Yield Management

Yield Management

Last week we talked about discounting, the uses and pitfalls of discounts.  It was not a question of should or shouldn’t I discount, rather the how and when of discounting.  This week we want to talk about Yield Management and how that might fit into your discounting or pricing models.

Yield management, also known as revenue management, is a strategic approach to pricing and inventory control used primarily in service industries, such as airlines, hotels, car rentals, and entertainment venues. It involves adjusting prices and availability in response to changing demand to maximize revenue or profit from a fixed, perishable resource.  But if we think about it in terms of discounting, rather than “dynamic pricing” many other industries can use these strategies to attract customers.

Does your business have limited inventory, limited schedule, or great fluctuation in demand either from hour to hour like restaurants, or days of the week such as a beauty salon, or seasonal fluctuation like construction or hotels?  If so, perhaps you can employ yield management to squeeze far more out of your human and physical resources.

Here’s a breakdown of its key components of Yield Management and how it works:

1. Demand Forecasting – Predicting future demand based on historical data, market trends, and other factors. This helps in anticipating periods of high and low demand.
2. Dynamic Pricing – Adjusting prices in real-time based on demand, competition, customer behavior, and other external factors. Prices can be increased during peak times and lowered during off-peak times to attract more customers.
3. Inventory Control – Managing the availability of products or services. For example, an airline may limit the number of low-priced seats available on a high-demand flight.
4. Segmentation – Dividing the market into different segments based on factors such as booking time, customer loyalty, and purchasing behavior. Each segment can be targeted with different pricing strategies.
5. Overbooking – Accepting more reservations than the actual capacity to account for no-shows and cancellations. This is common in airlines and hotels to ensure maximum utilization of resources.
6. Data Analysis – Utilizing advanced analytics and software tools to analyze data and make informed decisions. This includes monitoring booking patterns, competitive pricing, and market conditions.

How Yield Management Works

Collect Data – Gather historical data on customer behavior, booking patterns, and external factors such as seasonal trends and economic conditions.

Analyze Data – Use statistical and predictive models to forecast future demand. Identify patterns and correlations that can inform pricing and inventory decisions.

Set Pricing Rules – Establish pricing rules and guidelines based on the analysis. Determine how prices will change in response to different levels of demand.

Monitor and Adjust – Continuously monitor the market and adjust prices and availability as needed. This real-time adjustment helps in capturing as much revenue as possible from varying demand levels.

Evaluate Performance – Regularly assess the effectiveness of the yield management strategy. Analyze revenue outcomes, customer satisfaction, and market share to refine the approach.

Examples of Yield Management

• Airlines – An airline might sell a limited number of seats at a low-price months in advance and gradually increase prices as the departure date approaches and the plane fills up.
• Hotels – A hotel may offer discounted rates during the off-season to attract guests and raise rates during peak tourist season when demand is high.
• Car Rentals – Car rental companies might offer lower prices for rentals booked well in advance and higher prices for last-minute bookings.

Benefits of Yield Management

• Increased Revenue – By optimizing pricing and inventory, businesses can maximize revenue from each customer segment.
• Better Resource Utilization – Helps in maximizing the use of fixed resources like hotel rooms or airplane seats.
• Competitive Advantage – Businesses can stay competitive by responding dynamically to market changes.

Challenges of Yield Management

• Complexity – Requires sophisticated data analysis and forecasting tools.
• Customer Perception – Frequent price changes can lead to customer dissatisfaction if not managed carefully.
• Accuracy of Predictions – Reliant on the accuracy of demand forecasts, which can be affected by unpredictable factors.

Just like last week’s article on discounting you should get creative and make sure that lower pricing gains the business some advantage.  And once again, we can use value added, rather than dollars to reward the customer for the preferred behavior.  Here are a couple of examples:

A hotel that is in their slow season might give a low price but demand a two-night minimum stay, or a price that includes spa services or a round of golf.

It is difficult for a restaurant to send people home during the slow hours between lunch and dinner.  But seniors can eat any time of day, so make a very special price for seniors to come in between 2pm and 5pm.

Yield management, when executed effectively, can significantly enhance a company’s revenue and profitability by ensuring the right product or service is sold to the right customer at the right time and price.