ld e rs a n d d iscu s sio n s b e tw e e n h o te l p ro fe ss io n a l: "Du rin g th e p a s t p e rio d , o u r o ccu p a n cy le v e ls im p ro ve d fro m 5 5% to 5 9 % a n d th e b re a k -e ve n p o in t w ill b e re a ch e d a t X %. Th o u g h p o ss ib ly re fle ctin g o ve ra ll d e stin a tio n d e m a n d sw in g s, th is kin d o f s ta te m e n t is u s u a lly m o re o f a p ro p h e cy th a n a s ta tis tica lly s u p p o rte d fo re ca st. o ccu p a n cy h a s to b e p a id fo r in te rm s o f It n e g le cts th e fa ct th a t in a b u ye rs m a rk e t lo w e r a ve ra g e y ield s a n d co n trib u tio n s to fixed co s t. Du e to va ryin g d e m a n d , p rice e la sticity a n d a ve ra g e ra te s in d iffe re n t m a rk e t s e g m e n ts , in m o st ca se s , b re a k -e ve n o ccu p a n cy can n o t b e d e te rm in e d p re cise ly e n o u g h in a d va n ce fo r a fu tu re p e rio d . Th e re a so n is a n a lm o s t in d u s try-w id e la ck o f d e m a n d fo re ca stin g ca p a b ilitie s (h u m a n a n d te ch n ica l re so u rce s ) a n d d e n ial re co rd in g sy ste m s a n d a p p lica tio n s . In situ a tio n s o f o v e rs u p p ly, o v e ra ll o ccu p a n cy ca n b e, circu m stan ce s a llo w in g , ra is e d b y: Disco u n tin g o f a ll o r sp e cific p ro d u cts. De liv e rin g a n im p ro v e d p ro d u ct at co n s ta n t ra te s (u p g ra d e s e tc.). Th e first o p tio n u s u a lly re su lts in g ro w in g s a les to p rice o r m a rg in s en s itive s e g m e n ts (re s e lle rs , co rp o ra te , le is u re e tc.) a n d o fte n re su lts in re v e n u e lo ss e s n o t co m p e n s a te d b y th e o ccu p a n cy im p ro v e m e n t.

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In m o s t o f th e ca se s , th e s e re v e n u e lo sse s sta y u n acco u n te d fo r, d u e to la ck o f d ata a n d s yste m a tic a n a lys is. Ma n y d iffe re n t co m b in a tio n s o f Occu p a n cy a n d Ave ra g e Ra te g e n e ra te th e id e n tica l re ve n u e : JANU ARY F EBRU ARY MARCH OCCU PANCY % 4 0 5 0 75 $ AV ERAGE RATE 3 0 0 24 0 16 0 $ REV ENU E 12.0 0 0 12.0 0 0 12.00 0 OCCU PANCY % U P U P DOWN DOWN % ? $ ADR U P DOWN DOWN U P $ ? $ REV ENU E U P $ DOWN ? $ ?

1.4 THE MANAGEMENT PROBLEM Index Ap a rt fro m s e rv in g th e id e n tica l cu s to m e rs a n d m a rke t se g m e n ts, lo d g in g a n d p as se n g e r tra n sp o rt p ro vid e rs h a ve a n u m b e r o f m a jo r p ro b lem s (a n d o p p o rtu n itie s) in co m m o n : Th e y p ro d u ce a fixed in v e n to ry o f p e ris h a b le p ro d u cts (se rv ice s ) w h ich ca n n o t b e s to re d , if u n so ld a t a s p e cific p o in t in tim e. th e se s e rv ice s a re typ ica lly so ld fo r d iffe re n t p rice s u n d e r d iffe re n t co n d itio n s to d iffe ren t m a rke t s e g m e n ts , v a ryin g a t ce rta in tim e s a n d re la tive d a te s o f b o o k in g tra n sa ctio n a n d d e liv e ry . Ma rk e t se g m e n t d e m a n d fo r s e rv ice s v a ries w ith tim e . Diffe re n t m a rke t s e g m e n ts a cce p t d iffe re n t ra te s a n d re p re se n t d iffe re n t re ve n u e va lu e s. s u b je ct to Re le v a n t in fo rm a tio n to ta ke d e cisio n s a ffe ctin g th e fu tu re is sta tistica l p ro b a b ility . PROBLEM Yie ld Ma n a g e m e n t Th e term as a REV ENU E OPPORTU NITIES m e th o d to ca p tu re re la tiv e ly n e w . is a s o ld a s o u r in d u stry, o n ly th e , b a se d o n a sy ste m a tic a p p ro a ch , is

Th e u se o f th e te rm b y o fte n o n ly p a rtly in fo rm e d h o te l p ro fe ss io n a ls h a s ce rtain ly cre a te d s o m e co n fu s io n , m is u n d e rs ta n d in g s a n d , in so m e ca se s , a ve ry co s tly re sista n ce to ch a n g e . Th e m a jo r re a so n w a s th e fa ct, th a t Ho te lie rs h is to rica lly w e re n o t u se d to o n g o in g b u sin e ss an aly sis, tru e m a rk e t re se a rch , d e m a n d fo re cas tin g a n d in fo rm a tio n management.

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Th e ir m a in co n ce rn w a s lo o k in g a t o ccu p a n cy, n u m b e rs o f ro o m n ig h ts so ld a n d a v e ra g e ra te s - b o th q u ite m e a n in g le ss n u m b e rs to m a n a g e th e co m p le x a n d d yn a m ic lo d g in g re ve n u e g e n e ra tio n p ro ce ss . THE MAIN PROBLEM IS: Ho w to ra ise rev e n u e (y ie ld ) b y ra isin g a v e ra g e ra te s d u rin g p e a k d e m a n d p e rio d s b y re d u cin g d isco u n ted sa le s a n d a t th e s a m e tim e to a v o id lo o s in g to o m u ch o ccu p a n cy b y ra isin g a v e ra g e ra te s. Ho w to im p ro v e yie ld b y ra isin g o ccu p a n cy d u rin g lo w d e m a n d p e rio d s w ith o u t lo o s in g to o m u ch o n th e a ve ra g e ra te . Wh a t co n cep ts , to o ls a n d m e th o d s to u se in o rd e r to a ch ie ve a yie ld (re ve n u e p e r a v a ila b le ro o m ) m a xim isin g so lu tio n fo r th e co m p le x p ro b le m . Th e cu rre n t e co n o m ic clim a te a n d co n tin u in g d e ve lo p m e n t o f n e w p ro p e rtie s in a lre a d y o ve rcro w d e d m a rke ts p u t m a n a g e m e n t u n d e r e xtre m e ca s h -flo w / re v en u e p re ss u re s. Sp e cifica lly o ld e r 5 -Sta r p ro p e rties h a ve co m e u n d e r in te n s e ra te p res su re fro m to u g h n e w co rp o ra te tra v e l g u id e lin e s an d p rice co m p e titio n fro m n e w 3 -4 Sta r h o te ls . a s lo n g as it It is th u s m o re lik e ly fo r th e fo re se e a b le fu tu re , th a t vo lu m e b u s in es s, g en e ra te s a d d itio n a l re v e n u e s a n d co n trib u tio n s to co v e r fixe d co st , w ill b e to p p rio rity o n m o re d a ys p e r y ea r th a n e v e r.

