What is Yield Management?
Yield management is the process of understanding, anticipating, and influencing consumer behaviour to maximize yield or profits from a fixed, 'perishable' resource, such as hotel rooms, tables in restaurants, theatre tickets, airline seats, media, telecommunications and energy, to name but a few. The idea is to coordinate timing, price, and consumer buying patterns to achieve the best return.
Its effectiveness in generating incremental revenues from an existing operation and customer base has made it particularly attractive to business leaders who want to generate return from revenue growth and enhanced capability.
Firms that engage in yield management usually use computer yield management systems to do so. They review transactions for goods or services already supplied and for goods or services to be supplied in the future.
They may also review information about events (known future events such as Christmas, or unexpected past events such as terrorist attacks), competitive information (including prices), seasonal patterns, and other pertinent factors that affect sales.
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.
Increasing numbers of companies are taking elements of yield management and adapting this strategy to new uses. Here are some specific examples of how yield management is used in specific industries – but perhaps you could apply the strategy to your own industry?
Tip 1 - A lesson from Airlines
Your ticket to Barcelona may cost more or less than your fellow passengers due to yield management.
Remember, a plane only makes money when it is in the air, which is why we now see 30 minute turnarounds to get the aircraft in the air as quickly as possible and keep it up there as often as possible.
When an aircraft departs, the unsold seats cannot generate any revenue and thus can be said to have perished. Airlines use specialized software to monitor how seats are reserved and react accordingly.
There are various inventory controls such as a nested inventory system. For example, airlines can offer discounts on low-demand flights, where the flight will most likely not sell-out. Conversely they will charge more for a seat when there is excess demand.
The airline needs to keep a specific number of seats in reserve to cater to the probable demand for high-fare (last minute) seats. The fewer seats that are reserved for a particular category, the lower the price of each seat.
This will continue until the price of a seat in the premium class equals that of those in the concession class. Depending on this, a floor price (lower price) for the next seat to be sold is set.
Differences in demand – or varying 'willingness to pay' can be offset by market segmentation. Could this be relevant to your business? In the passenger airline case, this means implementing purchase restrictions, length of stay requirements, and requiring fees for changing or cancelling tickets.
Tip 2 - A lesson from Hotels
Hotels use yield management to calculate the rates, rooms and restrictions on sales in order to best maximize their return. These systems measure constrained and unconstrained demand along with pace to gauge which restrictions to implement, e.g. length of stay, a non-refundable rate, or close to arrival rate.
Often, offering lower prices is needed to encourage activity, which you may need to do. For a seaside hotel it may be the winter, for a business hotel the weekends, for a country house hotel mid-week, for a wedding venue mid-week, for a holiday package, out of season and so on.
During 'peak' seasons, the summer holidays or Christmas for instance, hotel prices will be at a premium rate. If there is a big event going on in a city (sporting or cultural), then hotel prices rise.
Tip 3 - A lesson from Restaurants
The common ways to increase RPASH (revenue per available seat hour) is to decrease the amount of time each party spends at their table, increase the average spend and also decrease the time that a table stays empty after a party leaves. Some common tips include:
- All day every day. You pay rent for the restaurant 24 hours a day, 7 days a week 52 weeks a year so make the most by increasing available seat hours. Be open for breakfast, lunch and dinner – offer takeaway breakfasts – whatever brings in more money.
- No more quiet days. Tuesdays are traditionally the toughest night for a restaurant, so run promotions to fill seats on those quieter nights. Maybe link in with a local cinema.
- Increasing the number of turn-arounds. Depending on your clientele and target market, you may be able to get another sitting in. Some restaurants do fixed sittings, say 6pm and 8pm so that customers know if they are in the 6pm sitting, they need to be out by 8pm. This works well if people are going on to a theatre or cinema.
- Have a bar area. Customers have a couple of drinks before dinner and are sitting there ready and waiting as soon as a table is cleared.
- Increase your prices. Check the local competition and see how you compare. This might be something for you to consider?
- Table optimisation. What is the average size of your bookings? Some restaurants and cafes attract more singles and couples, others larger groups. If all of your tables are for 4, it means that every singleton and couple is wasting seats and decreasing your RPASH.
Tip 4 - A lesson from Car Rental
Car rentals will be cheaper from holiday resort airports during off-peak periods and higher during peak seasons. They may be tied-in with a holiday package.
Think optional extras. Yield management regarding car rental deals with the sale of optional insurance, damage waivers and vehicle upgrades. This accounts for a major portion of the rental company's profitability, and is monitored on a daily basis.
Tip 5 - A lesson from Telecommunications
On average, Communications service providers utilize an average of just 35 to 40 % of available network capacity.
Recently, telecommunications software vendors such as Ericsson have promoted yield management as a strategy for communications service providers to generate additional revenue and reduce capital expenditures by maximizing subscriber use of available network bandwidth.
Approaches include basing a strategy on innovative services explicitly designed to use only spare capacity and borrowing proven methods from the airline industry.
Suggested approaches to executing a successful yield management strategy include accurate network information collection, bandwidth capacity allocation that doesn’t impact service quality, the deployment of service management software such as real time policy and real-time charging, and using new marketing channels to target consumers with innovative services – the latter may be of use to your business?
Tip 6 - Seasonal Products
In the autumn there will be a demand for leaf-blowers and plant bulbs. Come the winter products to clear away snow will be required. Spring will herald demands for gardening tools and lawnmowers, whilst summer inspires the purchase of new garden furniture.
Manufacturers will 'push' their products with attractive prices pre-season. In the midst of that season, prices will reach their highest point. Once the season is over, prices fall as retailers attempt to clear their stocks and prepare for the new season.
The Christmas retail shopping season is an excellent proving ground for yield management. Every year it seems there is one or two products where the demand is so high supply can’t keep up.
iPhones, PlayStations, Xboxes come to mind. Invariably, after Christmas, the supply catches up with the demand and there are ample quantities on the shelves.
The fashion industry uses yield management with high prices at the beginning of a fashion season, lower prices around the middle of the season and sale prices as the season comes to an end.
Sometimes the industry is 'caught out' if the weather does not confirm to seasonal norms! During periods of extreme cold weather they will sell more hats, scarves and boots. When temperatures rise they will sell more skimpy items and accessories.
What if the manufacturer of the “hot” product adopted yield pricing and charged a premium price for the product?
In that case those who really wanted it could buy it and those who were willing to wait could buy it after Christmas at the normal list price. If you wanted it badly enough you’d pay the higher price. Does this strike a chord?
Yield management is all about selling products and services at the right price, at the right time, to the right people – and making the most of a limited resource.
Sometimes businesses, faced with a lack of pricing power turn to yield management as a last resort but soon discover that it was a wise move.
Offering lower prices at off-peak/quieter times and raising prices at busy, peak times results in higher revenue overall.
By using this strategy 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.
Yield management opportunities are available everywhere. Smart marketing executives will be able to see the potential for a yield pricing relationship with their own products and services and adopt creative strategies to maximize profits.
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Pricing with Confidence: 10 ways to stop leaving money on the table, Reed K. Holden and Mark Burton, 2014
Pricing Strategy: tactics and strategies for pricing with confidence, Warren D Hamilton 2014
So Why Do I Care? Management, marketing and innovation insights for a changing world, Tom Coughlan, 2006
The Art of Pricing:how to find the hidden profits to grow your business by Rafi Mohammed, 2005