The key to selling the right unit, in the right place, at the right time, for the right price is yield management. While it’s one of the more complicated aspects of vacation rental management, mastering yield management and employing a technology to facilitate distribution of the strategy are vital to a profitable operation.
Yield management is the optimization of a component, such as occupancy or price. Rather than explaining the technical aspects of yield management, let’s look at how it applies to the two common scenarios: raising average daily rate (ADR), and increasing occupancy.
Yield Management for a Higher Daily Rate
When demand is significantly higher than supply, yield for higher ADR. This requires setting an occupancy limit and understanding historical data such as close rates and average lead-time for sales. For instance, some properties have an occupancy limit set at 80 percent, and any time occupancy is projected to pass 80 percent, rates are raised to maximize profit on the final units. Typically, this happens during peak season, special events, or during functions.
There are two common ways to predict the ideal rate. The first is to determined the shift in demand and apply it to ADR (for example, a 10 percent shift in demand equals a 10 percent shift in rate). This can work if there aren’t any outside influences, such as unexpected substitutes for lodging in the market.
Yielding based on inventory is more complex, but it can also have the most reward. For instance, if a property has less inventory than average for a given time period, it’s safe to assume that the inventory will move and rates can be raised. When we create inventory yield strategies, we craft it around the number of days out (60, 30, 15, 7) and inventory limits. When maximizing for ADR, occupancy is the limit; the idea is to approach target occupancy but never hit it.
Yield Management for Occupancy
When supply is greater than demand, yield for occupancy. The key is to understand margins and not yielding for bookings when it drives a negative margin (also called the “heads in beds” strategy). A loss leader approach in this situation is only valuable if there’s a separate revenue center where losses can be made up, such as an attraction or service add-on.
To yield for occupancy, calculate a hypothesis for the market saturation point then set prices at that point. It’s not necessary to have the lowest prices—just low enough to show value. In fact, standard discounts aren’t always the best option. Offering promotions that increase the length of stay or creating value-added packages can be more effective, because they’ll differentiate your property (and help control costs). When maximizing for occupancy, the limit is a price.
Some believe this process can be automated, and while it can be, the optimal scenario is to pair up smart people-led strategies with technology that automates those strategies.