Tourism Organisations, Products and Services » Occupancy Rates and Yield Management

What you'll learn this session

Study time: 30 minutes

Understand what occupancy rates are and how they're calculated
Learn about yield management and its importance in tourism
Explore strategies used by tourism businesses to maximise revenue
Examine real-world examples of yield management in hotels and airlines
Discover how seasonality affects occupancy and pricing strategies

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Understanding Occupancy Rates

Occupancy rate is one of the most important measurements in the tourism industry. It tells businesses what percentage of their available capacity is being used by customers at any given time.

Key Definitions:

Occupancy Rate: The percentage of available rooms, seats, or spaces that are being used during a specific time period.
Capacity: The maximum number of rooms, seats, or spaces available for use.

📊 Calculating Occupancy Rates

The formula for calculating occupancy rate is:

Occupancy Rate = (Number of units occupied ÷ Total number of units available) × 100%

For example, if a hotel has 100 rooms and 75 are occupied, the occupancy rate is 75%.

📅 Why Occupancy Matters

High occupancy rates usually mean more revenue, but 100% occupancy isn't always the goal. Sometimes, it's better to have slightly lower occupancy with higher prices to maximise profit. This is where yield management comes in!

Introduction to Yield Management

Yield management is a pricing strategy that helps tourism businesses maximise revenue by selling the right product to the right customer at the right time for the right price.

Key Definitions:

Yield Management: A variable pricing strategy based on understanding, anticipating and influencing consumer behaviour to maximise revenue.
Revenue per Available Room (RevPAR): A performance metric calculated by multiplying a hotel's average daily room rate by its occupancy rate.
Perishable Inventory: Products or services that cannot be stored for future sale, like hotel rooms or airline seats.

Core Principles of Yield Management

Yield management works best in industries with these characteristics:

🕑 Fixed Capacity

Hotels have a set number of rooms, airlines have a set number of seats and these can't be quickly changed.

🔀 Perishable Inventory

An unsold room or seat represents lost revenue that can never be recovered.

💰 Variable Demand

Customer demand changes by season, day of week, time of day and other factors.

Yield Management Strategies

Tourism businesses use various strategies to maximise their yield. Here are some of the most common ones:

📈 Dynamic Pricing

Prices change based on demand. During peak times (like holidays), prices go up. During off-peak times, prices go down to attract more customers.

Example: A hotel room might cost £200 on New Year's Eve but only £80 on a random Tuesday in November.

🔐 Booking Restrictions

Setting minimum stay requirements or cancellation penalties to protect high-demand periods and discourage short bookings that might block longer, more profitable stays.

Example: A beach resort requiring 7-night minimum stays during summer months.

👥 Market Segmentation

Dividing customers into groups based on their willingness to pay and offering different prices to different segments.

Example: Business travellers often pay more than leisure travellers because their trips are less flexible.

💲 Overbooking

Accepting more bookings than available capacity, based on the prediction that some customers won't show up.

Example: Airlines often sell more tickets than seats, knowing that typically 5-15% of passengers don't show up.

Case Study Focus: Premier Inn's Yield Management

Premier Inn, the UK's largest hotel chain, uses sophisticated yield management systems to maximise revenue. They offer different prices based on:

How far in advance you book (earlier bookings often get lower prices)
The day of the week (weekends vs weekdays)
Special events nearby (prices increase during concerts, sporting events, etc.)
Seasonal demand (summer holidays vs winter months)

This approach helps them achieve high occupancy rates (typically over 80%) while maximising revenue per available room.

Seasonality and Occupancy Patterns

Most tourism businesses experience fluctuations in demand throughout the year, creating distinct patterns of high and low seasons.

🌞 Peak Season

Highest demand, highest prices and highest occupancy rates. For example, summer for beach resorts or December for ski resorts.

🍂 Shoulder Season

Moderate demand periods just before or after peak season. Prices and occupancy are lower than peak but higher than off-peak.

❄ Off-Peak Season

Lowest demand, lowest prices and lowest occupancy. Businesses often use special promotions during this time.

Managing Seasonal Occupancy Challenges

Tourism businesses use several strategies to deal with seasonal fluctuations:

Differential Pricing: Charging higher prices during peak periods and offering discounts during off-peak times.
Product Diversification: Adding new services or facilities to attract visitors year-round (e.g., indoor pools for beach resorts in winter).
Target Market Shifting: Focusing on different customer segments during different seasons (e.g., families during school holidays, seniors during term time).
Special Events and Promotions: Creating reasons for people to visit during traditionally quiet periods.

Case Study Focus: EasyJet's Dynamic Pricing

EasyJet, a leading low-cost airline in Europe, is famous for its dynamic pricing strategy. Their ticket prices can change multiple times per day based on:

How many seats have already been sold on a flight
How quickly seats are selling (indicating demand)
How close the departure date is
Competitor pricing for similar routes

This approach allows them to maximise revenue on each flight. Generally, the last few seats on a popular flight sell for much higher prices than the first seats sold. Their computer systems automatically adjust prices to find the optimal balance between occupancy and yield.

Technology and Yield Management

Modern yield management relies heavily on technology and data analysis. Tourism businesses use sophisticated software to:

📊 Forecast Demand

Using historical data, booking patterns and external factors (like holidays, events, or weather) to predict future demand.

💻 Automate Pricing

Automatically adjusting prices in real-time based on changing demand, competitor pricing and booking pace.

Balancing Occupancy and Yield

The ultimate goal for tourism businesses is finding the right balance between high occupancy and high yield. Sometimes these goals conflict:

🔍 Occupancy-Focused Strategy

Aims to fill as many rooms/seats as possible, even if it means lower prices. This might be appropriate for new businesses building market share or during very low seasons.

💵 Yield-Focused Strategy

Aims to maximise revenue per available room/seat, even if it means some remain unsold. This might be appropriate for established luxury brands or during peak season.

Most successful businesses find a middle ground, using different strategies at different times based on market conditions.

Real-World Example: The Impact of COVID-19

The COVID-19 pandemic created unprecedented challenges for yield management in tourism. With dramatically reduced demand, many businesses shifted from yield-focused strategies to occupancy-focused approaches:

Hotels offered significant discounts and flexible cancellation policies
Airlines removed change fees and lowered prices to stimulate demand
Attractions operated at reduced capacity but maintained similar pricing

As the industry recovers, many businesses are gradually returning to more balanced yield management strategies, but with greater emphasis on flexibility and value.

Summary

Occupancy rates and yield management are fundamental concepts in tourism that help businesses maximise their revenue and profitability. By understanding customer demand patterns and implementing strategic pricing, tourism organisations can find the optimal balance between filling their capacity and charging the right price.

Remember these key points:

Occupancy rate measures what percentage of available capacity is being used
Yield management helps sell the right product to the right customer at the right time for the right price
Strategies include dynamic pricing, market segmentation and booking restrictions
Seasonality creates predictable patterns of high and low demand
Technology plays a crucial role in modern yield management
The goal is to balance occupancy and yield to maximise overall revenue

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