10/5/2019 Applying Yield Management

Pricing to your Service Business

Group 7 EPGP

Akash Mishra- 1914046

Akshat Kamath- 1914033
Puneet Agarwal-1914002
Rahul Singh Bist-1914014
Ravi Shankar-1014062
Introduction
Yield management pricing is a broad term that describes how a service provider can secure
higher revenues from its relatively fixed capacity. Its basic principle is that a marketer must
continuously update its price levels based on evaluating reservations for future purchases in a
specific time slot against a projection of demand for each time slot. Given the small marginal
cost of serving an additional customer for many services, the fundamental objective of yield
management pricing is to adjust prices to fill all available capacity.
This article develops a framework for implementing a yield management pricing system for
service-based providers.

Optimal Applications
Yield management pricing can be successfully applied in service industries characterized by
the demand characteristics, existence of reservations, cost characteristics, and capacity limits
(as shown in Table-1). In general, these include markets that can be segmented, services that
are traditionally booked via a reservation system, and services characterized with low marginal
costs (in comparison to both marginal revenue and fixed costs) and a relatively fixed capacity
(as shown in Table-2).
Service industries fit for yield management pricing are generally classified based on the time
interval between a consumer’s making a reservation and the time the service is delivered (short
term versus long term) and the level of the consumer commitment (no deposit versus non-
refundable deposit and/or a contractual obligation to purchase the service on the specific date).
Long-term services with high levels of consumer commitment (non-refundable deposits or
signed contracts) are best suited for yield management pricing. In this instance, marketers have
the longest time frame for revising price levels and have a high degree of confidence that a
consumer’s reservations will actually result in a purchase. Figure 1 below has more details:

Advantages of Yield Management Pricing

There are several major advantages associated with the use of yield management pricing.
 Firstly, yield management can better enable a high-cost service provider to compete
against a low-cost provider. E.g. major air carriers commonly used yield management
pricing to selectively match the fares of lower-cost upstarts, but only on flights with
histories of unsold capacity
 Secondly, yield management pricing better enables a service provider to utilize its
relatively fixed capacity; through the use of yield management pricing, a service
provider can shift demand from a peak to a slack period by raising the proportion of
higher-priced services.
 Lastly, yield management pricing is a more profitable alternative to simple
indiscriminate time-based price discrimination that provides discounts on a much
broader scale.

Developing and maintaining a Yield Management System

A service provider can develop and maintain a yield management system through completion
of eight interrelated steps. These steps include:
1. Setting up an organization for yield management – All the responsible personnel in the
organization should work together to realize the common goal. At many firms, potential
revenue improvements have been eroded by open fighting between the revenue
management and sales departments and by the failure of revenue management and capacity
planning departments to work together
2. Ascertain whether market segments exist - A good yield management system appeals to
price-sensitive and preventive consumers as a means of filling time slots that would
otherwise be empty, and to time-sensitive and emergency segments to increase its average
revenues. Yield management systems are far more profitable when a service provider faces
different market segments that arrive at different times to purchase the service.
3. Determining the number of days the system will look ahead - Capacity planning and yield
management planning need to recognize the different requirements of its market segments.
In the hotel industry, capacity planning generally begins six months prior to occupancy.
4. Specifying class membership conditions: Developing rate fences - Rate fences are typically
imposed to balance the perceived value for each market segment and to avoid offering
discounts to customers willing to pay a higher price. Rate fences help create customer
segments, as well as justify why people pay different prices.
5. Calculating the number of booking classes - The second aspect of developing rate fences
is to determine the number of different booking classes or rate buckets. Too many booking
classes can mean confusion among consumers, too few booking classes may mean missed
opportunities to maximize revenues.
6. Computing the proper proportion of rates within each booking class - This stage requires
that the service provider determine the proper proportion of rates within each booking class.
Regardless of industry type, the primary obstacle to successful yield management
implementation involves accurately assessing customer demand. There are two types of
yield management tools: heuristic tools based on rules-of-thumb, or those based on
complex computer programs.
7. Communicating updated prices to consumers - The Web has increased the potential for
yield management due to its ability to inexpensively provide the most current pricing
information to both intermediaries and final consumers. A service provider can
substantially reduce communication expenses to both intermediaries, such as travel agents,
and final consumers through a well-publicized Web site.
8. Fine-tuning the yield management pricing model - Lastly, a good yield management system
needs constant surveillance, as well as adjustments. The system must reflect last minute
cancellations, the entry or exit of a major competitor, unanticipated weather conditions, etc.

Possible Pitfalls
In developing and implementing a yield management pricing strategy, a firm must understand
and avoid several pitfalls.
 First, major pitfall deals with unanticipated reactions by customers. For example, a poor
yield management system may result in lower revenues due to sophisticated customers
anticipating price adjustments and then cancelling previous reservations. The discount
structure can also cause a backlash from loyal clients. Higher-paying consumers may
feel that the resulting price schedules are unfair.
 Second, some consumers may use yield management to their advantage by waiting until
the last minute to book a cruise, hotel, or freight transport service. Some of these
consumers would otherwise have paid full price.
 Lastly, some service providers seek to reduce their risk of consumers not honouring
their reservations through overbooking. An overly aggressive overbooking strategy can
result in long delays, consumer frustration, and high costs in a provider’s service
recovery efforts.