Revenue Management (Yield Management)

Occupancy Percentage

To understand yield management, we will first review some of the traditional measures
of success in a hotel. Occupancy percentage historically revealed the success of a hotel’s
staff in attracting guests to a particular property. This traditional view of measuring the
effectiveness of the general manager, marketing staff, and front office staff was used to
answer such questions as how many rooms were sold due to the director of sales’ efforts
in creating attractive and enticing direct mail, radio and television ads, billboard displays,
or newspaper and magazine display ads? How effective were reservation agents in meeting
the room and amenity needs of the guests? Did travel agents book a reservation? How
competent were front office staff members in making the sale? While interpretations of
occupancy percentage are still good indicators of the staff’s efforts, in this article we
will focus on applications of yield management.
The occupancy percentage for a hotel property is computed daily. The method used
to determine it is as follows:
(number of rooms sold)/number of rooms available*%=single occupancy %
To see how this formula works, consider a hotel that sold 75 rooms with a room
inventory of 100 rooms; this would yield a 75 percent occupancy percentage:
75/100*%=75%
Investors also use occupancy percentage to determine the potential gross income of a
lodging establishment. For example, a 100-room property with a daily average 65 percent
occupancy and an $89 average daily rate generates about $2.1 million in sales annually:
100 rooms    0.65 occupancy    65 rooms occupied daily; 65    $89 room rate    $5,785
revenue per day; $5,785    365 days in a year    $2,111,525 gross income from room
sales annually.
However, it is also important not to assume that occupancy is standard each night.
Variations are reflected in the following example:
A 65 percent occupancy is usually achieved on Monday, Tuesday, and Wednesday
evenings. However, Thursday, Friday, and Saturday night statistics reveal a 40 percent
occupancy, with Sunday night occupancy at 50 percent. Therefore:
Monday–Wednesday: 100    0.65    $89    156 (52    3)    $902,460
Thursday–Saturday:  100    0.40    $89    156 (52    3)    $555,360
Sunday:                  100    0.50    $89    52                       $231,400
                                                                                          Total: $1,689,220
Double occupancy is a measure of a hotel staff’s ability to attract more than one guest
to a room. Usually a room with more than one guest will require a higher room rate and
thus brings additional income to the hotel. This method is also traditional in determining
the success of building a profitable bottom line. The method to determine double occu-
pancy percentage is as follows:
(number of guests-number of rooms sold)/number of rooms sold*%=double occupancy %
If a hotel sold 100 rooms to 150 guests, then the double occupancy percentage is 50
percent, computed as follows:
(150-100)/100*=50%
Average Daily Rate
Average daily rate (ADR) is a measure of the hotel staff’s efforts in selling available
room rates. Such questions as why more $85 rooms than $99 rooms were sold, or whether
the marketing office developed attractive weekend packages to sell the $80 rooms instead
of relying on the desk clerk on duty to take any reasonable offer from a walk-in guest,
are typically answered when the ADR is reviewed.
The method to compute the ADR is as follows:
total room sales/number of rooms sold
If a hotel has daily room sales of $4,800 with 60 rooms sold, the ADR is $80, computed
as follows:
$4,800/$80=60
The ADR is used in projecting room revenues for a hotel, as previously described in
the discussion of occupancy percentage. Occupancy percentage and ADR computations
are essential parts of yield management, because they challenge hoteliers to maximize
occupancy and room rates.
RevPAR
RevPAR (revenue per available room) was introduced in Chapter 1 to allow you to
understand one of the financial determinants that hoteliers use. RevPAR is determined
by dividing room revenue received for a specific day by the number of rooms available
in the hotel for that day. The formulas for determining RevPAR are as follows:
room revenue/number of available rooms
or hotel occupancy*average daily rate
This type of financial insight into a hotel’s ability to produce income allows owners,
general managers, and front office managers to question standard indicators of hotel
success. RevPAR asks the question “How many dollars is each room producing?” If there
are certain rooms that are always occupied because of a lower rate, attractive amenities,
or other reasons, then the hotel’s administration may want to duplicate those sales to
similar markets. This questioning opens the door for the concept of yield management,
which turns the passive efforts of hoteliers into aggressive financial strategies.

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