Ms. Fenard

Spas, Health & Fitness

Yield Management in the Spa: A look at the Principles, Benefits, Challenges and Opportunities

By Elaine Fenard, Partner & Chief Operating Officer, Europe and U.S., Spatality

Yield management, also referred to as revenue management, is commonly defined as the process of understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable resource.

The International Dictionary of Hospitality Management states it more transparently as ‘selling the right inventory to the right customer at the right price at the right time.’ In other words, when it comes to perishable inventory, “use it or lose it” is the mantra. It all began on January 17, 1985 when American Airlines launched Ultimate Super Saver fares in an effort to compete with a low cost carrier. The Edelman Prize committee recognized the revenue/yield management systems developed at American Airlines for contributing $1.4 billion in a three-year period. Yield management spread to other travel and transportation companies in the early 1990s including implementation of revenue management at National Car Rental. Since the year 2,000, yield management techniques and dynamic pricing have been applied to many e-commerce sites and even the financial services industry. Variable dynamic pricing is a common and accepted practice in an increasing number of industries, affecting more and more consumer purchases. Today this practice is becoming more widely recognized, understood and accepted by consumers

The Principles of Yield Management for Spa can be applied if we look at the three essential conditions necessary in order for revenue management to apply. These are first, a fixed amount of inventory available for sale. Second, the inventory is perishable; that is, there is a time limit to selling the items, after which it ceases to exist or ceases to have value. Third, different customers are willing to pay different prices in return for the same items

In the spa world, this perishable inventory is time and it comes attached to resources such as treatment spaces and service providers. Consequently spa definitely measures up for yield management principles, with a fixed number of hours available each operating period. In most cases the number of treatment spaces and service providers available for sale are also fixed. It is perishable Inventory; once the hour has passed it cannot be recovered or reallocated for sale. Each available time slot that passes without booking is a missed revenue opportunity and in some payroll systems an uncovered labor cost. Therefore as with airlines, hotels and rental cars, a spa must achieve an average level of revenue in order to break even. While the spa industry certainly meets the first two criteria for effective application of yield management practices. The big question surrounds the third condition. Will spa guests pay a different price to receive the same service as another guest?

The answer to this question is, they already do! Variable pricing already occurs in the spa and salon industries where certain service providers or certain treatment modalities are priced at a premium though the facility and general service are the same or nearly the same as lower priced options. What this tells us is that the spa and salon guest is open to paying a premium charge for a specific experience or service provider that they desire.

This leads us to believe that some spa guests are in fact willing to pay more for a service in order to receive exactly what they are looking for in their spa experience. This suggests introducing variable dynamic pricing based on need, in a structured manner can result in increased productivity and revenue. The successful application of variable dynamic pricing in spa is based on legitimate reasoning and reasonable variances. The spa must convey the highest prices on the menu are the true value of the entire menu. Guest flexibility is then rewarded with special pricing and guests who have specific needs can get exactly what they want for a reasonable premium. Premium services and premium times are reasonably priced above standard services and times.

When the implementation is structured and understood by all parties there are aspects of yield management that benefit both the spa operator and the spa guest. The benefits for the Spa Operator are yield management will provide a tool that allows the operator to use time to their advantage. With variable dynamic pricing, the spa can reach a broader audience, and increase the guest base. These pricing techniques also allow the spa to control which types of inventory are marketed and sold and when. Yielding techniques are targeted at filling more of the available time slots on a more consistent basis. Over time usage patterns will emerge and the scheduling cycle will move further out allowing for more accurate planning and forecasting of operational commitments. The yield management system then becomes a tool through which spas can selectively change the behavior patterns of their guests. The benefits for the Spa Guest are the variable dynamic pricing provides an opportunity to pay for exactly the experience that they desire. The system allows the guest to create their spa experience based on the things that are most important to them (time, money, specific selections, etc.) The tiered nature of the pricing also appeals to a broader spa audience and creates a more evolutionary and organic spa experience. The yield management system allows new spa goers to experience spa with a lower cost commitment while the moresavvy spa goers, for whom specific experience is the main driver, will appreciate that they end up grouped with peers who have the same approach to spa.

