yield management pages 6 · pdf fileclock-related tactics revolve around the timing of the...

CHR Reports

Center forHospitality Researchat Cornell University

The

YIELD MANAGEMENT

2 • Center for Hospitality Research at Cornell University

CHR Reports

is produced for the benefit of the hospitality industry by

the Center for Hospitality Research at Cornell University

Cathy A. Enz, Executive Director

Glenn Withiam, Director of Publications Services

Copyright © 2001 by Cornell University

Yield Management Report • 3

Yield management is the umbrella termfor a set of strategies that enablecapacity-constrained service industriesto realize optimum revenue fromoperations. The core concept of yieldmanagement is to provide the rightservice to the right customer at the righttime for the right price. That conceptinvolves careful definition of service,customer, time, and price. The servicecan be defined according to thedimensions of the service, how andwhen it is delivered, and how, when,and whether it is reserved. Timinginvolves both the timing of the servicedelivery and the tining of when thecustomer makes known the desire forthe service, whether by reservation or bywalking in to the business. Price can beset according to the timing of theservice, the timing of the reservation, thetype of service, or according to otherrules that seem appropriate. Finally, thecustomer can be defined according todemand characteristics relating to theservice, the timing, and the price. Theideal outcome of a revenue-management strategy is to matchcustomers’ time and service

characteristics to their willingness topay—ensuring that the customeracquires the desired service at thedesired time at an acceptable price,while the organization gains themaximum revenue possible given thecustomer and business characteristics.

The strategic levers of yield managementcan be summarized as four Cs: namely,calendar, clock, capacity, and cost. Theyare bound together by a fifth C: thecustomer. The strategic levers of yieldmanagement are geared to matchingservice timing and pricing to customers’willingness to pay for service in relationto its timing. Based on customers’demand levels and characteristics,management can shift the demand ofthose customers who are relatively pricesensitive but time insensitive to off-peaktimes. Shifting that demand clears primetimes for customers who are relativelytime sensitive but price insentive.

C1: Calendar. Calendar-related yield-management levers rely on demandforecasts to determine the dates onwhich demand is strong or slack. Bycorrectly forecasting demand, a yield-management system can recommend

Summary continues on page 14

The “4-C” Strategy forYield Management

Executive Summary


The key concept underlying yieldmanagement’s strategic levers is to match thetiming of service delivery with the customer’swillingness to pay for a service rendered at thattime. The time element is a key to yield manage-ment, both in terms of when a service isordered (or reserved) and when that service isperformed. Most yield-management strategies

involveprice-relatedmethodso fshiftingdemand

according to a consumer’s price sensitivity andthe duration of the service involved. To shiftdemand, a manager must be able to predict thepeaks and valleys, either by keeping track of pastexperience or by watching reservation patterns.

The goal of a successful yield manage-ment strategy is to gain control of customerdemand by using the time- and price-relatedstrategic levers. Four factors enter into thetactics used to execute this strategy. Thesefactors can be remembered as “4Cs”: calendar,

clock, capacity, and cost. The 4-C factors areinextricably bound together as yield-manage-ment revenue levers. The calendar-related tacticsinvolve controlling when the sale (or reserva-tion) is made. Clock-related tactics revolvearound the timing of the service delivery. Thecapacity issue involves clearing the market byselling available capacity, while smoothing outthe peaks and valleys in customer demand.Finally, cost is the price of the service, which isset at a level that permits the effective function-ing of the other factors. Ideally, a manager cancontrol the flow of customer demand by settinga market-clearing price according to when thesale is made and when the service is delivered,so that the business sells its available capacity forthe most possible revenue.

Yield management is not per se a discount-ing strategy, even though it does involveadjusting prices and giving discounts undercertain conditions. What sets yield managementapart from blanket discounting strategies is thatyield management sets rules (known as ratefences) on offers of discounted prices. Yieldmanagement works most effectively at themargin—as companies seek to expand overall

A“4-C” Strategy for Yield Management

Yield management has developed into a powerful strategy for boosting revenues andimproving the flow of customer demand. To accomplish those objectives, yield manage-ment uses the basic stratagy of providing the right service at the right time to right cus-tomer at right price. Each element of that strategy involves specific strategic levers thatallow a manager to conduct an effective and profitable yield-management strategy. Themost important strategic levers connect price with timing. This report explains thosestrategic levers and give the steps for applying them in a variety of service organizations.

Center f or Hospitality Research Report, by Glenn Withiam

The goal of yield management is touse strategic levers to match demandwith availability.


sales by adjusting prices and service timing to fillout demand for a given period (whether that is ameal period, a room-night, or an airplane flight).From the company’s point of view, yieldmanagement is a way to maximize revenueduring busy times and to obtain at least somerevenue from service units that would otherwisego unused (e.g., unsold hotel room-nights,empty restaurant seats).

An effective yield-management strategyseparates price-insensitive customers from price-sensitive customers according to the time theservice is rendered or a reservation is made. Toobtain service at premium times, price-insensi-tive customers pay top dollar, while price-sensitive customers take advantage of lowerprices during non-peak times. The outcome of awell-executed yield management strategy shouldbe higher revenue for the operation andcustomers who are satisfied that their particulardemand characteristics have been met. That is,customers who are willing to pay for peak-timeservice will receive that premium service, whilecustomers who seek a price concession arehappy to pay a reduced price in exchange fortheir willingness to follow whatever policiesqualify them for that price.

