Yield Management Systems
Yield management is the process of understanding, anticipating, and influencing consumer behavior to maximize yield or profits from a fixed, perishable resource, such as hotel room reservations and airline seats .
Airline Tickets
Your ticket may cost more or less than mine due to yield management.
As a specific, inventory-focused branch of revenue management, yield management involves strategic control of inventory to sell it to the right customer at the right time for the right price. This process can result in price discrimination, where a firm charges customers consuming otherwise identical goods or services a different price for doing so.
Yield management is a large revenue generator for several major industries. Robert Crandall, former Chairman and CEO of American Airlines, gave yield management its name and has called it "the single most important technical development in transportation management since we entered deregulation. "
Optimization of Yield Management Systems
Firms that engage in yield management usually use computer yield management systems to do so. The Internet has greatly facilitated this process. Enterprises that use yield management periodically review transactions for goods or services already supplied and for goods or services to be supplied in the future. They may also review information (including statistics) about events (known future events such as holidays or unexpected past events such as terrorist attacks), competitive information (including prices), seasonal patterns, and other pertinent factors that affect sales.
The models attempt to forecast the total demand for all products or services they provide, by market segment and price point. Since total demand normally exceeds what the particular firm can produce in that period, the models attempt to optimize the firm's output to maximize revenue.
The optimization attempts to answer the question: "Given our operating constraints, what is the best mix of products and or services for us to produce and sell in this period, and at what prices will generate the highest expected revenue? "
Optimization can help the firm adjust prices and allocate capacity among market segments to maximize expected revenues. This can be done at different levels of detail:
- By goods (such as a seat on a flight or a seat at an opera production)
- By group of goods (such as the entire opera house or all the seats on a flight)
- By market (such as sales from Seattle and Minneapolis for a flight going Seattle-Minneapolis-Boston)
- Overall (on all the routes an airline flies or all the seats during an opera production season)
Learning and Profiting from Yield Management Systems
Yield management is particularly suitable when selling perishable products, which are goods that become unsellable at a point in time (for example, airline tickets just after a flight takes off). Types of businesses that use yield management include airlines, hotels, stadiums, and other venues with a fixed number of seats, and advertising.
With an advance forecast of demand and pricing flexibility, buyers will self-sort based on their price sensitivity (using more power in off-peak hours or going to the theater mid-week), their demand sensitivity (must have the higher cost early morning flight or must go to the Saturday night opera) or their time of purchase (usually paying a premium for booking late).
In this way, yield management's overall aim is to provide an optimal mix of goods at a variety of price points at different points in time or for different baskets of features. The system will try to maintain a distribution of purchases over time that is balanced as well as high.
Good yield management maximizes (or at least significantly increases) revenue production for the same number of units, by taking advantage of the forecast of high demand and low demand periods. This effectively shifts demand from high demand periods to low demand periods by charging a premium for late bookings. While yield management systems tend to generate higher revenues, the revenue streams tend to arrive later in the booking horizon as more capacity is held for late sale at premium prices.
Firms faced with a lack of pricing power sometimes turn to yield management as a last resort. After a year or two of using yield management, many of them are surprised to discover that they have actually lowered prices for the majority of their opera seats or hotel rooms or other products. That is, they offer far higher discounts more frequently for off-peak times, while raising prices only marginally for peak times, resulting in higher revenue overall.
By doing this, they have actually increased quantity demanded by selectively introducing many more price points, as they learn about and react to the diversity of interests and purchase drivers of their customers