INV ENTORY CONTROLLED We ll m a n a g e d a n d v o lu m e b u sin e ss w ith lo w d is p la ce m e n t o f h ig h y ie ld , m ain ly la te r b o o k in g , b u sin e ss w ill sta y im p o rta n t fo r th e fo re se e a b le fu tu re : Co rp o ra te Bu s in e s s Gro u p s Co n ve n tio n s, Me e tin g s & In ce n tive s To u r Op e ra to rs & Tra ve l In d u stry Sp e cia l Pa cka g e s (We e k e n d Bre a k s) Oth e r In n o va tive Pro m o tio n s Page 18of 81

GLOBAL CAPACITY U TILISATION In a v era g e , a t le a st 5 0 % o f all av a ila b le in ve n to ry (h o te l ro o m s, a irlin e s e a ts e tc.) s ta y e m p ty a n d re p re se n t Billio n s o f $s o f lo s t re ve n u e o r, in o th e r w o rd s: Op p o rtu n ity Co s t. De p e n d in g o n th e su p p ly / d e m a n d re la tio n sh ip , th e lo s t re ve n u e h a s to b e fin a n ce d b y m a rke t p a rticip a n ts: By Su p p lie rs (w h e n d e m a n d is lo w ) By Cu s to m e rs (w h e n d e m a n d is h ig h ) By Su p p lie rs & Cu s to m e rs (in m o st ca s e s) In a b u y e rs m a rk e t th e u n d e r-u tilis a tio n o f sa le a b le in v e n to ry h a s a d e p re s sin g e ffe ct o n p ro fits a n d ca n b e cited a s o n e o f th e m a in re a so n s fo r o u r in d u stry's d eclin in g re tu rn o n in ve stm e n t (ROI) . Still, m a n y h o te ls e xp e rie n ce g o o d n u m b e rs o f s o ld -o u t d a y s e ve ry y e a r a n d s till s e e m n o t ca p a b le , th o u g h , to a v o id lo o s in g p o te n tia l re ve n u e d u rin g th o s e h ig h d em a n d p e rio d s. Hig h -Yie ld d e n ia ls d u rin g h ig h d e m a n d p e rio d s a re s till m o re o fte n th e ru le th a n th e THINK AND SELL V OLU ME, NOT e xce p tio n , s in ce m o s t s a le s d e p a rtm e n ts still REV ENU E.

u n ca p tu re d re ve n u e o p p o rtu n itie s Yie ld Ma n a g e m e n t ca n h e lp id e n tifyin g a n d th e ir v a rio u s ca u s e s a n d p u ts m a n a g e m e n t in to th e d riv er's se a t a g a in in m a n a g in g in v en to ry in vie w o f o v e ra ll re ve n u e im p ro v e m e n t.

1.5 YM U SERS: THE CU RRENT SITU ATION Index Th e p rin cip le s o f yie ld m a n a g e m e n t h a d th e ir o rig in s in th e a irlin e in d u s try , b u t h a v e a lso tak e n h o ld w id e ly th ro u g h o u t th e p a s se n g e r tra n s p o rt, tra ve l a n d lo d g in g in d u s trie s a n d o th e r s e cto rs o f th e s e rv ice in d u strie s: Blo o d Ban k s Bro a d ca s tin g F in a n cia l In s titu tio n s Mo vie Th e a tres Te le co m m u n ica tio n s Re sta u ra n ts Alm o st a ll m a jo r lo d g in g co rp o ra tio n s , a irlin e s , cru ise lin e s, ca r re n ta l a n d p as se n g e r ra ilro a d firm s a re p ra ctisin g - k n o w in g ly o r u n k n o w in g ly - m o re o r les s s o p h istica te d yie ld m a n a g e m e n t m e th o d s. Page 19of 81

Th ey m a in ta in in v e n to ry co n tro l sy ste m s a n d h a v e e ith e r d e v e lo p e d th eir o w n so fta n d h a rd w a re co n fig u ra tio n s in co n ju n ctio n w ith co rp o ra te CRS a n d p ro p e rty b as e d PMS. Ma jo r Am e rica n h o te l ch a in s, su ch a s Ho lid a y In n , Hy att, Ma rrio tt a n d Sh e ra to n , to n a m e a fe w , s ta rte d Ove rb o o kin g a n d Co m p u te r Aid e d Pricin g e a rlie r th an th e ir co m p e tito rs a n d a re o n th e ir w ay to a tru ly th re e -d im e n sio n a l Yie ld Ma n a g e m e n t ca p a b ility . A n u m b e r o f Eu ro p e b a s e d ch a in s a re p la n n in g m a jo r o ve rh a u ls o f th e ir s ys te m s in fra stru ctu re , in clu d in g YMS. Ho lid a y In n , Hilto n , Rad is so n , Sh an g ri-La , to n a m e ju st a few , h a v e in ve ste d in YM a p p lica tio n s in co n ju n ctio n w ith th e ir PMS h arm o n is a tio n a n d CRS/PMS in te g ra tio n d rive . Yie ld Ma n a g e m e n t ca p a b ilities a re fin a lly im p ro vin g , b a se d o n lo n g -te rm in v es tm e n t in s ta te -o f-th e-a rt: PMS: d e ve lo p m e n t, h a rm o n isa tio n a n d in te g ra tio n w ith CRS a n d o th e r in te rn a l o r e xte rn a l b u sin e ss o r co m m u n ica tio n sys te m s. CRS: d e sig n , d e ve lo p m e n t, u p d a te s a n d re w rite s. Ma n a g e m e n t-e d u ca tio n a n d s ta ff tra in in g . It is im p o rta n t to n o te , th a t a irlin e in ve n to ry co n tro l, d is trib u tio n a n d re se rva tio n s ys te m s h a v e a lw a ys b e e n CENTRALISED, m a kin g YM a ce n tra l d e cis io n su p p o rt fu n ctio n fo r m a rk e tin g , p ricin g , sa le s, re s e rva tio n s an d YM d ep a rtm e n ts. Ho tel in ve n to ry co n tro l, to th e co n trary, h as tra d itio n a lly b e e n DECENTRALISED, m a k in g YM a p ro p e rty b as e d d e cisio n su p p o rt fu n ctio n a n d d e p e n d e n t o n fro n t o ffice s ta ff's p ro fe ss io n a lism . In m o st ca s e s o f ch a in s, g ro w in g b y a cq u is itio n , m a n a g em e n t co n tra cts, o r fra n ch isin g , th e PMS en v iro n m e n t u s u a lly is HETEROGENEOU S a n d o fte n n o t e ve n p ro p e rly in teg ra ted (in te rfa ced ) w ith th e CRS. In v e stm e n t d e cis io n s in IT-in fra s tru ctu re (PMS/CRS/BOS) h a v e o fte n b ee n a b ro g a te d to th e o w n e rs o f p ro p e rtie s, n o t a w a re o f th e b o tto m -lin e im p a ct o f th e s e s tra te g ic b u sin e ss d ecisio n . Th is h a s, fo r e xa m p le , in m a n y ca se s ca u se d th e fo llo w in g typ ica l p ro b le m s: To ta lly o u td a te d so ftw a re a n d h a rd w are in sta lle d . La ck o f sp e cific b u s in e s s d a te a t p ro p e rtie s a n d /o r in co n s isten t d a ta fo rm a ts a t p ro p e rtie s a n d He a d Qu a rte rs . Off-lin e re s e rva tio n s p ro ces sin g , m o s tly v ia fax (!) d u e to la ck o f re a l-tim e in v e n to ry a cce ss via a irlin e o r o th e r CRS/Ne tw o rk s . Page 20of 81

Rev e n u e lo ss e s ca u se d b y "virtu a l in ve n to ry " a n d a la ck o f in te llig e n t in ve n to ry v ie w in g a n d co n tro llin g ca p a b ilitie s . Wa ste o f h u m a n re s o u rce s to u p d a te in ve n to ry m a n u a lly a n d to re -e n te r e xistin g d ig ita l d a ta fro m / in to CRS, PMS, BOS, MIS, SMS, e tc. Lo s s o f co rp o ra te m a n a g em e n t co n tro l a n d tim e ly re s p o n se a n d /o r d e cisio n s to re a ct to ch a n g in g m a rke ts. THISCO a n d WIZ COM (AV IS) w e re th e first se rv ice p ro vid e rs (sw itch e s ) to a d d res s th e a cce s s p ro b le m fo r tra v e l a g e n ts via airlin e GDS fo r h o te l g ro u p s w ith a t le a st a ce n tra lis e d (v irtu a l) in ve n to ry d a ta b a se (CRS). In g e n e ra l, Ho te l YMS's h a ve n o t re ach e d th e le v e l o f s o p h istica tio n o f (ce n tra lis ed ) a irlin e YMS y et, b u t im p ro v e d sy ste m s a n d PMS/YMS/CRS in te rfa ce s a re u n d e r d ev e lo p m e n t. As to th e CRS/PMS in te g ra tio n d e ve lo p m e n ts, th e s e a re m a in ly d riv e n b y th e le a d in g h o te l ch ain s a n d m a rk e tin g co n s o rtia , n o t b y th e m u ltitu d e o f in d iv id u a l p ro p e rtie s o r s m a ll g ro u p s. To d a y's Ho te l YMS a re b a sica lly se p a ra te d e cisio n su p p o rt sys te m s (DSS), in th e b es t o f ca se s in te rfa ce d w ith PMS an d /o r CRS. A fas t g ro w in g n u m b e r o f in d ivid u a l p ro p e rtie s , s m a lle r g ro u p s a n d m a jo r ch a in s, th o u g h , a re cu rre n tly in ve s tin g in te llig e n tly in th e b as ic fo u n d a tio n o f a n y in fo rm a tio n s ys te m s in fra s tru ctu re o f re v e n u e e n h a n ce m e n t p ro je ct: MANAGEMENT EDU CATION & STAF F TRAINING

