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Thursday, June 17, 2010

Yield Management and Your Business

You may have heard the terms yield or revenue management (they’re synonymous) usually being discussed by a consultant at an industry event. And, if you’re like some people here at SpaBooker (we won’t name names), you wouldn’t be blamed for starting to get a little drowsy after the mentioning of these often confusing terms.  What we would like to do is to demystify the topic and talk about a few practical applications. 

First off, yield management doesn’t need to be a scary.  To really understand what it is, let’s learn a little about its history. Yield management, as defined by Wikipedia, is the process of understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable resource (like your Tuesday, 10am treatment times). In its simplest form, this means changing your price based on customer demand. 

The invention of yield management is widely credited to the airline industry, specifically to American Airlines with its launch of Ultimate Super Saver fares in 1985.  Prior to the launch of these fares, if you were flying on a Q class ticket then you could be assured that you paid the same price for that ticket as any other passenger flying on the same class of service.  These new fares ushered in our current era of pricing, where airline ticket prices fluctuate on a daily, hourly, or even minute-to-minute basis. After being introduced by the airline industry, the hotel industry (especially in Las Vegas) was quick to take it up. Today, revenue management is used in every large retail industry; from advertising to air tickets, from e-commerce to car rental, prices are changed based on customer demand.  So, how does this affect the Spa and Salon industries? The answer, of course, is - in a bunch of different ways.

If your business is anything like the thousands of spas and salons that use SpaBooker; you’re open six days a week (hopefully Tuesday – Sunday, but that’s a topic for another time), and your schedule probably breaks out into three buckets based on how many of your rooms and stations are booked at the same time – let’s call this Occupancy.
  1.  Peak – 70%+ Occupancy (Saturdays from 11am – 4pm)
  2. Shoulder – 50-70% Occupancy (Friday’s from 12pm – 3pm)
  3. Off-peak – Under 50% Occupancy
The challenge is how do you increase revenue during your peak times, and drive more occupancy during your shoulder and off-peak times?  The answer is, well, there are a few answers depending on your market segment.

Let’s outline a couple scenarios.

Scenario 1 – The Luxury Market
For businesses that play in the luxury segment, discounting is generally considered a no-no. So the best way to manage your yield/occupancy is to utilize different treatments at different times.  For example, we have a very successful luxury client that would never discount, but they do offer “mini-treatments” during off-peak times.  While during peak times, the minimum treatment length is 75 minutes. If you take the price of the treatment and divide it by the length to determine the price per minute (PPM), the mini-treatments offered during off-peak times actually cost less per minute than the peak treatments, but since there is no discount on the offer, it’s opaque to the customer. Put plainly, this means that a 30 minute Swedish massage mini-treatment that costs $45 has a PPM of $1.50, while the 75 minute Aromatherapy massage that costs $150.00 during peak times has a PPM of $2.00, or a 33% premium – not too shabby, eh? 

Scenario 2 - Mid Market
What about spas that are more mid-market? If you’re not allergic to discounts, one of the best practices we see in this segment is to offer off-peak (and sometimes shoulder) discounts.  For instance, many of our customers offer morning discounts. Some discount across all services; perhaps offering a 30% discount from 10-12pm,while others specifically target treatments with better retail opportunities, like facials.

Scenario 3 – Membership Programs
A great way to drive sign-ups for your membership program (you have a membership program, right?) is to offer killer benefits. These can come in the form of discounts, free treatments, retail therapy, etc. but the key factor to remember is that they don’t have to be the same all the time.
One of the best practices we see is businesses taking a page from the ski industry, especially the idea of the “locals season pass” otherwise known as no skiing on weekends or holidays.  How would this work for your business? How about a two tiered membership program, one with a monthly membership fee that is higher than the other; which of course allows benefits to be used all the time, versus just during off-peak and shoulder times.

Of course, there are lots of other scenarios, and the software you use to power your salon or spa should allow you automate all of them. If it doesn’t, then you might want to contact us.  Regardless of the scenario, the next step is calculating how much to discount or where to price your treatments, and unfortunately the answer is a little fuzzy.  It really depends on the type of business that you run and how you compensate your employees.  However, the place to start is to calculate your fixed costs per day (rent, utilities, insurance).  Once you have a clear idea of what it costs to be open on each day of the week, it’s pretty straightforward to come up with your fixed hourly costs.  And once you have those, the world of yield management is your oyster – really – and you can figure out exactly how to price your services.

How you ask? If your business has eight rooms/stations, is open from 10am – 7pm on a typical day, and your hourly fixed cost is about $30, then you know that you need to earn $30 plus staff costs per hour to be profitable. Let’s say that your service staff make $10 per hour plus 40% of any services (we know we’re generous) and your typical service rate is $1 PPM. If you have 2 treatment staff working during the off-peak time (10am to 12pm), and discount your service rate by 30%, then you’re covering costs.  Where’s the math you ask, here:

REVENUE
Employee 1 = 120 minutes x $1 per minute – 30% = $84
Employee 2 = 120 minutes x $1 per minute – 30% = $84
TOTAL REVENUE = $168

COST
Fixed Cost = $.50 per hour x 120 minutes = $60
Employee 1 Cost = $20 ($10 per hour x 2 hours) + $33.60 (40% x $84) = $53.60
Employee 1 Cost = $20 ($10 per hour x 2 hours) + $33.60 (40% x $84) = $53.60
TOTAL COST = $167.20

PROFIT = $.80

Now, we know that this is over simplified (we didn’t factor in payroll costs, etc.) but look at it from another angle, if those time-slots went unsold then you would still have spent $100!

If you’ve made it this far, then you have probably figured out the key to successful yield management, but if you jumped ahead for the conclusion, here it is.  The key to successfully using yield management is understanding your fixed costs and realizing that every room or station that goes unsold during your open hours is costing you money.  Once you not only understand this, but believe it (listen to us now, hear us later) then creating a strategy for adjusting your pricing or treatment menu by time-of-day, day-of-the-week, and even seasonally is the next step.

If you would like to learn more about how SpaBooker can help automate your yield management strategies, please contact us for a free consultation.
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