What is Yield management?
Yield management is a practice that has been adopted by service organizations across all spheres. It originally started as an airline industry concept, but soon emerged in other industries as well. The practice of yield management has been discussed and digressed over the past few decades to determine its exact impacts on the industry and its main benefits. However, there still exists limited research on the exact effects of yield management on business-to-business relationships. The knowledge about how feelings of price fairness affect loyalty is quite limited as well.
There are a number of definitions used to describe the processes of yield management. Wang and Bowie came up with the one that holds true for the airline industry. The main goal of yield management is to maximize the revenue with the help of effective management of three essential domains – pricing strategy, control of availability and inventory control. The inventory controls usually depend on the availability of resources such as aircraft, gasoline, and employees. The control of availability simply refers to the total number of empathy seats on board the aircraft.
The profitability of yield management systems is all too evident due to the sheer fact that most airlines who began to practice the concepts of yield management saw a direct increase of 3% – 7% in revenue. Some cases also resulted in a 50% – 100% increase in profit. American Airlines had accredited yield management policies for a revenue increase of $500 million per year. Delta also used similar systems to increase its revenues by almost $300 million per year. The airlines might be the champion advocates for yield management policies, but these practices are all too common in the hotel industry as well. Marriott Hotels credits these practices for an additional revenue of $100 million per year as well. Travel agents have also managed to use yield management practices to generate the maximum possible revenue from their holiday packages.
So how does the yield management system work?
Let’s take the example of a flight that has two fare buckets: discount price and full price. The flight has 200 seats that are available for an early morning flight on February 16th (Monday). The flight should easily be able to sell off all seats at a discounted price, but it understands that an increasing number of customers will be willing to pay full price for seats as February 16th gets closer. To make things easier, we further assume that the leisure demand occurs before business demand. The next thing to do is to determine how many seats the airline should sell at leisure fare and how many seats should it protect for people who would pay full price. If the airline ends up protecting too many seats, it faces the risk of flying with empty seats. On the other hand, if very few seats are protected, the airline might end up losing out on extra revenue that is usually generated from the business fliers.
In order to differentiate between the two groups, the airline often introduced barriers or “fences” between the two market segments. For example, the airline might phase in the full fare seats as the flying date gets closer and phase out the discounted seats. Since holiday fliers are expected to reserve their itineraries in advance, they are more than likely to make the most of the discounted fares. On the other hand, a majority of the business trips are decided within a week or two from the date of travel. This allows the airline to collect full fares from business fliers.
The same example can be used in the case of a hotel to make things even clearer. The concept of revenue management would remain the same, but the hotel would put up different “fences”. For example, the hotel might require guests to stay on a Saturday night to get the discounted room on Monday. Since most business travelers prefer to stay at home on weekends, leisure customers are more than likely to book this weekend stay because they are known to be more price sensitive. Therefore, the hotel might wish to sell as many rooms as possible to business customers at a higher price while ensuring that it maintains a high level of room utilization.
The concepts of yield management in the airline industry are known to have an impact on customer feelings of price fairness and it also affects customer loyalty. As expected, customers consider the price to be unfair when they realize that the airline is using price strategies to generate profit. Another issue is that yield management also ends up having a negative effect on leisure travelers because the business travelers are less price sensitive. Finally, price fairness is not a proper predictor of loyalty. Customers base their loyalty on different factors.
Ultimately, yield management works best in situations where the demand exceeds supply. This allows the industry to choose the demand that it wishes to address in order to maximize the revenue. However, these systems can also be used in cases where the supply exceeds demand to phase out bookings in a manner that allows the company to achieve the best possible revenue generation, given its constraints.
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