1.6 TODAY'S LIMITATIONS IN APPLYING YIELD MGT Index Th ere a re cu rre n tly m a n y re a l-life lim ita tio n s to o p tim a l YM, b u t fe w , w h ich ca n n o t b e o ve rco m e b y : Go o d p la n n in g Pro fe ss io n al m an a g e m e n t IT-in fra stru ctu re d e ve lo p m e n t Willin g n e ss to in v es t a n d su p p o rt th e te a m A lis t o f a fe w m a jo r lim ita tio n s o r p ro b le m s to b e o v e rco m e : EDU CATION: th e m in d s e t o f GM's a n d d ep a rtm en t h e a d s , sp e cifica lly th e d e e p ly ro o te d p a rad ig m , th a t MORE (V o lu m e , Occu p a n cy , ADR) IS BETTER. Page 21of 81

Th e w a y , b u sin e ss p erfo rm a n ce is m o n ito re d a n d d e cisio n s ta k e n (Occu p a n cy /ADR v e rsu s Yie ld ). La ck o f u n d e rsta n d in g th e v a lu e o f In fo rm a tio n (Bu sin e ss In te llig e n ce ) a n d Ma n a g in g In fo rm a tio n (MIS). Ou td a te d s o ftw a re a n d h a rd w a re in s ta lle d . PMS ve n d o r n o t w illin g o r a b le to d e live r in te rfa ce s o r so u rce co d e to d e ve lo p in terfa ce s w ith YMS. La ck o f m a n a g e m e n t a cce s s to re a l-tim e in ve n to ry a n d la ck o f in te llig e n t in v e n to ry v ie w in g a n d co n tro llin g ca p a b ilitie s . Pe rio d ica l d e stru ctio n o f d ig ita l h isto ric tra n sa ctio n (d e m a n d ) d a ta . La ck o f s to ra g e /b a cku p d ev ices . La ck o f th e m o s t b a sic d e m a n d fo re ca stin g s ys te m s, su ch a s b o o k in g cu rve s a n d p ro file s. La ck o f o p tim isa tio n m o d e ls to a llo ca te in ve n to ry to b o o k in g cla s se s (ra te s ) a n d m a rk e t s eg m e n ts . La ck o f co n s is te n t d e n ia l re co rd in g fo r d e m a n d fo re ca stin g p u rp o se s . La ck o f o n lin e a cce s s to a ll s ys te m s, d a ta b a s e s, d a ta , in fo rm a tio n a n d file s b y sta ff a t d iffe re n t d ep a rtm e n ts. Off-lin e re se rva tio n p ro ce s sin g , m o s tly v ia fa x, d u e to la ck o f re a l-tim e in ve n to ry a cce ss v ia a irlin e o r o th e r CRS / Ne tw o rk s.

2. WHAT EX ACTLY IS YIELD MANAGEMENT ? 2. WHAT EX ACTLY IS YIELD MANAGEMENT ? 2. WHAT EX ACTLY IS YIELD MANAGEMENT ? 2. WHAT EX ACTLY IS YIELD MANAGEMENT ? Index

A TYPICAL SITU ATION: Page 22of 81

A clie n t ca lls yo u r re se rva tio n o ffice , re q u e stin g a d is co u n t ra te a va ila b le ro o m ) fro m n e xt We d n es d a y n ig h t th ro u g h F rid a y . Th e q u es tio n is : Th e q u e s tio n is : Th e q u es tio n is : Th e q u e s tio n is : Sh o u ld y o u r re s e rva tio n o ffice a cce p t th a t re se rva tio n o r n o t? - An d if n o t, w h y n o t?

sin g le ro o m (th e las t

IF If it w a s th e la st s in g le ro o m a va ilab le , it w o u ld n o t lik e to a cce p t th is re s e rva tio n , it p ro je cte d th a t b e tw e e n n o w a n d We d n e s d a y n ig h t th e re w a s th e lik e lih o o d o f a b o o kin g re q u e s t fro m a ra ck ra te tra n sie n t cu sto m e r fo r th e sa m e a rriva l d ay a n d n u m b e r o f n ig h ts. Ne ith e r w o u ld th e re s erva tio n d e p a rtm e n t w a n t to a cce p t th a t d is co u n t re se rv a tio n , if it co u ld a n ticip a te a la te -b o o k in g re q u e s t fo rm a cu sto m e r, w h o w o u ld lik e to sta y fro m We d n e s d a y th ro u g h Su n d a y, sin ce th is cu sto m e r a lso re p re s e n ts a g re a ter re ve n u e . In fa ct, a d isco u n te d ra te fo r a lo n g e r sta y m a y b e s ig n ifica n tly m o re re v e n u e th a n a s h o rte r stay a t ra ck ra te . IF It w o u ld a cce p t th e re se rv a tio n , th o u g h , it co u ld a n ticip a te a ca n ce lla tio n u n til We d n e sd a y o r a n e a rly d e p a rtu re o n Wed n e sd a y , le a v in g th e las t ro o m fo r th e e xp e cte d h ig h y ie ld g u e s t. Ho w d o e s th e re s e rv atio n s m a n a g e r k n o w , h o w m a n y re s e rv atio n s to ta k e fo r w h a t typ e o f ro o m s a t w h a t p ro p e rty a t w h a t ra te s a n d fo r w h a t a rriva l a n d d e p a rtu re d a te s? THAT'S WHAT YIELD MANAGEMENT IS ALL ABOU T Prin cip a lly , Yie ld Ma n a g em e n t d e te rm in es th e rig h t n u m b e r o f u n its o f a p ro d u ct typ e (sin g le , d o u b le , su ite) to b e a llo ca te d fo r sa le to th e rig h t cu sto m e r typ e (b u sin e ss o r le is u re tra v e lle rs , co n ve n tio n p a rticip a n ts) a t th e rig h t p rice in o rd e r to m axim ise rev e n u e (yie ld ). Ho te l Yie ld Ma n a g e m e n t h e lp s d e te rm in in g th e n u m b e r o f ro o m s o f d iffe re n t ty p e s to b e so ld fo r fu tu re a rriv a l d a te s a t m a rk e t s e g m e n t o rie n ted ra te s , ta k in g le n g th o f sta y in to a cco u n t. In v e n to ry is g e n e ra lly co n tro lle d b y s e ttin g b o o k in g lim its/sa le s a llo ca tio n s fo r d iffe re n t b o o k in g cla sse s /m ark et s e g m e n ts a n d o p e n in g o r clo s in g a va ila b ility o f b o o k in g cla s se s in th e Res e rv a tio n Sys te m (PMS/CRS).

2.1 THE YIELD MANAGEMENT DEF INITION Index Page 23of 81

Yie ld Ma n a g e m e n t" Th e te rm " h a s b e e n co in e d in th e a irlin e in d u s try a n d its o b je ctive is to m a n a g e th e p ro d u ct in ve n to ry (s ea ts o n a g iv e n flig h t, ro o m s fo r a g ive n n ig h t), in s u ch a w a y a s to m a xim ise re ve n u e . "Yie ld " In th e a irlin e co n te xt, is e xp re s se d in ce n ts p e r p a ss e n g e r m ile, w h ich is n o t a v ery a p p ro p ria te d e fin itio n to b e u s e d fo r n o n -a irlin e m a rk e t p a rticip a n ts . "Yie ld " Tra n sla ted in to h e h o te l s itu a tio n , w o u ld b e d e fin e d b y $s p e r g u e s t ro o m re n ta l tim e (n ig h t, h o u rs , m in u te s) b y ro o m ty p e , co m p a ra b le to th e re ta il d e fin itio n o f $s p e r s q u a re m e tre p e r tim e p e rio d .