The nature of the service businessdictates which strategic levers will be mosteffective. Businesses that offer a service with aknown or fixed duration, but which have avariable price can use price incentives tomanipulate demand. Businesses that do notoffer a service of specific duration must work todefine their service in terms of duration.Restaurants, for instance, should work to definetheir service as duration at table, rather than as ameal. Since their prices are relatively fixed (thatis, they generally cannot change the price of ameal according to, say, when a reservation camein), restaurants must use other tactics, such asforecasting and controlling guests’ arrival anddeparture to maximize revenue from availablecustomers.

To return to the the airline industry, forinstance, the duration of the customer’s use ofthe service is entirely predictable: it is the lengthof an airplane flight. Other industries with

Typology of revenuemanagement

Price

Dur

atio

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Unp

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MoviesStadiums and arenasConvention centers

Although all of the businesses in the boxes above have capacityconstraints, they are subject to different combinations of pricingand duration for their services. A classic yield-management tacticis to use a variety of price classes to shift demand for a service of aknown duration. Thus, airlines and hotels are ideally suited tooperating yield-management levers. Restaurants and golf courses,on the other hand, have to adapt the strategic yield-managementlevers, because their prices are largely fixed and the duration ofthe service is variable and unpredictable. By using price fences ofvarious kinds and by using process management and other tacticsto standardize their services, restaurants and golf courses canfiguratively move their operations into the upper right quadrantoccupied by classic yield-management firms

Pred

icta

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Fixed Variable

HotelsAirlines

Rental carsCruise lines

RestaurantsGolf courses

Internet-serviceproviders

Continuing-carehospitals


similarly predictable duration of customer useare hotels (use of the room for a night orspecified number of nights) and car-rental firms(use of a car for an agreed-on rental period). Incontrast, although restaurant operators can makean educated guess regarding how frequently theycan turn their tables, customers may still elect tolinger. Thus, restaurant service duration forrestaurants remains unpredictable. The same istrue for golf courses, since the time elapsed toplay a round of golf depends on many uncon-trollable factors.

Price is another matter entirely. Eventhough airlines know the duration of theirservice, the price they will charge for that servicevaries considerably, depending chiefly onanticipated demand for the flight. Given ademand forecast, the airline can open or closelow-price seats (with travel restrictions) in anattempt to fill the plane for the highest possiblerevenue.

Hotels encounter a set of challengessomewhat different from those of airlines andrestaurants. While a hotel does not have tounravel the same service-duration issue as arestaurant, most hotels do not have sufficientmarketing power to change room rates at will, asairlines do. One reason for hotels’ less-flexiblepricing is that would-be hotel guests generallyhave more choices of accommodation than dowould-be fliers. As explained later, some hotelcompanies have attempted to use variable roomrates by applying specific rules, known as ratefences, to enable a price-based yield-manage-ment strategy.

Restaurant rate fences

Tangible rate fences

Intangible rate fences

• Table location• Party size• Menu type• Presence or absence of certain amenities (e.g., bread

on the table)

• Group membership or affiliation• Time of day or week• Duration of use• Timing of booking• Walk-in or reservation• Type of reservation (guaranteed or not)

Although restaurants are not ideally suited to yield management(owing the the fact that their prices are essentially fixed), restau-rant operators can still apply yield-management-type tactics totheir prices to improve revenues. The key to virtual yield manage-ment for a restaurant is to use time-based strategic levers. One ofthose levers is the use of rate fences. The rate-fence rules mustmake sense to the customer and not offend customers’ sense offair play. Tangible rate fenses are those that are visible to thecustomer, while intangible fences are not immediately apparent.Many restaurateurs apply some or all of the above tactics, butyield management requires the integration of tactics with strategy.

The starting point of a yield-managementstrategy is forecasting demand.

C1: CalendarThe heart of a yield-management strategy isforecasting demand and having a reasonablyfirm idea of when customers will arrive(and depart) so that one can manage thatdemand. Most yield-management systemsrest on historical demand patterns for each


rate class. However, a key matter to beincluded in any mathematical solution is theextent of cannibalization among rateclasses—that is, the number of high-priceunits that go unsold because buyers havetaken advantage of a lower price.

Overbooking is a topic that also has beenheavily researched. The forecast model mustmake allowance for overbooking policies andinclude likely percentages of no-shows. Ifoverbooking policies are integrated with theyield-management system, a company willusually end up underselling a given time period.Airlines have alleviated this problem by sellingnonrefundable tickets, but many ticket holderscan still renege or reschedule. As a result, theairlines use overbooking to hedge their forecast-ing bets, based on their historical estimates ofthe number of refundable-ticket holders whowill actually embark on a particular flight. Hotelsand restaurants use similar overbookingstrategies, but have made little progress in sellingnonrefundable reservations, in part owing to thegreater supply of hotel rooms and restaurantseats (as compared to airline seats).

To invoke the full potential of a yield-management system, managers must know thedemand elasticity for each rate class. Since pricechanges affect demand, the model mustconsider the likely change in demand in re-sponse to a given price change. However, thosepricing decisions cannot be made in a vaccum.One key issue involved in pricing is that acompany cannot change its prices without takinginto account the reaction of competitors.Moreover, none of the above is possible withoutan effective and accurate information system.While this usually means computerized reserva-tions, that is not essential as long as manage-ment can obtain solid information on volumelevels for each rate class.

