What is yield management?
Yield management translates as yield management and means: product-dependent price differentiation to increase yield.
In order to optimize revenues and maximize margins (= profit), systematic demand management is required. One method of putting this into practice is revenue management.
How it works: This is primarily about optimizing demand driven by price, not about acquiring new customers. By using special software, countless data fragments as well as other aspects can be analyzed in order to target different groups of buyers and encourage them to take action.
The goal: to prioritize those requests that are associated with the highest willingness to pay. Classical yield management can be found in segments such as air travel, hotel accommodation and rental cars. This is intended to make the best possible use of existing capacities and resources.
Simply explained! Use of yield management with airlines
A look at the tourism industry is enough to understand why dedicated revenue management makes sense:
- A basic distinction is made between different customer groups, including business travelers, individual travelers and package tourists.
- The way in which and, above all, when those customer groups book air travel differs significantly. Individual travelers, for example, are very flexible, while business travelers are more short-term oriented.
- These customer-specific differences result in a different willingness to pay in each case; in addition, a differentiation must be made between the quotas for each individual customer group.
The task of yield management is now to balance the optimal relationship in terms of price. The aim is to ensure optimum capacity utilization. And in this context, "optimal" means that the focus is primarily on the customer group of business travelers, which is associated with a high willingness to pay. This is achieved through targeted demand management with the help of prices and offers.
Important: The more information given, the better prices can be tailored specifically to the needs of a customer group. The so-called nesting, i.e. a contingent formation, is of particular importance here.
This information influences the application of earnings management
Even Gordon Gekko, the legendary character from the US cinema film "Wall Street" (1987) knew that information is the most important factor of all. Literally, it says, "The most valuable commodity I know of is information."
If we take this uncritically and relate it to yield management, the context becomes clearer. After all, demand management is always about maximizing profit. And this works best when as much relevant information as possible is given.
But what information is needed in revenue management? Here is a compact overview that provides a better understanding of the subject.
- Capacity for the underlying product/service
- Own prices as well as prices of the competition
- Seasonal fluctuations
- Demand situation of the past
- Current utilization
- Time of purchase/booking
- Custom behavior
However, there are still many unknown variables that can only be estimated or approximated. These include factors such as willingness to pay on the one hand, but also cancellations, the influence of competitors' marketing campaigns, etc. on the other.
Especially in industries such as logistics, which are already strongly driven by data, information and automation, intelligent revenue management comes in handy. After all, this means that there are countless variables that can be analyzed using the right algorithms. Nevertheless, we do not only want to present advantages of yield management, but also critically examine disadvantages.
Advantages Yield Management:
- Optimized, i.e. higher capacity utilization or increased sales with the help of dynamic pricing
- Presentation of attractive prices relevant to the customer group (= customer loyalty)
- Meaningful market segmentation that influences key decisions of the company
- Better management of supply and availability, leading to synergy effects
- Adaptation of the sales process by means of cross-selling and upselling
Disadvantages Yield Management
- Yield management must be aligned with the company's pricing strategy
- Willingness to pay of individual customer groups changes, which negatively influences demand
- Adaptation of the competition, which requires regular market analysis
This means that yield management methods must be constantly adapted and put to the test, as important parameters can change rapidly. In addition, a fundamental pricing strategy is needed in the context of a target group approach, as control via price is not always the best way to achieve higher capacity utilization.