Yie ld Ma n a g e m e n t b e calle d Re ve n u e Ma n a g e m e n t In ve n to ry co n tro l s h o u ld ra th e r or , s in ce it is rev e n u e , n o t (a irlin e ) yie ld to b e m a xim is ed . Yie ld o r Re v e n u e Ma n a g e m e n t is n o t re a lly n e w to Ho telie rs , s in ce id e n tica l ro o m s h a v e b e e n so ld fo r h ig h e r p rice s d u rin g h ig h s e a so n a n d fo r lo w e r p rice s d u rin g lo w s ea s o n a n d w e e k e n d s fo r g en era tio n s . Th is w as d o n e b y m o re o r le s s e xp e rie n ce d s ta ff w ith va ryin g ta le n t to a n ticip a te o v e ra ll d e m a n d a t ce rta in d a ys , w e e ks o r p e rio d s o f th e ye a r fo r a lim ite d s u p p ly o f ro o m s . Yie ld Ma n a g e m e n t (o r Re v e n u e Ma n a g e m e n t) is a n e co n o m ic d iscip lin e a p p ro p ria te s p e cifica lly to h o te ls, b u t a lso to m a n y s e cto rs o f th e se rvice in d u s try, s e llin g p e ris h a b le p ro d u cts. Ma rk e t Se g m e n t Pricin g " " (p rice d iffe re n tiatio n ) is co m b in e d w ith sta tistica l a n a ly se s to e xp a n d th e m a rk e t fo r th e s e rv ice a n d in cre a se th e re ve n u e "yie ld " p e r a va ila b le u n it o f ca p a city. It is a s et o f d e m a n d fo re ca s tin g te ch n iq u es , o p tim isa tio n m o d e ls , a n d im p le m e n ta tio n p ro ce d u re s w h ich co lle ctive ly d e te rm in e w h ich re s e rva tio n re q u es ts to a cce p t a n d w h ich to re je ct in o rd e r to m a xim ise re ve n u e . A n u m b e r o f Am e rica n a ca d e m ics d e fin e "Yie ld " a s th e p ro d u ct o f o ccu p a n cy a n d "Price Efficie n cy ". Price Efficie n cy is d e fin e d b y d iv id in g th e a ve ra g e ra te so ld b y th e ra ck ra te .

Exa m p le : Ra ck ra te : Occu p a n cy : $ 20 0 % 50

Ach ie ve d a ve ra g e ra te : $ 10 0 Page 24of 81

YIELD = OCCU PANCY RATE X PRICE EF F ICIENCY Y = 5 0 /10 0 x 10 0 /20 0 = 25 % Ma xim u m Yield is re a ch e d , w h e n 10 0 % o f ca p a city is so ld a t ra ck ra te : Y - 10 0/10 0 x 20 0 /20 0 = 10 0% In v ie w o f Yie ld Ma n a g e m e n t o b je ctiv e s, h o te ls sh o u ld n o t fo cu s o n o ccu p a n cy ve rs u s ADR, b u t ra th e r lo o k a t th e "tru e " YIELD, i.e. REV ENU E PER AV AILABLE ROOM (REV PAR): ROOM REV ENU E PER DAY OR PERIOD NU MBER OF ROOMS AV AILABLE PER DAY OR PERIOD Av e ra g e re v e n u e p e r ro o m s o ld n e ith e r ra k e s u n s o ld ro o m s in to a cco u n t n o r ch a n g e s in ro o m su p p ly (re n o va tio n s , n e w co n s tru ctio n ) n o r d o es it te ll m a n a g e m e n t, w h e th e r it is m a k in g o r lo o s in g m o n e y. Av e ra g e co st p er a v a ila b le ro o m p er p e rio d ca n th en e a sily b e co m p are d w ith av e ra g e y ie ld p e r ro o m (REV PAR) p e r p e rio d a n d th u s p ro fit (m a rg in ) o r lo s s p e r a va ilab le ro o m p e r p e rio d .

2.2 THE TRADE-OF F BETWEEN RATE & REV ENU E Index Th e re is o b v io u sly a tra d e-o ff b e tw ee n av e ra g e ra te a n d re v e n u e , d riv e n b y se g m e n t a n d to ta l d e m a n d (o ccu p a n cy) rea ctin g o n ra te le ve ls. Ho te ls w o u ld ce rta in ly p re fe r to se ll a ll ro o m s a t ra ck ra te to ra te -in s en s itive tra n s ie n ts, in d iv id u a l b u s in e s s tra ve lle rs o r w e ll-to -d o w a lk -in s to m a xim ise re v en u e Be ca u s e o f d e m a n d flu ctu a tio n , e xce s s ca p a city a n d d isco u n tin g b y co m p e tito rs, th is s trate g y w ill re s u lt in a lo ss o f m a rk e t sh a re a n d re v e n u e . Sin g le Price Stra te g ie s d is re g a rd p rice se n s itive cu s to m e rs (m a rk e t se g m e n ts) w h ich w ill b e lo s t to m o re fle xib le co m p e tito rs. Th e o p p o site stra te g y to se ll o u t e a rly a t d is co u n te d ra te s re su lts in re v e n u e lo ss e s, s in ce la te r h ig h y ie ld cu sto m er re q u e sts ca n n o t b e a cce p te d a n d w ill b e lo s t to co m p e tito rs .. . Th e re fo re th e g o a l is cle a r: to d e te rm in e , h o w m a n y ro o m s to p ro te ct fo r e a ch b o o kin g cla ss (ra te cla ss / m a rk e t se g m e n t) in o rd e r to m in im ise re ve n u e lo s s ca u s e d b y la ck o f re s e rv atio n co n tro ls.

2.3 THE REV ENU E IMPACT OF RATE DIF F ERENTIATION Page 25of 81

Index Eco n o m ic th e o ry te lls u s, th a t re ve n u e fo r o n e p ro d u ct ca n , m a th e m a tica lly sp e ak in g , o n ly b e m a xim ise d , if a p rice is o ffere d to e ach cu s to m e r, th a t cu sto m e r is w illin g a n d a b le to p a y. Th e w illin g n e ss a n d a b ility to p a y a p rice is ca lle d p rice e la sticity , w h ich is m e a s u re d in % o f q u a n tity s o ld (m o re o r le ss ) re la tiv e to a % ch a n g e o n p rice (d o w n o r u p ). If h o te ls kn e w th e p rice ela sticity o f th e ir m a rke t se g m e n ts, re v e n u e o p tim a l p ricin g w o u ld b e m u ch les s o f a p ro b le m .

MAX IMU M ROOM REV ENU E AT ONE RATE

Page 26of 81

Price in $ 400 Lost revenue from customers, willing to pay a higher price than $ 200

Lost revenue customers only willing to accept prices below $ 200 200

Units 0 50 100 Remarks: The maximum achievable revenue at one price only is reached at 50 units sold for $ 200, generating a total revenue of $ 10.000. Any other single price would result in less revenue. The unhatched space below the demand curve represents lost revenues with customers, willing to pay more or only less than $ 200.