The that system is used to forecastdemand must be fast, reasonably accurate, andinexpensive. One common method is to usewhat is known as a threshold curve (see the nextpage for an example). This model has beenpopular because it does not involve intricatemathematics. To develop a threshold curve, the

Restaurant duration-managementmethodsReduceuncertaintyof arrival

Reduceuncertaintyof duration

Internalmeasures

• Improve forecasting• Use overbooking

• Require guaranteed reservations• Reconfirm reservations by phone• Offer service guarantees

Externalmeasures

Internalmeasures

Externalmeasures

• Redesign menus• Use process analysis• Schedule employees• Improve communication systems

• Use pre-bussing• Improve check delivery• Offer a coffee and dessert bar• Provide visual signals of timespent• Apply process analysis• Improve communication systems

Two key strategic levers for restaurant revenue management are toensure that guests arrive when expected and to standardize thelength of the meal once they arrive. The tactics to activate thoselevers must operate in the context of the gracious hospitality of therestaurant business. Thus, tactics that ensure guest arrival areaimed at encouraging them to make and honor reservations.Tactics aimed at reducing the uncertainty of duration all focus oncontrolling the time guests sit at a table, without overtly rushingthem. With the uncertainty of arrival and of duration reduced, arestaurant manager can concentrate on the main focus of yieldmanagement, which is to shift demand to achieve the bestrevenue outcome.


company collects historic data on bookings for60 to 90 days before a given date and graphsthat booking data as a curved line. Managersbuild a booking curve for each block ofinventory (e.g., a night, a meal period, a flight).Next, the manager calculates an acceptablerange of deviation from the average, generallyrepresented as a parallel curve. The variation

could be a set fraction of astandard deviation from theaverage or perhaps a percent-age. While this solution is staticand does not necessarilyoptimize demand, it is simple touse and offers a reasonableresult. The threshold curve usesaggregate demand, rather thandemand for each rate class.

C2: ClockTo reiterate, the essence ofyield management is tomatch service timing tocustomers’ willingness to payfor the service. To do that,managers must shift demandaccording to customers’price sensitivities. The chiefprice-related mechanism toaccomplish the matchingtask is differential pricing—which often involvescharging customers differentprices for using the sameservice at the same moment.To accomplish this feat,which some customersmight find offensive,managers must use price inconjunction with other yield-management levers. To

review, those levers involve durationmanagement, accounting for arrival uncer-tainty, and maintaining rate fences fordifferential rates.

Duration is the length of time it takes tocomplete one service cycle for a particular

Typical threshold demand curve

Based on its historical records (day 0 on the graph above), a hotel yieldmanager would develop a graph of expected average demand for that date,represented by the middle line. To activate a yield-management strategy, themanager sets trigger points at which to open or close rate classes either toencourage or discourage demand. If reservations fall on the gray lines belowthe expected-reservation line, the manager can open low-price rate classesand accept more business to bring reservations back up to the expectedaverage. On the other hand, if reservations exceed the average and rise to thelines above the middle, the manager can close low-rate classes and acceptonly high-rate business to dampen demand and avoid overbooking. Asexplained on the next page, group business creates distortions in the demandcurve because of group room blocks.

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customer (or party). Measurement can be interms of time or event, but the most effectiveway to manage duration is to define each servicecycle in terms of time. As discussed below,restaurateurs must calculate the average lengthof a meal to gain some control of the timeelement. Duration-management levers includeshifting customers’ time of arrival, reducinguncertainty of arrival, and controlling length ofstay. These levers must be implemented against abackground of customers’ characteristics.

Most operations that employ yieldmanagement use some type of advance-reservation mechanism. In an ideal world, acustomer would appear as arranged to claim thereservation—thus allowing managers the luxuryof knowing exactly how much of their perish-able inventory will be sold. Such certainty israrely possible, because customers frequentlyarrive on their own schedule—and sometimesnot at all. The chief problems arising fromcustomers’ erratic behavior are no-shows andlate arrivals. Yield managers seeking tactics tooffset those problems usually rely onoverbooking, cancellation penalties, or deposits(depending on customer characteristics and thenature of the business).

Even though customers are aware ofoverbooking practices, hospitality firms realizethat few customers are pleased to be deniedservice as a result of overbooking. Thus,companies have developed other policies to shiftsome of the responsibility for arrival uncertaintyto the customers themselves. Cruise lines andresorts commonly request deposits to holdreservations, for instance. Airlines have longimposed cancellation penalties on their low-price tickets, and most hotels request credit-cardguarantees for guests arriving so late that theirroom cannot be sold if they fail to arrive. Somerestaurants are experimenting with similarpolicies, including asking for credit-cardnumbers when taking reservations and chargingthe cards a fee if the customers do not show orare unduly late.

A major tactic in managing capacity as astrategic lever is to gain control of theduration of a given service cycle.

