The changed paradigm of yield in revenue management

While yield is a concept which has been central in revenue management for decades, what it covered and focused on has dramatically changed over the years. Yield used to be a revenue thing. It was something which was the domain of the sales and marketing function. Moreover, yield was often driven by price or the average daily rate. A higher yield by connotation meant achieving as high a rate as was possible. This was irrespective of what damage it could be doing to the sustenance of that revenue.

Yield was spearheaded by a marketing concept of price leadership. Your prominence in the competitive set was determined by the highest rate you commanded. While price leadership is not a bad thing, what often it failed to consider was the resultant impact on volume. This was based on yet another powerful marketing concept which is price resistance.

Price resistance is inherent in any market and it is basically the fact that when the value received from the customer’s perspective was falling compared to the price that was paid, price resistance sets in. Price resistance is a clear indication that the benefits from the product were no longer outweighing the cost (price). It’s most immediate effect is on the volume which begins to taper or even drop. This is the reason why a better measure of yield had to be pursued. Enter the RevPAR approach.

Yield in today’s context

The problem with the price oriented or directed approach to yield is that it is uni-dimensional. It only considers the price aspect of revenues which clearly are achieved through a constantly see-sawing battle for balance in price as well as volume. Most critically, the price approach to yield fails to consider the umbilical cord relationship between price and volume. This realization has led to yield in today’s context being a completely different kettle of fish.

The realization that the price-volume relationship is something foundational to achieving a good yield on revenues inevitably led to a composite approach – in other words the importance of the concept of RevPAR came to the fore. RevPAR takes a holistic perspective to yield in revenue management. It emphasizes the relative contribution of both the average rate and occupancy in a revenue model. In other words, RevPAR wipes out the uni-dimensional approach and takes on a multi-dimensional one.

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