IMPACT OF RATE DIF F ERENTIATION ON REV ENU E Page 27of 81

Price in $ 400 Lost revenue 300

200

100

Units 0 50 100 Remarks: Widening the scope of prices offered to three ($ 100, 200, 300) generates a higher revenue of $ 15.000, but still leaves customer groups unserviced and cuases lost revenue (unhatched space). Maximum revenue could be reached by charging a different rate for eache unit ($ 1-400). this pricing strategy would result in an economically optimal utilisation of inventory. 25 75

2.4 MARK ET SEGMENTATION & F ENCING Index Page 28of 81

Th e co n d itio n s , m e n tio n e d e a rlie r fo r p rice d iffe re n tia tio n a n d y ie ld m a n a g e m e n t b a s e d o n m a rk e t se g m e n ta tio n w e re th e fo llo w in g : A d o w n w a rd slo p in g d e m a n d cu rve . Ea sily id en tifia b le g ro u p s o f cu sto m e rs w ith d iffe re n t typ e s o f d e m a n d fo r th e p ro d u ct. Th e a b ility to se g re g a te sa le s to e a ch g ro u p o f cu sto m ers in su ch a w a y th a t th e y a re "s e a led o ff" (o r fe n ce d ) fro m e a ch o th e r an d h ig h y ie ld cu s to m e rs a re p re ve n te d fro m trad in g d o w n . Th e h o te l in d u s try u s u a lly sa tis fie s th e first tw o co n d itio n s , b u t p ra ctica lly a n d cu ltu ra lly , it h a s n o t b e e n a b le to ch a rg e th e m b a s e d o n a ra tio n a l p ricin g m e th o d a n d s u cce s sfu lly se p ara te its cu sto m e rs b y s e ttin g e ffe ctive fe n ce s. . BOOK ING RESTRICTIONS & F ENCES: TIME U NTIL ARRIV AL/CONDITIONS OF PU RCHASE TIME ON ARRIV AL DAY ADV ANCE PU RCHASE, NON-REF U NDABLE RATES REF U ND F OR NON/PART-U SE OF SERV ICES POSSIBILITY OF CHANGE OF SCHEDU LE ARRIV AL/DEPARTU RE DAY WEEK END BOOK ING DU RATION OF STAY CLU B MEMBERSHIP - F REQU ENT F LYER NU MBER OF PERSONS IN A GROU P REASONS OF THE TRIP SOU RCE OF BOOK ING ROOM / BED / SERV ICE TYPE NU MBER OF NIGHTS / GU EST REV ENU E SPECIAL GU EST REQU IREMENTS OTHER Wh a t w e s e e in re a lity to d a y is w h a t e xp e rts ca ll "u n co n tro lle d d isco u n tin g ", le a d in g to ra te w a rs to th e sh o rt te rm b e n e fit o f cu s to m e rs , b u t n o t th e h o tel b o tto m lin e .

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Th e p ro b le m is th a t n o t a ll d isco u n t cu s to m e rs b o o k e a rly b e ca u s e h o te ls d o n 't a lw ay s o ffe r d isco u n ts e arly (a s a irlin e s d o ) an d th e re is n o t in ce n tiv e to b o o k e a rly. F u rth e rm o re , in a w o rld w h e re n o o n e p a ys stick e r p rice s a n y m o re , h ig h y ie ld cu s to m e rs d o trad e d o w n fro m ra ck ra te to d is co u n ts , d u e to th e la ck o f a p p ro p ria te fen ce s (b o o k in g re strictio n s). Th e lo d g in g in d u stry h a s "ed u ca te d " co rp o ra te a n d b u sin e ss cu sto m e rs to se a rch fo r d isco u n ts o n a ro u tin e b a s is a n d a ve ry d an g e ro u s "b a za a r m e n ta lity " h a s tak e n h o ld . Th is la ck o f ra tio n a l p ricin g a n d th e d o w n w a rd sp ira l o f co rp o rate v o lu m e a n d g ro u p ra te s re m in d s u s o f th e s itu a tio n o f U .S. a irlin e s a fte r d e re g u la tio n , w h e re lo w -co s t ca rrie rs sta rted th e fa re -w a rs a n d a lm o st a ll p la y e rs lo st m o n e y a t th e e n d Wh a t o rig in a lly w a s a g o o d id e a to fill e m p ty ro o m s a n d g e n e ra te m o re re v en u e to co v er fixed co s ts h a s b e co m e g ro s sly o u t o f a lig n m e n t. Th e re d e fin ite ly is a n e ed fo r ch a n g e th ro u g h a d iscip lin e d a n d ra tio n a l a p p ro a ch (Exa m p le : Ma rrio t's a d v a n ce Pu rch a s e , n o n -re fu n d a b le Ra te s) in h a rm o n y w ith th e y ie ld m an ag e m en t co n ce p t. Th e re a re so m e o b v io u s ch a lle n g e s , th o u g h , to b rin g in g ra tio n a lity to ro o m p ricin g , to s tim u la te in cre m e n ta l b u s in e ss a n d to a llo w y ie ld m a n a g e m e n t (s ys te m s) to fu n ctio n m o re a ccu ra tely : Th e m a jo rity o f h o te ls a re d e ce n tra lise d p ro fit-ce n tre s a n d n o t g o o d a t s a yin g "n o " to cu sto m e r's re q u e sts. Ou r in d u s try cu ltu re s till fo cu se s o n "h e a d s in b e d s " a n d h ig h o ccu p a n cy le v e ls . Sy ste m s d e ve lo p m e n t a n d In fo rm a tio n Ma n a g e m e n t s ta rte d ve ry la te a n d is n o t vie w e d a s a to p s tra te g ic m a n a g e m e n t p rio rity. Ma n y h o te ls a re n o t a co m m o d ity a n d p rice is ju s t o n e o f s e ve ra l fa cto rs fo r cu s to m e rs' ch o ice . 2.5 WHEN DO SEGMENTS BOOK ? Index Re v e n u e is n o t o n ly d rive n b y d e m a n d b u t is als o in flu e n ce d b y cu s to m e r (se g m e n t) b o o k in g b e h a v io u r a n d th e p o in t in tim e , re la tiv e to a rriv a l, se g m e n ts a ctu a lly m a ke res e rv a tio n s. Exp e rie n ce te lls u s th a t p rice se n s itive ("e la stic") m a rk e t s e g m e n ts (le is u re tra ve lle rs, g ro u p s ) g e n e ra lly b o o k e a rlie r. Tim e s e n sitiv e , le ss p rice e la s tic se g m e n ts (b u s in e s s o r in d iv id u a l tra ve lle rs) te n d to b o o k la te r in th e p ro ce ss. Sp a ce n e e d s to b e p ro te cte d fo r th e h ig h yie ld , la ter b o o kin g m a rk e t se g m e n ts to a vo id se ll-o u t to d is co u n t co n scio u s, e a rly b o o k in g clie n ts . 2.6 THE INF ORMATION PROBLEM Page 30of 81

Index h o w m a n y ro o m s to p ro te ct To m a ke th e re cu rren t d e cis io n , k in g clas s (m ark e t s eg m en t) b y b o o kin g lim its, re lia b le v a lu e s fo r d e cis io n p a ra m e ters, d e te rm in in g th e fu tu re , a re n e e d e d b y th e Yie ld Ma n a g e m e n t Sy ste m . fo r w h ich b o o

k n o w n Ap a rt fo rm fa cts , su ch a s ca p a city, ra te s , re se rv a tio n s o n th e b o o k s a n d fu tu re cu s to m e r h isto ric tra n sa ctio n d a ta , in fo rm a tio n is n e e d e d , d e scrib in g b e h a v io u r a n d co m p e tito rs re a ctio n s . cla irv o ya n ce Sin ce h o te l e xe cu tiv e s la ck , th e in fo rm a tio n d e scrib in g fu tu re a rriv a l a n d d e p a rtu re d a te s a n d re s erva tio n s d e ve lo p m e n t b e tw e e n n o w a n d fu tu re d a te s ca n es tim a ted o r fo re ca sted . o n ly b e K NOWN DECISION PARAMETERS: CAPACITY F OR SALE RATES OF F ERED RESERV ATIONS HOLDING TODAY HISTORIC TRANSACTIONS & DEMAND DATA HISTORIC DESTINATION DEMAND (ARRIV ALS) U NK NOWN DECISION PARAMETERS: F U TU RE DEMAND HOW MANY EARLY V ERSU S LATE BOOK INGS CANCELLATIONS NO-SHOWS WALK -INS & NON-RECO RDS EARLY & LATE DEPARTU RES U PSELL PROBABILITY ACTION & REACTION OF COMPETITORS EX TERNAL EV ENTS THE INF ORMATION PROBLEM Page 31of 81