C3: CapacityA major tactic in managing capacity as astrategic lever is to gain control of theduration of a given service cycle. If compa-nies have a good estimate of serviceduration, they can come closer to the yield-management goal of selling out theirinventory in each period. Hospitalitycompanies use a number of mechanisms tocontrol duration. As with arrival uncertainty,managers can forecast the length of use (aswell as the number of early and late arrivalsand departures) so that they can accommo-date guests more effectively. A restaurateurwho has a good sense of how long a typicalparty will spend in the dining room canmake effective decisions regarding when toaccept reservations. Likewise, a hotelmanager can forecast the number of guestswho will leave a night early or stay a nightextra—and do this for each rate class.Airlines struggle with duration controlwhen trips involve more than one leg, whichis a common occurrence.

Restaurants can implement internal-process changes to achieve greater consistencyof duration. By analyzing bottlenecks in thedelivery process, restaurants can not only speedservice delivery but gain a greater control overthe timing and duration of service. An exampleof how this works is shown on page 9.

Changeover time is also a substantialfactor in any calculation of service duration.Changeover time is the amount of time betweencustomers, when planes are being cleaned andserviced or tables are being bussed and reset.Process management is also the tool forexamining ways to reduce changeover time andthus increase available inventory. Many restau-


rants, for instance, employ table-managementsystems that track the tables in use and progressof each meal.

Although some operators have addedpenalties for guests who leave early, mostcompanies have so far not been willing to riskconsumers’ ire by penalizing them in such afashion.

C4: CostManaging price strategies may be the mostchallenging aspect of yield management,since the core tactic is to charge customersthe highest price that they feel is fair for theservice they will receive. Companies offer avariety of prices that are connected withdifferent demand characteristics, and thosefirms do not want (and cannot afford) tohave high-rate customers availingthemselves of rates meant for price-sensitive customers who are buyingservices during marginal time periods.

The first step in controlling pricesfor yield management is to have a logicalset of prices that make sense to potentialcustomers. Most service firms set their pricesusing rate fences, or rules that discriminateamong price categories. The rules need not becomplicated, but they should be somehowlogical. The classic example might be theairlines’ requirement of a Saturday-nightstayover and 14-day prepurchase for certain farecategories. This logically separates low-rateleisure travelers (who would probably be stayingover on Saturday and can plan in advance) fromhigh-rate business travelers (who are more likelyto be traveling during the weekdays or on amoment’s notice). Rate fences can be physical(based, for instance, on the size of a room orlocation of a restaurant table) or they can

involve customers’ buying characteristics, suchas time of use or membership in a particulargroup or organization. Another type of ratefence involves the addition of certain amenities(e.g., a golf cart, free breakfast) if a customeraccepts a particular rate class. Rental-carcompanies have used this approach for years toupsell renters at the desk, by offering them alarger car for a slightly higher rate. At this point,the rental firm has great certainty about whetherthe upgrade car will be rented (it won’t be) andthus the opportunity cost of the upgrade is nil,with any increased revenue being essentially pureprofit.

Some companies, however, still offer avariety of rates without rate fences. That is, ifcustomers figure out to ask for a lower rate theycan get that rate without any specific limitationor qualification. The classic example is hotelrack rate, which travelers in most hotel segmentsknow not to pay. Customers see no reason forpaying higher rates and can be resentful whenthey discover that they could perhaps haveobtained a lower rate. Thus, the hotel industry’sexperience has demonstrated the principle thatgood rate fences make for neighborly customerrelations.

Potential pitfalls of yieldmanagementThe chief potential downside of yieldmanagement is the possibility of alienatingcustomers who run afoul of the rate-fencerules. Especially if there is not a “fair” or“logical” reason for differential prices,customers who discover that they have paidmore than others for a particular servicemay become disgruntled.

Other potential downsides include thepossibility of a misdirected organizational focusand consequent damage to employee morale. If

The chief danger of yield management isthe possibility of alienating customers whorun afoul of the rate-fence rules.

Price is one of the chief strategiclevers, but yield management doesnot involve giving blanket discounts.


the organization’s focus shifts primarily tomaximizing short-term profits, manag-ers might ignore longer-term issues ofproducing and delivering good serviceand being responsive to customerdemand. Similarly, if employees(particularly those in the sales office)believe that the yield-managementsystem is “running things,” they may feelthat the system rules are substituting fortheir own professional judgment aboutthe mix of price and services theyshould offer. In particular, group-salesdepartments may feel blocked by yield-management systems. Group sales ofteninvolves taking in large volumes ofrelatively low-rate business. With yieldmanagement, the incentive structure forthe group-sales employees may have tobe changed to reflect the reality ofhaving some room blocks held forhigher-rate, transient business when theyield-management system so indicates.

Companies must also organizetheir operations to take advantage ofyield-management systems, by maintain-ing strong information systems and bytraining employees in how yield manage-ment works and how to use it. All ofthis stems from strong managementcommitment, without which any sales ormarketing program (let alone yieldmanagement) will not succeed.

Specific applicationsof the 4C StrategicLeversYield-management applications fortransient hotel guests and airlinetravelers seem fairly straightforwardbecause the duration of the serviceis reasonably well defined. Applica-tions for other operations, such asrestaurants and country clubs, or groupsales in hotels require additional analysis ofhow to control the duration of service, asdiscussed below.

