Yield management (YM) is a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, time-limited resource (such as airline seats, hotel room reservations, or advertising inventory).
[5] Deregulation is generally regarded as the catalyst for yield management in the airline industry, but this tends to overlook the role of global distribution systems (GDSs).
They also gave management staff direct access to price at time of consumption and rich data capture for future decision-making.
The Coca-Cola Company's plans for a dynamic pricing vending machine were put on hold as a result of negative consumer reactions.
If all customers would pay the same price for using the same amount of resources, the challenge would perhaps be limited to selling as quickly as possible, e.g. if there are costs for holding inventory.
It has evolved from the system airlines invented as a response to deregulation and quickly spread to hotels, car rental firms, cruise lines, media, telecommunications and energy to name a few.
In the passenger airline case, capacity is regarded as fixed because changing what aircraft flies a certain service based on the demand is the exception rather than the rule.
[10] In the rental car industry, yield management deals with the sale of optional insurance, damage waivers and vehicle upgrades.
Finnish low-cost inter-city bus service OnniBus, as well as Polish PolskiBus, bases its revenue flow on yield management.
[12] Recently, telecommunications software vendors such as Telcordia[13] and Ericsson[12] have promoted yield management as a strategy for communications service providers to generate additional revenue and reduce capital expenditures by maximizing the subscriber use of available network bandwidth.
[14] Approaches include basing a strategy on innovative services explicitly designed to use only spare capacity and borrowing proven methods from the airline industry.
[15] The approach can be more difficult to implement in the telecommunications industry than the airlines sector because of the difficulty to control and sometimes refuse network access to customers.
Determinants of such variable prices include date-specific expected demand factors (institutional and public holidays, weekends, weather, size and accessibility of the resort, etc.)
With predictable demand far outnumbering fixed supply in the professional pet boarding industry, yield management has become an ever-popular practice for this segment of businesses.
Much like the hotel industry, those systems help gauge which restrictions to implement, such as length of stay, non-refundable rate, or close to arrival, and also ensuring they are selling rooms and services at the right price to the right person at the right time.
If the market for a particular good follows the simple straight line Price/Demand relationship illustrated below, a single fixed price of $50 there is enough demand to sell 50 units of inventory.
In practice, the segmentation approach relies on adequate fences between consumers so that everyone doesn't buy at the lowest price offered.
In capacity-constrained cases, there is a bird-in-the-hand decision that forces the seller to reject lower revenue generating customers in the hopes that the inventory can be sold in a higher valued segment.
In the case illustrated here, a car rental company must set up protection levels for its higher valued segments.
The need to calculate protection levels has led to a number of heuristic solutions, most notable EMSRa and EMSRb, which stands for Expected Marginal Seat Revenue version a and b respectively.
Neither of these heuristics produces the exact right answer and increasingly implementations make use of Monte Carlo simulation to find optimal protection levels.
Since the mid-1990s, increasingly sophisticated mathematical models have been developed such as the dynamic programming formulation pioneered by Talluri and Van Ryzin[19] which has led to more accurate estimates of bid prices.
The optimization attempts to answer the question: "Given our operating constraints, what is the best mix of products and/or services for us to produce and sell in the period, and at what prices, to generate the highest expected revenue?"
Optimization can help the firm adjust prices and to allocate capacity among market segments to maximize expected revenues.
This can be done at different levels of detail: Yield management is particularly suitable when selling perishable products, i.e. goods that become unsellable at a point in time (for example air tickets just after a flight takes off).
Industries that use yield management include airlines, hotels, stadiums and other venues with a fixed number of seats, and advertising.
With an advance forecast of demand and pricing flexibility, buyers will self-sort based on their price sensitivity (using more power in off-peak hours or going to the theater mid-week), their demand sensitivity (must have the higher cost early morning flight or must go to the Saturday night opera) or their time of purchase (usually paying a premium for booking late).
After a year or two using yield management, many of them are surprised to discover they have actually lowered prices for the majority of their opera seats or hotel rooms or other products.
By doing this, 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.
In 2002, Deutsche Bahn, the German national railway company, experimented with yield management for frequent loyalty card passengers.