MARKETING POWER

DECISION - MAKING

KNOWLEDGE

INFORMAITON

DATA

2.7 HOTEL YIELD MANAGEMENT OBJ ECTIV ES Index Page 32of 81

YIELD MANAGEMENT HAS THE F OLLOWING MAIN OBJECTIV ES: Ma xim ise Yie ld o r m in im is e lo s t rev e n u e p e r a v a ila b le ro o m , n ig h t o r p e rio d in v ie w o f to ta l co s t p e r a va ila b le ro o m . Co n tro l a va ila b ility o f ro o m s b y cu sto m e r re ve n u e p o te n tia l (e xp e cte d va lu e o f re q u e sts) a n d se g m e n t m ix. Co n tro l d a ily a v a ila b ility o f ra tes lo w e r th a n ra ck in vie w o f u n s o ld in ve n to ry , tim e le ft to s e ll a n d s e g m e n t o r to ta l d e m a n d . De te rm in e m in im u m s ta y re q u ire m e n ts in vie w o f p o te n tia l h ig h y ie ld (lo n g s ta y / h ig h ra te ) d isp la ce m e n ts . Min im ise re v en u e e ro sio n o r lo s s o f m a rk e t s h a re in v ie w o f to ta l d e m a n d a n d p rice e la sticity. Min im ise lo st re ve n u e ca u s e d b y re b o o ks , ca n ce lla tio n s, n o -s h o w s a n d e a rly d ep a rtu re s. Min im ise lo s t re ve n u e ca u se d b y lo w d e m a n d fo r sp e cific p ro d u cts (su ite s , d o u b le s e tc.). Eva lu a te g ro u p re q u e sts in v ie w o f d isp la ce m e n t o f h ig h e r v a lu e b o o k in g se g m e n ts. IN GENERAL TERMS: TO MINIMISE LOST REV ENU E OPPORTU NITIES 2.8 THE HISTORIC DEV ELOPMENT Index Alth o u g h th e lo d g in g in d u s try b u s in e ss id e a lly le n d s its e lf to Yie ld Ma n a g e m e n t co n ce p ts a n d a p p lica tio n s, it is th e a irlin e in d u stry th a t sp e a rh e a d e d th e d e ve lo p m e n t o f Yie ld Ma n a g e m e n t Sy ste m s s in ce th e e a rly 8 0 's . It a ll b e g an w ith th e p io n e e rin g d e ve lo p m e n t o f SABRE (Se m i Au to m a ted Bu s in es s Re s e a rch En viro n m e n t), a jo in t ve n tu re b e tw e e n IBM a n d Am e rica n Airlin e s , so m e 3 4 y ea rs a g o in 19 6 2.

Th e SABRE p ro je ct w a s th e b e g in n in g o f a e ra o f e le ctro n ic a n d ce n tra lis e d in ve n to ry le a d in g Glo b a l co n tro l, w h ich d e ve lo p e d o v er th e p a s t d e ca d e s in to o n e o f th e w o rld 's Tra ve l Dis trib u tio n Sy ste m s . Th e p a st d e ca d e a lso e xp e rie n ce d a n acce le ra te d d e ve lo p m e n t o f Pro p e rty Ma n a g e m e n t Sy ste m s (PMS) a n d Ce n tra l Re se rva tio n Syste m s (CRS) a s m a rk e tin g a n d sa le s to o ls fo r h o te ls.

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His to rica lly, h o te l sy ste m s w e re d e sig n e d a n d u se d fo r b ack -o ffice p u rp o s e s, a n d DEP d e p a rtm e n ts re p o rte d to th e d ire cto rs o f F in a n ce . F o r th e lo d g in g in d u stry to d a y, PMS a n d CRS re p re se n t th e b u ild in g b lo cs o f th e b a s ic in fra stru ctu re fo r e le ctro n ic in v e n to ry a n d re se rva tio n s a le s co n tro l a n d o ffe r m u ch m o re in te llig e n ce to Ma rke tin g De p a rtm e n ts th a n in th e p a st.

3 . PRECONDITIONS F OR THE SU CCESSF U L APPLICATION OF YIELD MANAGEMENT 3 . PRECONDITIONS F OR THE SU CCESSF U L APPLICATION OF YIELD MANAGEMENT 3 . PRECONDITIONS F OR THE SU CCESSF U L APPLICATION OF YIELD MANAGEMENT 3 . PRECONDITIONS F OR THE SU CCESSF U L APPLICATION OF YIELD MANAGEMENT CONCEPTS CONCEPTS CONCEPTS CONCEPTS Index

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3 .1 BASIC YIELD MANAGEMENT REQU IREMENTS

Th e in te llig e n t u se o f y ie ld m a n a g e m e n t p rin cip le s ca n b e u s ed to in cre a s e b o tto m lin e p ro fita b ility in a n y s e rvice in d u stry se cto r w ith th e fo llo w in g ch a ra cte ristics : De m a n d fo r (p h ys ica lly) id e n tica l se rvice p ro d u cts ca n b e d ivid e d in to d is tin ct m a rk e t s eg m e n ts . Diffe re n t cu s to m e r typ e s co m p e te fo r a lim ite d in ve n to ry. Price e la sticity va rie s a m o n g co m p e tin g cu sto m e r se g m e n ts. Th e ca p a city is fixe d a n d fixe d co s t re la tiv e ly h ig h in co m p a ris o n to v a ria b le co st. Th e in v e n to ry is p e ris h a b le a n d ca n n o t b e sto re d to b e so ld a t a la te r d a te . Th e m a rg in a l co st o f s ellin g a n ad d itio n a l u n its o f in v e n to ry is lo w a n d o f a d d in g a u n it v e ry h ig h . Th e se rvice is o rd e re d (b o o k e d ) in a d va n ce o f its d e liv e ry / co n s u m p tio n . De m a n d fo r th e se rvice flu ctu a tes an d ca n n o t b e p re d icte d w ith a h ig h d e g ree o f ce rta in ty . fo r p h ys ica lly id e n tica l, b u t co m m e rcia lly n o t Diffe re n t p rice s ca n b e ch a rg ed id e n tica l p ro d u cts. Cle a rly , h o te l ro o m s fit th a t p ro d u ct / s e rvice p ro file THE CAPACITY IS F IX ED AND F IX ED COST RELATIV ELY HIGH RELATIV E TO TOTAL COST: Ho tels m a n a g e a fixe d ca p a city. On ce a h o te l is b u ilt, it is d ifficu lt to a d a p t ca p a city to m a rk e t d em a n d sh o rt term . U n d e r th e se circu m stan ce s , th e m a in p ro b le m is to a ch ie ve m a xim u m re tu rn o n th e in v es tm e n t in fixe d ca p a city , th e h u m a n re so u rce p o o l a n d th e fixe d co st o f o p era tio n s .

DEMAND F OR THE SERV ICE CAN BE DIV IDED INTO DISTINCT MARK ET SEGMENTS: Ho tel Ma n a g e m e n t's d es ire is to o ffe r e a ch m a rk e t s e g m e n t th o s e typ e s o f ro o m s, ra te s a n d b o o k in g co n d itio n s w h ich b e s t m a tch cu s to m e r's n e e d s . Page 35of 81