Restaurant process management:Service blueprint

Arrival

Reservationpolicy

Greeting

No hostWait timeRenege

Wait management

Seating

Table managementNo host

Can’t find partyTables unavailableNo server greeting

Ordering

Customer confusionInattentive server

Appetizer

Late deliveryWrong orderPoor timing

Selling strategyClearing tablePre-bussing

Entrée


Selling strategyClearing tablePre-bussing

Dessert


Selling strategyClearing table

Payment

Slow deliveryInattentive server

Slow pickupPre-bussing

Departure

Guests lingerNo farewell

Bussing

▼ ▼

▼ ▼

▼ ▼

▼▼

A service blueprint is an stepwise analysis of the service process. Thepinch points for the restaurant in question are listed here, allowingmanagers to gain better control of meal duration. Some of the issues(such as the host’s being occupied and not greeting or seating guests)occur during busy times. Other pinch points occur because of therestaurant’s particular layout (e.g., the bar is on a different level from thedining room and can be crowded) or because of a complex menu. Therestaurant’s upselling strategy also slows service during busy times. Theoutcome these service impediments was that meal duration was widelyvariable and difficult to control, thus interfering with the restaurant’sability to prosecute a yield-management strategy.


Restaurant StrategyAs mentioned above, the key to restaurantrevenue management is to redefine the unitof sale from a meal or cover to a time-basedunit, in this case the seat-hour. The goal ofa restaurant yield-management program isto maximize the revenue per available seat-hour, abbreviated RevPASH. Havingdefined the operation in this time-orientedfashion, managers can then focus on the

strategic levers that drive RevPASH. Thoselevers are meals of predictable length, menudesign, process analysis (to standardizeoperations), and labor scheduling, pluscertain specific operating policies (such aspre-bussing, check delivery, and reducingturnaround time).

Gaining control of customer demand andmeal duration are the primary goals for restau-rants pursuing yield management. Most restau-rants face two challenges with regard tocustomer demand. One is the familiar challengeof uncertainty of arrival, which bedevils allhospitality and tourism operators. Restaurantsalso face an additional problem—uncertainty ofdeparture. Although most restaurant managershave a reasonably solid idea of the typical

duration of a meal in their restaurant, guestscan, in reality, stay as long as they wish. More-over, internal restaurant processes may slow ameal even when guests wish it to move ahead.

To deal with uncertainty of arrival,restaurant managers can apply tactics commonto many hospitality firms. They can makeforecasts of arrivals based on reservations, orthey avoid taking reservations and depend on aqueue for a steady flow of customers during

busy times. Restaurants that take reserva-tions might use overbooking, but that hasnot been a practice typical of the restaurantbusiness. Instead, restaurants can use walk-in business as a buffer against no-shows.

Some restaurants are requestingreservation guarantees via credit card, andAmerican Express has set up a “No-ShowInitiative” that charges patrons a fee if theyfail to honor their reservations. On theother hand, some restaurant operators takea service-oriented approach to preventingno-shows by phoning customers toreconfirm reservations.

Restaurant managers who wish toexert control over the duration of theircustomers’ meals have many avenues opento them. To begin with, these managersmust be certain that their operationfunctions effectively enough to allow

control of meal duration. The restaurant musttherefore design its menu and processes toensure that the meal goes smoothly. Managersmight consider revising or removing menu itemsthat require excessive preparation time—oroffering those items only during off-peak hours.Similarly, the restaurant might want to removemenu items that cause diners to linger (particu-larly if those serving those items diminishesRevPASH). To ensure that restaurant proceduresare not interfering with RevPASH, the managercan use process analysis to find and resolve anyoperating hitches. The example on page 9 showshow pinch points can be found and removed.

Some specific tactics that can help moveguests through the meal in a gracious fashioninclude having table server pre-buss tableswhenever possible, ensuring a speedy check

Yield-management strategy gauge

Tactics Slow time Busy time

• Suggestive selling Use Avoid• Reservations Accept Decline• Host Multiple duties Greet and seat only• Menu variety Wide Narrow• Prices Regular Prime• Promotions Available Not offered• Chips and salsa Brought by server On table

The Cal-Mex restaurant studied for this report used process analysis toidentify service bottlenecks, as shown on the previous page. Manage-ment then discontinued certain time-consuming practices during busytimes. The result was not only faster table turns but more consistentmeal duration—a key strategic lever for restaurant yield management.


delivery and settlement (a weak spot for manyrestaurants), and offering a coffee and dessertbar rather than serving dessert at the table.Finally, the restaurant can reduce the timeneeded to reset the table between customers.

Once the restaurant has gained control ofthe strategic levers of yield management, it canestablish a baseline RevPASH and then experi-ment with methods of increasing revenues.Differential pricing is one way to accomplishthis, but such pricing must be carefully imple-mented using logical rate fences to avoidannoying customers. Rate fences available torestaurateurs including table location, party size,menu type, and absence or presence of certainamenities (e.g., a visit from the chef ). Whilecustomers may resist the idea of raising pricesfor premium service, restaurants can effectivelycharge large groups more by implementing aservice charge for parties over a certain size orby offering a special package that bundles anumber of menu items for a given price.

Restaurants also have available to themthe same types of rate fences used by otherhospitality operators, such as charging accordingto group membership (e.g., labor union,frequent-diner club), time of day or day of theweek, duration of the meal, timing of thereservation, whether the reservation wasguaranteed, and, indeed ,whether the guest madea reservation at all or walked in.

