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Yield management in Hyatt Hotels. On a flight to Goa, two passengers were discussing about the price they paid for the flight and hotel. They were amazed.

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Presentation on theme: "Yield management in Hyatt Hotels. On a flight to Goa, two passengers were discussing about the price they paid for the flight and hotel. They were amazed."— Presentation transcript:

1 Yield management in Hyatt Hotels

2 On a flight to Goa, two passengers were discussing about the price they paid for the flight and hotel. They were amazed at the price difference as one of them was charged 6800 INR for a round trip airfare and INR for a hotel and the other 4600 INR for the airfare and just INR for the same hotel. The first passenger had booked his flight and hotel only one day in advance while the other a month in advance. How can the same airline or hotel manage profit by charging so discriminately? The answer to this amusing question is Revenue Management.

3 Yield Management is a method of selling: the right inventory to the right inventory to the right customer at the right customer at the right time at the right time at the right price. the right price.

4 Yield Management Qualifiers of Hyatt Perishable Inventory Variable Demand, Fixed Capacity Sales via Reservations Multi-Pricing Capability Low Variable Costs Pricing is a Powerful Drive

5 Introduction Hyatt hotel corp. was founded in Hyatt hotel corp. was founded in Its HQ at Chicago Its HQ at Chicago It possesses 111 hotels and resorts and more than 55,000 guestrooms in 44 countries. It possesses 111 hotels and resorts and more than 55,000 guestrooms in 44 countries. Annual Revenue of Hyatt is $3.4b. Annual Revenue of Hyatt is $3.4b.

6 Determinants of demand of Hotels Tourist arrivals to India increased Tourist arrivals to India increased - Tourist growth - Tourist growth Average length of stay in the country is highest in the world i.e. 31.2days. Average length of stay in the country is highest in the world i.e. 31.2days. Indian Govt. plans to boost the travel & tourism industry Indian Govt. plans to boost the travel & tourism industry Abolishment of air travel tax of 15% Abolishment of air travel tax of 15% Reduction in the aviation fuel to 8% Reduction in the aviation fuel to 8% Campaigns Campaigns MNC s are growing rapidly in India.MNC s are growing rapidly in India.

7 Bookings at Hyatt Sales via Reservations Hyatt makes reservations in advance Weeks and Months ahead Many reservations also made at the last minute

8 Multi-Pricing Capability Market Segmentation Published Price List (available online or telephonically )

9 Low Variable Costs Fixed: Construction Costs, Admin Personnel Variable: Service Provider Room Cleaning, Products

10 Financial Impact Before YM $100K Revenue $10K Profit (10%) After YM $105K Revenue (+5%) $2.5K Increase in Profit 25% Increase in Profit

11 Strategy of Hyatt ? Strategy of Hyatt ? Two fare classes : full price and discount price. Two fare classes : full price and discount price. The hotel has 210 rooms available for oct 29 (assume that oct 29 is a Monday night). It is now the end of september, and the hotel is beginning to take reservations for that night. The hotel could sell out all 210 rooms to leisure travelers at the discount price, but it also knows that an increasing number of business customers will request rooms as March 29 approaches and that these business customers are willing to pay full price. The hotel has 210 rooms available for oct 29 (assume that oct 29 is a Monday night). It is now the end of september, and the hotel is beginning to take reservations for that night. The hotel could sell out all 210 rooms to leisure travelers at the discount price, but it also knows that an increasing number of business customers will request rooms as March 29 approaches and that these business customers are willing to pay full price. To simplify this problem, Hyatt Hotel assumed that leisure demand occurs first and then business demand occurs. Hence it decided how many rooms it was willing to sell at the leisure fare or in other words, how many rooms shall it protect (i.e., reserve) for the full price payers. To simplify this problem, Hyatt Hotel assumed that leisure demand occurs first and then business demand occurs. Hence it decided how many rooms it was willing to sell at the leisure fare or in other words, how many rooms shall it protect (i.e., reserve) for the full price payers. If too many rooms are protected, then there may be empty rooms when March 29 arrives. If too many rooms are protected, then there may be empty rooms when March 29 arrives. If too few are protected, then the hotel forgoes the extra revenue it may have received from business customers. If too few are protected, then the hotel forgoes the extra revenue it may have received from business customers.

