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Yield management: Why you only need 3 rates to grow your hotel

Learn why an over-extended offer risks limiting your hotel's bookings.

How to optimize your hotel rates with yield management | Smartpricing

Yield management is a strategy first popularized in the early 1980s by American Airlines, which was the first to apply it to the airline industry with astonishing results: the company later claimed that yield management had contributed to an increase of $500 million a year in its revenues.

The winning insight was to abandon the use of a uniform fare and start analyzing consumer behavior to predict demand and adjust prices accordingly. In other words, the theory of yield management is to sell the right offer, to the right customer, at the right time, and at the right price.

Although yield management has since merged into the broader, more nuanced discipline of revenue management, understanding its basic workings is critical for any hospitality establishment, no matter how small. That's because it only takes a few interventions to help increase your revenue generated per available room (RevPAR), improve occupancy and optimize resources.

How to apply yield management at your lodging facility

The steps for applying a yield management strategy are:

  1. Collection of data records on reservations and demand trends
  2. Customer segmentation based on guest characteristics, needs and budget
  3. Setting strategic rates to intercept different segments, rate rules and distribution of rooms across channels

Often, the question arises precisely on the last point. How to organize the offer? How many rates to propose?

Before answering this question, it is necessary to understand how the psychology of your customers works.

Why too much choice for the customer is counterproductive

Intuitively, you might think that offering a wide range of options to your customers is the best way to meet their needs. After all, who doesn't like having the freedom to choose?

However, the reality turns out to be more complex, and psychologist Barry Schwartz explains this with his theory of the "paradox of choice": in a world where an abundance of options has become the norm, people are finding it increasingly difficult to make informed and rewarding decisions.

This is true in every sphere, and especially in the buying process. Offering too many alternatives to your customers means risking true "decision paralysis," where the fear of making the wrong choice can lead many to postpone the decision or give up on the purchase.

That's why in your hotel, too, you should aim to optimize your offerings and rates as much as possible based on the preferences and behaviors of your customer segments.

Go beyond hotel room categories

In accommodations, people are used to selling rooms by categories (e.g., "standard," "superior," or "executive") and often tie these categories to purely physical elements: room size, view, presence or absence of a balcony. This is an approach that is not wrong, but it can sometimes be limiting, especially if that physical element is not of high value to the guest.

Therefore, when reorganizing your offer, it would be interesting to adopt a broader logic and include features that actually enhance the room’s attractiveness to potential customers within the different categories.

Imagine, for example, if your Superior room − in addition to being a bit larger than the Standard − also included late check out, parking, and a free minibar. How much more attractive would that be to your guests, and how much more would it make them pay for that room?

The perfect number of rates for your hotel rooms

Another characteristic shared by many independent hotels is that of the excessive number of available rates.

As we have seen, even if this is done to meet everyone's needs, offering too many rates that differ little from each other can confuse the customer, complicating the sale. On the other hand, having too few types of rates may limit your flexibility.

But then what is the ideal number? According to science, it is three. This is because three rates will give the potential customer the perception that they have enough choice to receive a service calibrated to their needs, but without being confused by them.

How to design rates for your hotel (and what psychological factors to take advantage of)

Each of the three rates will need to meet the needs of the three main customer segments. (If you want to know more about segmentation, read our article with the definition of hotel market segmentation and a practical guide to starting from scratch).

Here are the 3 must-have rates:

Budget Rate

This is the rate dedicated to the most price-sensitive guests. It should therefore be competitively priced and either be available only on certain dates or have restrictions.

This rate also serves an additional (psychological) goal. It will serve to entice guests to consider purchasing the next higher-value rate. This happens because most people do not want to buy something explicitly cheap, but aspire to find "the bargain," that is, a product that provides them with the best value for their money.

Seeing that, all things considered, the price difference between the "Budget" and "Value" rate is not that great, customers may decide to buy the "Value Rate".

Value Rate

This is the rate dedicated to guests looking for value for money. It should therefore include essential services and amenities for a pleasant stay, and will have cancellation conditions that are not overly restrictive.

In proposing this type of rate, it is essential to have in mind that, by increasing the price compared to the "Budget Rate", you need to more than proportionally increase the perceived value for the customer, otherwise there is a risk of diverting the client to the lower rate or, worse, losing the reservation.

Premium Rate

This is the rate for guests seeking the ultimate in flexibility, extra services and luxury. It will therefore present a significantly higher price and include not only services such as free cancellation and late check out, but also high-end services such as free transfers, tastings or tours.

Remember that the clients who choose this package are few, but they have decided that they want the best of the best. So don't be afraid to raise the price even to unimaginable levels for your accommodation.

This third rate also has a psychological objective because it exploits people's tendency to evaluate options based on contrasts. Seeing the "Premium Rate" and its exclusive services at a significantly higher price, customers will tend to perceive the "Value Rate" as more advantageous and better value for money.

Key points and tips for better selling your hotel rates

  • Optimize room categories by strategically differentiating them
  • Set 3 different rates: Budget, Value, Premium
  • Clearly communicate the added value for each
  • Take advantage of the psychological effect of contrast by emphasizing the price difference between one rate and another
  • Use high-quality images and videos to make your offer more attractive
  • Optimize online and offline sales channels to reach your target audience
  • Focus on the overall value of the experience you offer and aim to exceed each guest's expectations, regardless of the rate purchased

Optimizing your rates with yield management is a winning choice, but it requires in-depth study of the market, lots of dedication and constant monitoring.

That's why we created Smartpricing, the AI-based dynamic pricing and revenue management software that helps you achieve maximum effectiveness in your pricing strategies, but without increasing your workload or needing to gain the knowledge of a revenue manager.

The more than 3,000 hoteliers who have chosen Smartpricing have increased their revenue, on average, by +30%.

If you want to learn more about Smartpricing and find out how it could support you too, start with a free demonstration!