Dis co u n t ra te s a re m a d e a v a ila b le to e a rlie r b o o k in g leis u re tra ve lle rs o r co n v e n tio n g ro u p s , u su a lly co m b in e d w ith b o o k in g re strictio n s. Rack o r h ig h yie ld in v e n to ry is p ro te cte d fo r la te r b o o k in g b u s in e ss, in d iv id u a l tra v e lle rs w ith th e n e e d fo r fle xib ility a n d ra te in se n sitiv e g ro u p s . DIF F ERENT CU STOMER TYPES COMPETE F OR A LIMITED INV ENTORY: Ma rk e t se g m e n ta tio n a n d ra te d iffe ren tia tio n a re b a se d o n th e fa ct, th a t d iffere n t cu s to m e r ty p e s b eh av e d iffe re n tly in te rm s o f w h en th e y b o o k a n d w h a t rate s th e y a re w illin g o r a b le to a cce p t u n d e r w h a t b o o k in g co n d itio n s . Gu e s t h isto ry a n a ly sis a n d m a rk e t re se a rch a re th e in s tru m e n ts to e s ta b lish a b as ic se g m e n ta tio n a n d in fo rm a tio n co n ce rn in g p rice e la sticity o f in d iv id u a l s e g m e n ts a n d th e re v e n u e e ffe cts o f b o o k in g re strictio n s. PRICE ELASTICITY V ARIES AMONG COMPETING CU STOMER SEGMENTS: To s e g m e n t th e h o te l m a rk e t, k n o w in g th e p rice e la s ticity o f cu sto m er ty p e s a n d th e ir b o o kin g b e h a v io u r is o f g re a t im p o rta n ce . Typ ica l p rim a ry m a rke t se g m e n ts a re b u sin e ss a n d in d ivid u a l trav e lle r, m e etin g s a n d co n v en tio n s, co rp o ra te a n d le isu re g ro u p s . It is re la tiv e ly e a sy to d iffe re n tiate b e tw e e n tim e s e n sitive b u sin e s s a n d p rice s e n sitiv e le is u re cu sto m e rs b u t m o re ch a lle n g in g to k e ep th e m a p a rt th ro u g h F ENCING. Ho tel m a n a g e m e n t p u rsu e s d iffe re n t m a rk e tin g s tra te g ie s a n d y ie ld m a n a g e m e n t ta ctics fo r th e se d iffe re n t cu s to m e r g ro u p s. INV ENTORY IS PERISHABLE AND CANNOT BE STORED TO BE SOLD AT A LATER DATE: Ho tel ro o m s cle a rly a re p e rish a b le p ro d u cts w h ich lo o se th e ir va lu e , if n o t co n s u m e d a t a sp e cific p o in t in tim e . Ho tel ro o m s ca n n o t b e s to re d fo r fu tu re sa le , if d e m a n d is in su fficie n t o r a d d itio n a l u n its cre a te d , if d e m a n d is la rg e r th a n in ve n to ry . It is th e co m p e titio n w h ich b e n e fits fro m d e n ie d b o o k in g s, e v e n if ro o m s g o u n so ld o n a rriv a l d a y. THE MARGINAL COST OF SELLING AN ADDITIONAL U NIT IS LOW AND OF ADDING A U NIT IS HIGH: Page 36of 81

On ce a ce rta in n u m b e r o f u n its is so ld , th e m a rg in a l co st o f se llin g a n a d d itio n a l u n it is lo w a n d ca n b e n eg le cte d in v ie w o f y ield m an ag e m en t ta ctica l in ve n to ry a llo ca tio n . Th e a d d itio n a l re ve n u e , th o u g h , g e n e ra te d b y a n ad d itio n a l sa le a lm o st fu lly co n trib u te s to co ve r fixe d co st o r b o tto m lin e p ro fit. THE SERV ICE IS ORDERED (BOOK ED) IN ADV ANCE OF ITS DELIV ERY / CONSU MPTION: Ho tels s e ll th e ir in ve n to ry w e e k s , d a ys o r h o u rs p rio r to a rriva l, b u t in sp e cia l m a rk e ts ( g ro u p s, co n v e n tio n s ) b o o kin g s a re m a d e m o n th s o r e ve n y e a rs in a d v a n ce . Wh e n fu tu re h o te l ro o m s are so ld , h o te l m a n a g e m e n t h a s th e p ro b le m o f m ak in g a d ecis io n to d a y affe ctin g fu tu re a va ila b ility a n d rev e n u e s. a ctu a l d e m an d o n a rriv a l d a y a n d re se rva tio n s d e v e lo p m e n t u n til a rriva l d a y u s u a lly a re n o t k n o w n a n d re ve n u e m a y w e ll b e lo s t b y s e llin g lo w ra te s e a rly a n d d is p la cin g h ig h va lu e b u s in e ss b o o k in g s w h ich m a te ria lise clo s e to arriva l. DEMAND F OR THE SERV ICE F LU CTU ATES AND CANNOT BE PREDICTED WITH A HIGH DEGREE OF CERTAINTY: Th e lo d g in g in d u s try su ffe rs fro m s tro n g to ta l a n d se g m e n t d e m a n d flu ctu a tio n s fo r s in g le d a ys o r p e rio d s. De m a n d flu ctu a te s d aily, w e ek ly, m o n th ly, s e a so n a lly fo r a ll typ e s o f p ro d u cts, ra te s, a rriv a l a n d d e p a rtu re d a te s. On e -tim e o r re cu rrin g e ve n ts, s u ch a s Oly m p ic Ga m e s , e xh ib itio n s , co n v en tio n s, h u rrica n e s a n d h o te l o p e n in g s can im p a ct h e a v ily o n d e m a n d fo r ce rta in a rriv a l d ay s a n d su b s e q u e n tly o n re ve n u e . DIF F ERENT RATES CAN BE CHARGED F OR A PHYSICALLY IDENTICAL PRODU CT: Th e lo d g in g in d u stry h a s ch a rg e d d iffe re n t ra te s fo r d iffe re n t s e a so n s , p e rio d s o r p h y sica lly , b u t co m m e rcia lly n o t id e n tica l p ro d u cts : a rriva l d ay s fo r g e n e ra tio n s fo r A MONDAY ROOM IS NOT A TU ESDAY ROOM AND A TU ESDAY THROU GH F RIDAY ROOM IS NOT A READY THROU GH MONDAY ROOM! Co rp o ra te , g ro u p , w e e k e n d an d o th e r s p e cia l ra te s a re co m m o n p ra ctice a n d cu s to m e rs h a d to le a rn to live w ith it.

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Airlin e s h a ve led th is d e ve lo p m e n t b y ch a n g in g fa re a va ilab ility a n d b o o kin g res trictio n o v e r 10 0 m illio n tim e s p e r y e a r.

3 .2 YIELD MANAGEMENT BENEF ITS IN V IEW OF PROPERTY TYPES & MARK ETS SERV ED Index Th e re cle a rly a re typ e s o f p ro p e rtie s a n d / o r m a rk e ts se rve d w h ich len d th e m s e lve s m o re o r les s to YM p ra ctice s an d co n ce p ts. In g e n e ra l, YM w o rk s b e tte r fo r p ro p e rtie s s e rv in g a va rie ty o f d is tin ctly d iffe re n t m a rk e t se g m e n ts, i.e . cu s to m e r g ro u p s o f v a ry in g a ve rag e y ie ld , p rice e la sticity, re as o n s fo r tra ve llin g (d u ra tio n / p e rio d s o f u tilisa tio n ) a n d / o r b o o kin g b e h a v io u r. Th e m o re h o m o g e n e o u s th e cu sto m e r typ es in v ie w o f th e a b o v e m e n tio n e d a sp e cts, th e le ss rev e n u e im p ro ve m e n t ca n b e e xp e cte d fro m ra te d iffe re n tia tio n . Still, e v e n a o n e -ra te e co n o m y h o tel ca n a p p ly yie ld m a n a g e m e n t b y co n tro llin g d u ra tio n , w h e re -a s re q u e s t fo r m o re n ig h ts (m o re $s fo r th e h o te l) g e n e ra lly en jo y a g re a te r a va ila b ility th a n sh o rt stay s. A re so rt p ro p e rty in Sp a in , se llin g 9 0 % o f its a p a rtm e n t in ve n to ry to o n e m a jo r U K to u r o p e ra to r m a y n o t b e co n vin ce d to in ve st s ca rce re so u rce s in a so p h istica te d ta ctica l YMS. A m u lti-s eg m e n t city p ro p e rty in tu rn , se rvin g a w id e r ra n g e o f m a rk et se g m e n ts, su ch a s co rp o ra te , co n v e n tio n s, g ro u p s, to u r o p e ra to rs, sh o rt b re a ks , le is u re a n d in d ivid u a l tra v e lle rs w ill ce rta in ly re ap m u ch la rg e r b e n e fits fro m p ra ctis in g YM. Re la tiv e re ve n u e im p ro ve m e n ts ca n d e p e n d o n m a n y fa cto rs, b u t w ill m a in ly b e d rive n by: Qu ality a n d p ro fe ss io n a lism o f th e h u m a n re s o u rce p o o l o n a ll le v e ls Th e m a tu rity o f th e sy ste m in fras tru ctu re Th e le ve l o f s ys te m s in te g ra tio n Th e a ctu a l YMS (a p p lica tio n ) in p lace Dep e n d in g o n th e sp e cific situ a tio n , a ve rag e re ve n u e (y ie ld ) im p ro ve m e n ts b e tw e e n 0 a n d 5 % ca n u su a lly b e ach ie v ed re la tiv e ly so o n , a s lo n g a s m a jo r se g m e n t o r d e s tin a tio n d e m an d d o e s n o t d e clin e a n d w e ll tra in e d a n d e xp e rie n ce d s ta ff d o e s n o t le a ve in th e m id d le o f th e p ro ce ss. Th e la w o f d e clin in g re tu rn s a p p lie s to Yie ld Ma n a g e m e n t p ro g ra m s to o a n d fu rth e r o n g o in g re v e n u e im p ro ve m e n ts w ill b e h a rd e r a n d m o re co stly to a ch ie v e e a ch ye a r (co m p a rin g w ith le v els a ch ie ve d las t p e rio d ). Pre v e n tin g y ie ld to d e clin e in d ifficu lt m a rk ets re la tive to co m p e tito rs ' p e rfo rm a n ce s h o u ld b e se e n a s an im p o rta n t a ch ie v e m en t! Page 38of 81

