Nowadays, industries such as tourism and hospitality experience constant shifts. Though they often have opportunities like contingencies, events, and trends to make a profit, with these opportunities being seasonal, the profits come and go rapidly.
Nevertheless, these industries can leverage rare opportunities and maximize revenue.
With a well-defined yield management strategy, any industry can achieve desired profit.
A business looking for a crucial pricing strategy for detailed and effective forecasting needs to look no further because yield management has got it covered.
Yield management is a great tool for businesses interested in balancing between availability and price, in other words, supply and demand.
Learn more about yield management, its pricing, strategies, examples, and more to determine how it can prove to be a boon for boosting revenue.
What is Yield Management?
Yield Management is the practice of pricing, that businesses in air travel, hospitality, and other tourism-based industries utilize to generate maximum profit by providing perishable inventory.
Besides the number of inventory sold at a certain price, yield management also depends on certain other external factors.
In other words, yield management is a selling strategy that involves selling certain fixed inventory to the right prospects for the right price at the right time.
In the hotel industry, this generally means selling the best room to the right guest at the high time for the loftiest amount possible to maximize the profit gained.
Yield management and revenue management have many similarities, but yield management has been around for longer.
It is essential to illustrate that the focus of yield management is more limited and is related only to the selling rate and the proportion of sales, which help to generate reasonable revenue yield.
The same inventory (like a hotel room or an air ticket) is likely to be sold to different people for varied prices due to the number of variables involved in the strategy.
A data-driven approach is applied to the yield management strategies to ensure that the pricing is adjusted to increase the business outcomes.
The use of yield management strategies helps hotel owners to increase the revenue they make from a limited number of rooms, which require to be sold by the exact time.
Moreover, by utilizing past performance data and widespread business trends, executives can figure out the demands to respond accordingly.
Particularly, yield management pricing is of interest to organizations having the characteristic of fixed inventory- some with fixed and others with variable pricing.
For instance, hospitality businesses can customize the selling and pricing strategies of their most valuable resources such as the best available rooms. So, the use of yield management brings them maximum revenue.
What is a Yield Management System (YMS)?
Yield Management Systems are used to: manage the revenue of organizations or businesses. They can be utilized in service industries that sell perishable inventory, such as airline seats or hotel rooms.
Earlier, yield management was used by the United and American airline industry. The function of yield management is to leverage selling and making the maximum revenue from all available inventory.
Let’s take the example of airlines; they have a limited number of seats available on an aircraft to a specific location. In case, an airline fails to sell a seat, it will lose the ability to make a profit on that seat in the future. Hence, yield management aims to sell all seats at the best price possible.
However, there is less possibility of selling all the seats on a plane at the same rate because by using yield management strategies, the seats may be offered at a discounted rate to attract more people to buy the tickets.
Sometimes, the airplane is overbooked to make sure all the seats are reserved in case some people do not come or cancel their tickets.
Specialized algorithms and historical data are utilized by a yield management system to determine the appropriate price for the inventory. Working in real-time, these systems can change the prices following the demand.
However, the yield management systems are not able to discriminate between fresh and frequent customers. Also, if they cannot anticipate well, revenue will not be maximized.
Nevertheless, yield management systems are very popular in-service industries. They have been helping many industries to make large savings and boost revenue.
With the help of yield management, firms can make more profit than low-cost providers. The pricing mechanism of yield management is quite an effective way to distribute a fixed capacity as well as a better alternative to offer discounted rates on an extensive scale.
History of Yield Management System
In the late 1900s, American Airlines developed a yield management system that was recognized by a prestigious prize committee to have contributed $1.4 billion over three years.
In the early 1990s, other transportation and travel companies also started using yield management, but the most notable implementation was at National Car Rental.
Later in 1993, the company, General Motors broadened the definition of yield management by including pricing, reservations control, and capacity management. Here, yield management paved the way for a more general process of managing revenue.
While revenue management refers to forecasting consumer behavior through market segmentation, demand forecast, and optimization of prices for many different types of inventories, yield management involves maximization of revenue through stock control.
What are the Benefits and Advantages of Yield Management?
Using yield management is incredibly beneficial for hotels and other industries. Yield management adds value to businesses by increasing revenue, decreasing errors, understanding booking structures, and increasing value perception. Let’s look at the benefits of using yield management in more detail.
- Increased Revenue
Since machine learning and advanced analytics have been changing the perceptions of people about hospitality, yield management has also evolved.
With revenue being the main concern of businesses, yield management helps industries to increase their revenue even if the company is not located in a residential area.
