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 | January 02, 2011
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.
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