Yield Management Pricing

Table of contents

What is yield management?

Yield management is a distinct pricing strategy stemming from several key principles. Namely, yield management pricing takes into account understanding, influencing, and anticipation of consumer behavior for the sake of profit maximization. The method often deals with some fixed and time-limited resources. Yield management is considered a branch of revenue management, and it involves strategic control of any accessible inventory. Such an approach helps maintain inventory and sell it at the right time and place.

Yield management has been used since the 1980s and is directed toward price discrimination. The system grants consumers access to identical goods charged at different prices. Yield management is a significant profit generation tool used in various industries. The approach includes several key variables:

1. Perishable nature of the product.
2. Different demand levels.

Yield management attempts to anticipate consumer behavior while pursuing profit maximization strategies with these factors in mind. Companies also use statistics, seasonal events, and unexpected events when predicting behavior. On the occasion of any given event, the demand shifts. As a result, it changes the price of a good or service, thus increasing the profit.

What is the yield management system in the retail industry?

With the yield management in the retail industry, it is possible to create the conditions when an offline or online store does not lose costs when operating at limited capacity. Specifically to the selected industry, there are several key aspects worth considering:

• Seasonal products. There are changes to product pricing based on seasonality. In the retail industry, depending on the given season, different prices may increase in demand with a regard to particular seasonal events. For instance, consider Christmas or the New Year. It is the time when the demand for gifts is much higher, and, naturally, prices for them will rise.
• Unexpected events. With the occurrence of some unforeseen event, the industry might shift drastically. At this point, yield management can be extremely important. For example, if retailers yield some inventory anticipating something to occur, they can prepare themselves for the event in advance. Besides, when some unexpected event takes place, the demand decreases. In such a case, a retailer can also reduce the price to make the options more appealing.
• Increase in prices. Imagine a situation when some major event, such as a music festival, should occur at a certain location. Naturally, the retailers in the vicinity of the event receive an opportunity to price event-related products much higher than other stores located far from the event. Essentially, this strategy and anticipation of various events help charge higher prices and receive greater profits.

These aspects apply to the retail industry. They show how some external variables can potentially grant stores an opportunity to alter prices based on the event's magnitude. The yield management system is extremely important for the retail industry.

Yield management pricing example

Regarding the yield management pricing example, there are several variables to consider. The approach is a flexible pricing strategy. Remember, it is based on anticipation and influence on consumer behavior to boost profits from some time-limited inventory.

To illustrate, suppose there is a hotel with around 50 all-suite rooms with a general rate of $300 per room. When multiplying the rate on the number of rooms, a hotel’s potential revenue under 100 occupancy rate is $15,000. In such a case, after determining the service price, a hotel needs to have a mechanism for controlling prices under different circumstances. At this point, if there is some event held in the vicinity of a hotel, the cost can be changed to $600 per room. Keeping this in mind, even under 50 percent of occupancy, a hotel will reach its expected revenue.

Use by industry

There are several key industries where yield management creates the most value.

Airlines

In the airline industry, the price of services is based on the available capacity, the demand, and the time-based component. If the airplane departs with the unsold sets, it cannot generate any additional revenue from such seats. To avoid such things, the yield management inside the airline industry uses specific software to monitor how seats are reserved.

Keeping that in mind, based on the available data, airlines can charge different prices based on the demand and capacity. Besides, the price will be much higher if a client reserves a seat closer to the departure day. Essentially, the logic dictates that the lower is the number of seats reserved, the lower is the price per seat.

Telecommunications

In telecommunications, service providers use 35 to 40 percent of available network bandwidth or capacity on average. The industry providers promote yield management as the strategy to generate additional revenue employing reduction of capital expenditures and maximizing the number of subscribers to the network.

As a result, service providers design networks specifically applicable to use only spare capacity. There is particular software available to do such a thing. For instance, service providers use real-time policy and real-time charging to implement yield management into telecommunications.

Online advertising

In online advertising, yield management correlates to managing the publisher's inventory with the market demand. The logic is to establish the best price while ensuring the highest rates possible.

The bottom line

Yield management pricing is the method of boosting revenue by smart utilization of inventory. The approach includes consideration of different external factors. From seasonal holidays to unexpected events, yield managers can use the available information to prepare for the shifting demand and prices. When prepared, companies can anticipate their revenue and engage in the most revenue.

Tags:

• Yield Management

• retail

• Airlines

• Telecommunications

Marina Dias,

Pricing Solution Consultant at Competera