Hotel owners and revenue managers can get the advantage of the anticipated demand and maximize average revenue per product or service. Costs are not variables as the demand is; therefore, businesses can raise the prices of their services during peak season.
Since these factors also rely on supply and demand, the higher the demand is, the more people are willing to pay higher costs.
- Understanding Booking Structure
Some customers make bookings in advance and others on short notice. If businesses like hotels and airlines have clear insights into booking structure, they can adapt their pricing to the booking behavior.
For instance, the people who book at the eleventh hour can be penalized with high prices whereas the ones who book in advance can be offered lower prices.
- Increased Value Perception
Perceived value is the customers’ anticipated worth of the product. When they perceive the costs to be right, they are willing to pay more for limited goods.
This same notion applies to the hotel industry; consumers are ready to pay during the peak season because their anticipated value of the rooms is higher.
Their perceived value can be boosted by using different marketing strategies, a variable pricing scheme, and by providing offers to get the book in advance.
- Elimination of Pricing Errors
By using an innovative yield management system, businesses can assure that no human errors occur because costs are decided based on market forecasting.
This sort of management program brings businesses into the future by automating their processes through the use of technology.
- Effective Segmentation of Customers
Since market segmentation is an important part of a business strategy, a significant forecast can help figure out the subtleties of that demand segmentation.
Some of those subtleties can be identified through customer’s intentions to make reservations as well as booking patterns and trends.
What is the Yield Management Pricing?
Yield management refers to a flexible pricing strategy that is based on insights, anticipation, and influence over consumer behavior to increase the profit or revenue from time-limited and fixed inventory of any product manufacturing companies or service-providing industries.
The simple way to calculate revenue or yield is to calculate how much real-time profit you made. To calculate yield, use the following formula.
Revenue Achieved / Maximum Potential Revenue
For instance, if a hotel has around 60 all-suite rooms with a general rate of $360 each.
By multiplying the $360 rate to 60 rooms, the hotel’s exact potential revenue becomes $21,600. If the hotel sold 30 rooms at $300 each in one night, the total price becomes $9,000. Its revenue is $9,000/$21,600 or about 41.6%.
Each generated yield must be described with the whole scenario such as considering the performance of competitors on the same day. Yield management should be done in advance; this helps a business adjust its prices in real-time to be prepared for reservation trends.
For example, when a business identifies a boost in bookings done at the eleventh hour, it may want to increase costs for future bookings to further improve those high-yield last-moment bookings.
The concept of yield management is not confined to pricing only but goes a few steps ahead. After determining the right costs for the products or services, there must be mechanisms for controlling prices in situations when pricing variables cause apparent discrimination.
For price control, the yield manager of a business must evaluate how to price change affects the demand for a certain type of inventory from different segments.
Which Industries Use the Yield Management System?
Since Yield Management is the practice of pricing, companies decide appropriate prices for their products or services to make the most of the right time by offering their customers the right price. This increases their sales and so does their revenue.
Following are some of the typical characteristics of the companies that have a yield management problem:
- High stabilized costs, low unstable costs
- A significantly fixed volume of inventory
- Segmentation of markets
- Proper cost and pricing structure
- Time variable market
- Perishable inventory
- Advance Bookings
With these characteristics as problems, industries need to use a Yield Management System (YMS). Here’s the list of those industries that use yield management systems:
- Car Rental Agencies
- Television Broadcast
- Golf Courses
- Cruise Lines
What are the Examples of Yield Management?
Increase in Hotel Prices
Consider a big festival going to take place at a certain location. The hotels in the vicinity of that festival venue can price their rooms at a considerably higher rate as compared to other hotels located away from that venue.
At such time, hotels have the opportunity to generate more revenue if they can sell all their rooms.
In another case, if a big concert is scheduled at a stadium, the hotels in its surroundings can charge for their rooms more than usual days. This strategy helps them generate more profit on those days than other ordinary days.
Discount Coupons or Promotions of a Restaurant
For instance, a restaurant that gets less traffic on Tuesday nights may offer special discounts or promotions to bring more diners.
Increase in Airline Tickets
Since tourism increases in Summer, an airline may increase the rates of tickets during the summer and offer the same benefits at less cost during Winter.
Many businesses use yield management systems to manage their profitability through selling inventory at variable higher rates.
Businesses that incorporate yield management strategies into their practices notice an obvious increase in their revenue.
Moreover, It is helpful for businesses having limited inventory to offer within time constraints. Yield management systems utilize the best time to offer the best items at the right rates and ensure maximum utilization of available resources.
To make the best use of yield management, companies need to have a team of people with the ability to carry out the analysis activities and research at the same time.