Many restaurants use one or more of theabove strategies to increase revenues. The earlybird menu is a classic example of a demand-shifting technique. However, yield managementcreates an integrated framework for the strategicrevenue levers, and the RevPASH statistic givesmanagers a measuring stick to determine howwell those levers are functioning.

A Restaurant ExampleCoyote Loco, a Cal-Mex restaurant locatednear Cornell University in Ithaca, NewYork, wanted to implement a yield-manage-ment system based on the RevPASHmeasurement. The restaurant seats 72 in itsmain dining room, plus 27 in the bar and, ingood weather, 66 on an outside patio. When

the revenue-management study began, therestaurant offered a menu comprising adozen appetizers, 30 to 40 entrées, and ahalf-dozen desserts.

To begin its yield-management study, therestaurant needed to establish baseline data onarrival patterns, meal duration, and RevPASH.The arrival data were collected in hourlysegments, which is appropriate for a restaurantof this type. Other types of restaurants can usedifferent arrival intervals; quick-service restau-rants, for instance, might record arrivals in 15-minute increments. The data can be drawn fromPOS records, from direct observation, or both.Existing computer software can analyze POSdata for arrivals, and those POS data can bechecked by direct analysis for sample nights (e.g.,one time-series analysis for each night).

From the POS data, the researcherscalculated the average meal duration for eachperiod. More important, the researcherscalculated the standard deviation (or variation)in meal times. The average meal duration wasjust over one hour, but the deviation was 30minutes—a statistically large number. Thismeant that sometimes guests finished their mealin about 35 minutes and sometimes theylingered for 90 minutes. Further study revealedthat those meal durations were frequently notentirely under the customers’ control, butinstead resulted from process difficulties. Finally,the researchers calculated the RevPASH for eachhourly interval. For dinners, that figure rangedfrom $.76 (Monday, 5:00) to $7.33 (Friday, 8:00).Perhaps the biggest surprise for managementwas the anemic RevPASH for lunch—under$1.00.

The time study documented the timing ofeach section of the meal, starting with the timeguests were seated (and the number of guests).The other steps were the time the guests were

Once restaurant managers gain somecontrol over the duration of a meal, theycan experiment with ways to increaserevenues.


suggestive selling, declined reservations, put inplace a dedicated host, narrowed menu selection,bumped up prices, and offered no specialpromotions. Rather than have servers bringchips and salsa (a gracious gesture appropriate toslow times), the tables were instead preset sothat servers could focus their attention on tablemanagement. Thus, one outcome of the studywas the realization that one set of strategiesworked better at increasing RevPASH duringslow times, while another set was most effectiveduring busy times.

Revenue management forgolf coursesThe core concept of revenue per unit oftime can apply equally to golf-courseoperation as to other capacity-constrainedoperations. For a golf course, the yield-management concept is revenue per avail-able tee time. The key inventory measure-ment is available tee times, which is, in turn,driven by the length of time available on the

golf course.

To activate a yield-management strategy, agolf-course manager has available the followingstrategic levers: reducing the uncertainty ofarrival, redefining the concept of the duration ofa golf match, reducing the uncertain of thatduration, and reducing the tee-time interval.

Reducing either the uncertainty of arrivalor of the duration of a round involves tacticsthat can be labeled either internal or external.Internal tactics are those that are within theoperation and are essentially invisible to custom-ers, while external measures involve customers’actions as well.

By defining the unit of sale as an availabletee time, a manager can first establish when

greeted, the time the appetizer was delivered (ifordered), the time the entrée was delivered, thetime dessert was delivered (if ordered), and thetime the guests left.

The next step was to analyze why the mealsteps took the time they did. For instance, mostguests had been sitting at the tables for as longas 15 or 20 minutes before they receivedappetizers, and the entrées took another 20minutes after the appetizers appeared. Oneanalytical tool includes a service blueprint(which is a critical path of service steps, seepage 9). The service blueprint stated the serviceprocess step by step, giving explanations of eachstep and the potential problems that wouldcause delays.

Another analytical tool is a fishbonediagram, which charts problems by the catego-ries of causes. In the case of Coyote Loco’sfishbone diagram, the problem was defined asthe high standard deviation of meal duration.Researchers examined solutions in the areas ofpersonnel, information, equipment, methods,and products. As examples, one method-relatedproblem was the restaurant’s tendency to holdtables open for people who had reservations buthad not yet arrived, even during busy timeswhen walk-ins were waiting. One equipmentproblem was the absence of adequate storage inthe kitchen or on the main floor; cooks some-times had to run to a downstairs storage area forsupplies.

To remedy the problem of uneven mealduration, Coyote Loco’s managers took severalsteps. They trained employees to think in termsof yield management; developed standardoperating procedures (the absence of whichshowed up on the fishbone diagram; andimproved table management. Delivery timeswere standardized for each meal course; tableswere bussed continually; and the payment timingwas shortened.

The researchers then set a pattern ofyield-management strategies, based in part onwhether the restaurant was busy (see the charton page 10). To move guests through the mealduring busy times, the restaurant discontinued

The strategic levers relating to revenuesper unit of time works as well on thegolf course as in restaurants or hotels.


demand is strong, when it is moderate, andwhen it is weak. Armed with that knowledge, amanager can then set strategies to managedemand at each level. The manager may wish toshift demand from strong times (when, presum-ably, people are turned away) to weaker times,when more customers can be accommodated.