With this tool in place the spa operator can begin to identify patterns of use based on the dynamic pricing and tailor their style of service to meet specific guest types. The guests have more choices and options in their spa experience and often the tiered pricing allows repeat guests to visit more often.

The Challenges facing Yield Management in relation to Spa are primarily surrounding a lack of understanding of the principles and benefits. Yield management in relation to spa is still considered a new concept and is not wisely used, therefore not considered proven. There is a common misconception that yield management tactics are ‘unfair’ practices. Some Directors and therapists have a difficult time balancing the healing nature of spa with the business of spa. In this respect dynamic pricing strategy is often confused with discounting practices and associated with price gouging or irrational price variances. Additionally the systems and technology for yield management in spas are still in the early stages of development. Having outlined the challenges, the spa that plans to introduce yield management with a succinct plan, that is clearly understood and endorsed by the spa team, has an opportunity to increase revenue therefore increasing working hours for the staff while offering the guest choices they will welcome.

A typical spa operating 12 hours per day with high demand weekends and low demand weekdays could experience significant revenue lift by implementing a few simple yield management techniques.

In this simple example we have a 10-room spa operating 12 hours per day with a standard 1hr service priced at $100. Assuming capture rates of 20% Sunday to Thursday and 80% Friday and Saturday, the current operation would look something like this:

Now take that same spa and apply dynamic pricing. Assume that the number of services at standard pricing during the week will remain unchanged as many of the guest already coming Sunday through Thursday are likely coming during the “peak” periods on those days. Assume a reasonable lift of an additional 10% capture at “Off Peak Pricing” during the week. Finally, assume that 80% capture is maintained on the weekends, but now half of those services are sold in “Premium Pricing” time slots. The spa revenues now look like this:

The very simple dynamic pricing changes of adding a premium price for the most in demand service periods and introducing an off-peak price for slower periods (even with extremely conservative changes to capture) results in a significant lift of $6,720 per week or over 20% revenue gain. With effective and targeted marketing, the opportunities for revenue lift are remarkable and the loss of perishable inventory can be significantly reduced.

As the practice of yield management becomes more widely used in the spa industry, its acceptance by both operators and guests will create a shift in how spas operate and in the overall business model of spa. As an industry, spa has typically been inefficient and less concerned with good business practices as with the experience and benefits provided.

With spa now a multi-billion dollar industry, the business of spa must be expected to take advantage of the best practices and strong systems available and already in use in dozens of other industries.

Yield Management is a highly effective and time- tested method of generating incremental positive growth. Tempered by the “giving nature” of spa, yield management can be effectively and ethically implemented to create a more stable business model while still providing the extraordinary experiences that brought us all to the industry to begin with.

For more information on Yield Management we recommend reading the ResortSuite White Paper; titled ‘Yield Management in the Spa Industry’ www.resortsuite.com

Justin Sturgis contributed to this article. Mr. Sturgis is Senior Director of Spa Consulting for Spa Strategy, oversees all aspects of spa development, design and operations for Spa Strategy clients worldwide. With more than 18 years of experience in the spa industry, Mr. Sturgis is recognized as a leading authority in the spa industry. His skills in spa development, programming and management guide the Spa Strategy team in creating distinctive spas and wellness centers throughout the world.

Elaine Fenard is an integral partner in Spa Strategy, one of the world's leading spa consulting and design firms. Joining in the Spa Strategy quest to create innovative and profitable spas, Elaine brought to the team more than 25 years experience in spa development and operations with one of the world's largest hotel companies and the leading international spa operations company. As an industry pioneer and recognized expert, Elaine is a frequent speaker at many conferences, and is a regular guest speaker at Cornell University. Ms. Fenard can be contacted at 303-573-8100 or Elaine@spastategy.com Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.