3 .3 BASIC YIELD MANAGEMENT SYSTEM REQU IREMENTS Index Th e m a jo rity o f YMS n e e d th e s am e k in d o f d a ta a n d in fo rm a tio n a n d s h are ce rta in req u ire m e n ts fo r s u cce ss fu l o p e ra tio n : An a p p ro p ria te Da ta Pro ce ss in g Sys te m : so ft- a n d h ard w a re A Res e rv a tio n Sys te m (CRS/PMS) A De cis io n Su p p o rt Sy ste m (DSS) A Da ta b a s e o f Pa st Tra n sa ctio n s (Histo ry ) Stru ctu re d Se g m en t De m a n d In fo rm a tio n A F o re ca stin g Mo d e l/Sys te m An Op tim is a tio n Mo d e l A Mo n ito r a n d Pe rfo rm a n ce Co n tro l Sys te m A cle a rly d e fin e d Ma rk e tin g Po licy A d em a n d o rie n te d Rate Stru ctu re A ra tio n a l se t o f e ffe ctive F e n ce s A cle a rly d e fin e d p o licy co n ce rn in g Ove rb o o k in g a n d Se rvice Qu ality A m e d iu m - a n lo n g -te rm Yie ld Ma n a g e m e n t Stra te g y AN APPROPRIATE DATA PROCESSING SYSTEM: To a cce s s a n d p ro ce s s a ll re le va n t d a ta a n d in fo rm a tio n n e e d e d fo r re v en u e o p tim a l in ve n to ry co n tro ls in a s p e e d y a n d co st e fficie n t m a n n e r. Typ e , s ize a n d p ro ce ss in g sp e e d o f h ard w a re u s e d is d e te rm in ed b y th e s ize o f th e o p era tio n a n d sp e cific re q u ire m e n ts b y th e y ie ld m a n a g em e n t a n d re se rva tio n s ys te m s o ftw a re . A h o te l ch a in , m a n a g in g h u n d re d s o f p ro p e rtie s, w o u ld n o rm a lly e m p lo y a m a in fra m e o r a n u m b e r o f lin k e d m in i-co m p u te rs to co p e w ith larg e q u an titie s o f d a ta an d th e co m p le xity o f m o d els. Sm a lle r h o te l g ro u p s o r in d ivid u a l p ro p e rtie s w o u ld n o rm a lly u se PCs o r p o w e rfu l w o rk sta tio n s to s u p p o rt y ie ld m a n a g e m e n t a n d re se rv a tio n s ca p a b ilitie s .

A RESERV ATION SYSTEM:

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Ce n tra l re se rva tio n sy ste m s (CRS) o r th e lo ca l p ro p e rty m a n a g e m e n t sy ste m s (PMS) a re lik e e le ctro n ic (virtu a l) s to re sh e lve s , w h e re re se rva tio n s fo r d iffe re n t p ro d u cts (ro o m typ e s), a rriva l a n d d e p a rtu re d a te s a re s o ld a n d w h e re ca n ce lla tio n s o ccu r. Th e m a jo rity o f to d a y's re s erva tio n sys te m s s u p p o rt d iffe re n t m e th o d s o f re se rva tio n sa le s co n tro ls . Mo st cu rre n tly a va ila b le s ys te m s a llo w o ve rb o o kin g a n d b o o k in g lim its fo r ra te (b o o k in g ) cla sse s a n d sto re a v aila b ility b y ro o m typ e a n d / o r ra te cla s s fo r fu tu re a rriva l d ay s. In a d d itio n , s o m e sy ste m s a ls o a llo w d u ra tio n a n d m o re co m p le x co n tro ls . A DATABASE OF PAST TRANSACTION: Th e la st 1-3 y e a rs o f h is to ric tra n sa ctio n s, in clu d in g a ll b o o kin g s (re se rv a tio n b u ild -u p & s tru ctu re , re la tiv e b o o k in g d a te ), a rriva ls, d e p a rtu re s , ca n ce lla tio n s, n o -s h o w s, w a lk -in s, e a rly / la te d e p a rtu re s , re ve n u e s (in clu d in g F & B), w a lk e d g u es ts a n d co st o f o v e rb o o k in g . Th e firs t ste p to w a rd s a fu lly o r se m i-a u to m a te d yie ld m a n a g e m e n t s ys te m is co m p le te s to rag e o f d a ta n e e d e d a n d g e n e ra te d d a ily b y th e CRS/PMS fo r fu tu re an a ly sis. Th e s e d a ta a re th e a b so lu te ly es se n tia l raw m a te ria l fo r a n y k in d o f d e m a n d fo re ca stin g a n d re v e n u e o p tim is in g in ve n to ry a llo ca tio n .

STRU CTU RED SEGMENT DEMAND INF ORMATION: To im p ro v e d e cis io n m a k in g , Ho te l Yie ld Ma n a g e m e n t Sys te m s re q u ire h is to ric in fo rm atio n o n b o o k in g s, b u s in e s s tra n sa ctio n s a n d d e m a n d b y m a rk e t se g m e n t. F o r p ro d u ct / ra re cate g o rie s , a rriv a l a n d d e p a rtu re d ay co m b in a tio n , b o o kin g cu rve s ca n b e d e v e lo p e d b y m ark e t se g m e n t / b o o kin g clas s. Re s e rva tio n d a ta ca n b e stru ctu re d to re fle ct s e as o n a lly o r re cu rrin g e ve n ts a n d b o o k in g cu rve s g en era te d fo r d e m a n d fo re ca stin g . No Yie ld Ma n a g e m e n t Sys te m d e se rvin g its n am e ca n p ro d u ce re su lts w ith o u t g o o d (se g m e n t) d e m a n d fo re ca stin g ca p a b ilitie s. A F ORECASTING SYSTEM: To d e te rm in e fu tu re su p p ly (a va ila b ility) a n d d e m a n d it is n e ce ss a ry to fo re cas t cu s to m e r b e h a vio u r (b o o k in g s , ca n ce lla tio n s , n o -sh o w s , w a lk -in s, ea rly / la te d e p a rtu re s) b as e d o n h isto ric d a ta . Ap a rt fro m co m p e tito rs' a ctio n s a n d o th e r e xte rn a l fa cto rs , re lative ly re lia b le fo re ca sts can b e p ro d u ce d b y u s in g s ta tis tica l tim e se rie s a n d / o r ca u sa l m o d e ls . Page 40of 81

AN OPTIMISATION MODEL To d e te rm in e rev e n u e m a xim is in g b o o k in g lim its fo r e a ch b o o k in g (ra te ) cla s s in vie w o f e xp e cte d re se rva tio n re q u e s t, a n o p tim isa tio n m o d e l n e e d s to b e d e v e lo p ed . To d e te rm in