The job is greatly complicated by the factthat the core product is a golf round ofuncertain duration. For this reason, tactics thatreduce the uncertainty of duration are key tooperating the strategic levers of yield manage-ment for golf operators. Internal approachesinclude a course design that allows for durationmanagement. External approaches includerequiring guests to use carts during busy times,using course marshals or caddies to move thingsalong, and posting golfers’ playing times.Shotgun starts or playing the course out oforder can also help smooth demand during busytimes.

Some of the above efforts are negated bythe uncertainty of arrival that haunts allhospitality operations. Like restaurants andhotels, golf-course operators can refine theirforecasting mechanisms and possibly usejudicious overbooking during busy times. Thoseinternal measures can be supplemented byrequiring guests to guarantee reservations with acredit card or at least reconfirming reservationsby phone during busy times. If the marketpermits, an operator could charge a fee for no-shows.

If a course operator has implemented theabove tactics to operate the strategic leversrelating to duration and arrival uncertainty, theoperator can use forecasting as a guide toencourage customers to shift their tee timesfrom the busiest (and, presumably, mostdesirable) times to slack times. The key strategiclevers are based on pricing structure, as well ascertain tactical measures, such as shaving cycletime.

Demand shifters. Most of the demand-shifting levers involve setting prices according todemand predictions. In general, the strategy is toset the highest prices at the busiest times andthen to offer discounts for customers who are

willing to schedule tee times for less-busyperiods. An important tactic for activating thisstrategy is to employ rate fences to ensure thatthe discounts are given only for golfers who signup for slack times. That approach assumes thelikely case that the golf course accepts reserva-tions. A part of this strategy is to determinehow to handle walk-in customers. One mustdetermine, for instance, whether walk-ins qualifyfor discounted rates at slack times or whether areservation is essential to get a discount. As withother hospitality operations, golf-coursemanagers cannot be certain that golfers willhonor their reservations.

One process-management issue is

Golf-course duration-management methods

Reduceuncertaintyof arrival

Redefine“duration”

Reduceuncertaintyof duration

Internalmeasures

• Improve forecasting• Use overbooking

• Require guaranteed reservations• Reconfirm reservations by phone• Enforce a no-show fee• Charge a fixed fee for reservations• Offer service guarantees• Flexible course design• Employ technology (e.g., GPS)

Externalmeasures

Make itevent-basedMake ittime-based

• Use equipment (e.g., requirecarts)

• Employ appropriate technology

Internalmeasures

Externalmeasures

Reduce tee-time interval

• Use course marshals or caddies• Post golfers’ playing times


when to open or close price categoriesfor specific service periods. Openingrate categories generally fills slacktimes, whle closing rate categoriescloses off all but top-price demand fromstrong times.

C2: Clock. Clock-related strategic leversare related to the timing of when theservice is ordered. Most yield-management strategies rely on someform of reservation-driven system thatemploys rate fences to separatecustomers according to their demandcharacteristics. Those who are willing toabide by the “rules” of a rate fence canreceive the same service as those whodo not, but at a lower price (andsometimes at a different time). Oneclock-related strategic lever involvestactics to ensure that customers honorreservations once they are made.

C3: Capacity. Since yield managementis used chiefly by capacity-constrained

ExecutiveSummary

(concluded)

whether the time between tee times can bereduced. If the current schedule is ten minutesbetween tee times, then reducing that to nineminutes would increase the number of tee times.However, that would necessitate more carefulmanagement of the golfing parties, generally toencourage them not to dawdle when they play.

The Special Case ofForecasting Hotel GroupBusinessGroup business for hotels has its own setof characteristics that invoke a slightlydifferent set of strategic levers from thetypical approaches for transient guests. Inparticular, one big question is how well onecan forecast group business and whatfactors to look for.

Forecasting group business is particularlyimportant during high-occupancy times, when

accepting group business means deferringtransient business, which is usually morelucrative. Failing to accept sufficient groupbusiness, on the other hand, may mean emptyrooms that could otherwise be filled.

A study of forecasting errors for groupbusiness found, not surprisingly, that the averageforecast error declined and the forecast becamemore accurate with time. Moreover, large hotelswere able to forecast group business moreaccurately than small properties. Those hotelsthat had a substantial group business were ableto forecast groups’ arrivals most accurately.Hotels that regularly updated their forecastswere more accurate, particularly during the twoweeks before arrival. Since the yield-manage-ment system takes the group forecast as one ofits given factors and adjusts availabilities andrates based on those givens, the group-businessforecast must be as accurate as possible so thatthe system can perform at its peak.

businesses, it is essential that theoperation make the most of existingcapacity. This is particularly true forbusinesses such as restaurants and golfcourses, in which the duration of theservice is not consistent. Yield managerscan use process control and otherstrategic approaches to attempt tostandardize the duration of each meal orround of golf, thereby gaining a morereliable forecasting of demand.

C4: Cost. All yield-managementstrategies rely on the lever of variablepricing. A yield manager establishesprice classes according to demandforecasts to shift low-price demand intoslack times and encourage high-pricedemand in strong times. Those prices areset according to the rules of the ratefences that are designed to parsedemand into various rate classes andmatch the service offering to customers’characteristics.