12 Why Hyatt is appropriate for the practice of yield management ? 1.It is expensive or impossible to store excess resource (they cannot store tonight's room for use by tomorrow night's customer). 2.Commitments need to be made when future demand is uncertain (they must set aside rooms for business customers - "protect" them from lowpriced leisure travelers - before we know how many business customers will arrive). many business customers will arrive). 3.The firm can differentiate among customer segments, and each segment has a different demand curve (purchase restrictions and refundability requirements help to segment the market between leisure and business customers. The latter are more indifferent to the price.). 4.The same unit of capacity can be used to deliver many different products or services (rooms are essentially the same, whether used by business or leisure travelers). 5.Producers are profit-oriented and have broad freedom of action (in the hotel industry, withholding rooms from current customers for future profit is not illegal or morally irresponsible.

13 Predictors tracked at Hyatt to determine duration of demand cycle. How best to plan for high demand? one day (varies by hour) one day (varies by hour) one week (varies by day) one week (varies by day) one month (varies by day or by week) one month (varies by day or by week) one year (varies by month or by season or reflects annual events) one year (varies by month or by season or reflects annual events) some other period some other period

14 Causes of these cyclical variations? employment schedules employment schedules wage and salary payment dates wage and salary payment dates school hours and vacations school hours and vacations seasonal changes in climate seasonal changes in climate occurrence of public or religious holidays occurrence of public or religious holidays natural cycles, such as coastal tides or phases of the moon natural cycles, such as coastal tides or phases of the moon

15 Demand Levels are changed randomly due to : day-to-day changes in the weather day-to-day changes in the weather health events whose occurrence cannot be pinpointed exactly health events whose occurrence cannot be pinpointed exactly accidents, fires, or even criminal activities accidents, fires, or even criminal activities natural disasters, from earthquakes to storms to mud slides and volcanic eruptions natural disasters, from earthquakes to storms to mud slides and volcanic eruptions

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17 Patterns and Determinants of Demand: Predictable Demand Patterns and Their Underlying Causes day day week week month month year year other other billing or tax payments/refunds pay days school hours/holidays seasonal climate changes public/religious holidays natural cycles employment (e.g., coastal tides) Predictable Cycles of Demand Levels Underlying Causes of Cyclical Variations

18 Hotel Room Demand Curves by Segment and Season B h = business travelers in high season B l = business travelers in low season T h = tourist in high season T l = tourist in low season BhBh BhBh BlBl BlBl ThTh ThTh TlTl TlTl Price per room night Quantity of rooms demanded at each price by travelers in each segment in each season Note: hypothetical example

19 Variations in Demand Relative to Capacity (Fig 9.1) VOLUME DEMANDED TIME CYCLE 1 TIME CYCLE 2 Maximum Available Capacity Optimum Capacity (Demand and Supply Well Balanced) Low Utilization (May Send Bad Signals) Demand exceeds capacity (business is lost) Demand exceeds optimum capacity (quality declines ) Excess capacity (wasted resources) CAPACITY UTILIZED Use marketing strategies to smooth out peaks, fill in valleys Use marketing strategies to smooth out peaks, fill in valleys Many firms use a mix of both approaches Many firms use a mix of both approaches

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21 Recommendations Booking hotel reservations online Booking hotel reservations online Online travel booking through Branded Website Online travel booking through Branded Website Sliding scale pricing Sliding scale pricing Tie up with Transportation service providers like buses, cabs to bring customers Tie up with Transportation service providers like buses, cabs to bring customers Doing extra benefits of stay in hotel during lean period to be different than other hotels and attract more customers. Doing extra benefits of stay in hotel during lean period to be different than other hotels and attract more customers.


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