SourcesSheryl E. Kimes, “Yield Management: A Tool for

Capacity-constrained Service Firms,” Journal ofOperations Management, Vol 8, No. 4 (October 1989), pp.348–363.

Sheryl E. Kimes, Richard B. Chase, Sunmee Choi, PhilipY. Lee, and Elizabeth N. Ngonzi, “Restaurant RevenueManagement: Applying Yield Management to theRestaurant Industry,” Cornell Hotel and RestaurantAdministration Quarterly, Vol. 39, No. 3 (June 1998), pp.32–39.

Sheryl E. Kimes and Richard B. Chase, “The StrategicLevers of Yield Management,” Journal of ServiceResearch, Vol. 1, No. 2 (November 1998), pp. 156–166.

Sheryl E. Kimes, “Implementing Restaurant RevenueManagement: A Five-step Approach,” Cornell Hotel andRestaurant Administration Quarterly, No. 40, No. 3 (June1999), pp. 16–21.

Sheryl E. Kimes, Deborah I. Barrash, and John E.Alexander, “Developing a Restaurant Revenue-management Strategy,” Cornell Hotel and RestaurantAdministration Quarterly, Vol. 40, No. 5 (October 1999),pp. 18–29.

Sheryl E. Kimes, “Group-forecasting Accuracy in Hotels,”Journal of the Operational Research Society, Vol. 50 No. 11(1999), pp. 1104–1110.

Sheryl E. Kimes, “Revenue Management on the Links:Applying Yield Management to the Golf-courseIndustry, Cornell Hotel and Restaurant AdministrationQuarterly, Vol. 41, No. 1 (February 2001), pp. 120–127.

Principal InvestigatorSheryl Kimes is a professor financial management at the Cornell UniversitySchool of Hotel Administration, where she teaches graduate-level courses inyield management. She holds a Ph.D. from the University of Texas at Austinand an M.B.A. from New Mexico State University. She has provided yield-management consultations to such companies as Bass Hotels, Enron Corpo-ration, Hilton Hotels, Starwood Asia-Pacific, and Walt Disney World.

For more informationRobert G. Cross, “Launching the Revenue Rocket: How

Revenue Management Can Work for Your Business,”Cornell Hotel and Restaurant Administration Quarterly, Vol.38, No. 2 (April 1997), pp. 32–43.

Ellis D. Norman and Karl J. Mayer, “Yield Management inLas Vegas Casino Hotels,” Cornell Hotel and RestaurantAdministration Quarterly, Vol. 38, No. 5 (October 1997),pp. 28–33.

Eric B. Orkin, “Wishful Thinking and Rocket Science:The Essential Matter of Calculating UnconstrainedDemand for Revenue Management,” Cornell Hotel andRestaurant Administration Quarterly, Vol. 39, No. 4(August 1998), pp. 15–19.

William J. Quain, Michael Sansbury, and Stephen A.LeBruto, “Revenue Enhancement, Part 1: A Straight-forward Approach for Making More Money,” CornellHotel and Restaurant Administration Quarterly, Vol. 39, No.5 (October 1998), pp. 41–48.

William J. Quain, Michael Sansbury, and Ted Abernethy,“Revenue Enhancement, Part 2: Making More Moneyat Your Hotel,” Cornell Hotel and Restaurant Administra-tion Quarterly, Vol. 39, No. 6 (December 1998), pp. 71–79.

William J. Quain, Michael Sansbury, and Dennis Quinn,“Revenue Enhancement, Part 3: Picking Low-hangingFruit—A Simple Approach to Yield Management,”Cornell Hotel and Restaurant Administration Quarterly, Vol.40, No. 2 (April 1999), pp. 76–83.

William J. Quain, Michael W. Sansbury, and Stephen M.LeBruto, “Revenue Enhancement, Part 4: IncreasingRestaurant Profitability,” Cornell Hotel and RestaurantAdministration Quarterly, Vol. 40, No. 3 (June 1999), pp.38–41.

Other investigatorsJohn E. Alexander, CBORD Solutions; Deborah Barrash, Cornell University;Richard B. Chase, University of Southern California; Sunmee Choi, CornellUniversity; Philip Y. Lee, Cornell University; and Elizabeth N. Ngonzi,Cornell University


About the

Center for Hospitality Research

at Cornell University

The Center for Hospitality Research is the premier source forin-depth research on the hospitality industry. The Centerconstitutes a community of researchers and industrysponsors working in concert to develop and dispense newknowledge that directly bears on the hospitality industry.Membership in the Center is open to any individual orcorporation interested in furthering high quality research forthe betterment of the hospitality industry.

The goal of the Center for Hospitality Research is to informscholarship in hospitality with an industry perspective.Development of the CHR’s research efforts are augmentedby industry representatives’ expertise. By enhancing industryaccess to meaningful research, the CHR creates a commu-nity of researchers and industry sponsors.

The concept of a community of researchers and sponsors works as follows.Sponsoring affiliates of the Cornell University Center for Hospitality Researchbecome active participants in the research process—working with leading hospitalityresearchers from around the world to exchange ideas and develop research ques-tions.

For more information or to become a part of the Center forHospitality Research, contact us [email protected] or 607-255-9780.


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Ithaca, NY 14853

www.hotelschool.cornell.edu/

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