Chapter2: The principles of Yield

Management
 The principles of Yield Management

INTRODUCTION

I. DEFINING YIELD MANAGEMENT

II. STRATEGIC LEVERS OF YIELD MANAGEMENT
III. TYPOLOGY OF YIELD MANAGEMENT

CONCLUSION
 INTRODUCTION

• Yield management originated with deregulation of the

U.S airlines industry in the late 1970’s.
• Yield management is a method which can help a firm to
sell the right inventory unit to the right type of customer,
at the right time and for the right price.
• Yield management guides the decision of how allocate
undifferentiated units of capacity to available demand in
such a way as to maximize profit or revenue.
• The problem then becomes one of determining how
much to sell at what price and to which market segment.
 I. DEFINING YIELD MANAGEMENT
 Yield management is the application of information
systems and pricing strategies to allocate the right
capacity to the right customer at the right place in
the right time.
 Yield management means setting prices according to
predicted demand levels so that: price sensitive-
customers who are willing to purchase at off peak-
times can do so at favorable price,
 While price-incentive customers who want to
purchase at peak times will be able to do so.
 The applications
The application of Yield management has been
most effective when it is applied to operations that
have the following characteristics: 
 Relatively fixed capacity
 Predictable demand
 Perishable inventory
 Appropriate cost and pricing structure
 Demand that is variable and uncertain
 1.Relatively fixed capacity

Yield management is appropriate for capacity

constrained service firms.
Capacity can be measured in both:
• Physical capacity may be measured by the number of seats,
the number of rooms or the number of square meters.
• Non physical capacity is usually time-based and reflects the
notion of a physical capacity used for certain period of time:
room-nights, seats-hours and tee-times for golf courses.
• Capacity is generally fixed over the short term. Firms can
adjust their capacity: restaurants can reconfigure their dining
rooms or use outdoor seating…
 2.Predictable demand
• Demand for capacity constrained firms
consists of customers who make reservations
and walk-in customers.
• To forecast this demand and manage the yield
it generates, a manager needs to compile
information on the percentage of reservations
and walk-in customers desired time period
and likely service duration.
  
3.Perishable inventory

• The inventory of capacity constrained service

firms should be thought of as time, in this
case, the time during which a unit of capacity
is available.

• If an inventory unit is not occupied for a

period of time that part of the firm’s inventory
perishes.
 4. Appropriate cost and pricing
structure

 
• Industries using yield management should possess a cost
structure that features relatively high fixed costs and fairly
low variable costs.
• Like hotels, other capacity constrained industries must
generate sufficient revenue to cover variable costs and
offset at least some fixed costs.
• The relatively low variable costs associated with many
capacity constrained industries allow for some pricing
flexibility and give operators the option of reducing price
during low demand times.
 5. Time-variable demand

• Customer demand varies by time of year, by week, by day, and by time of day.

• Manager must be able to forecast time related demand so that they can
make effective pricing and allocation decisions to manage the shoulder
period around high demand periods.

• A special factor for firms using yield management is that they have to predict
the length of time a customer will use the service.

• For example in restaurant while it is usually true that lunch is short and diner
is long, if managers can accurately predict customer duration, they can make
better reservation decisions and give better estimates of waiting times for
walk-in customers.
 II. STRATEGIC LEVERS OF YIELD MANAGEMENT

A successful yield management strategy is

predicated on effective control of customer
demand. The two strategic levers that managers
have at hand to manage demand and thus
revenue are: 
• Duration management,
• Demand- based pricing.
Figure 1: Typical pricing and duration positioning of selected industries

PRICE
FIXED VARIABLE

DURA Quadrant 1: Quadrant 2:

TION PREDICTABLE cinemas, Hotel
Stadium Airlines
Arenas, Rental cars
Convention centers Cruise lines

Quadrant 3: Quadrant 4:
Restaurant, Continuing care,
UMPREDICTABLE Golf courses, hospitals
Internet service
provider
 Conclusion
• Successful yield management applications are
generally found in quadrant 2 industries, because
they can manage both capacity and customer
duration.
• Hotels are able to apply variable pricing for a product
that has a specified or predictable duration.
• Other industries can shift to quadrant 2 strategies to
achieve some of the revenue gains associated with
yield management by manipulation duration and
price.
 
III. TYPOLOGY OF YIELD MANAGEMENT

1. Reduce time between customers

• Reducing the amount of time between customers (change over time

reduction) by definition means that more customers can be served in the
same, or shorter, period of time.

• Change over time reduction has become a common strategy for restaurant.

• Many restaurants have instituted computerized table management systems

which track tables in use, the progress of the meal and when the bill is
paid. When customers leave, the table management system notifies
waiters, and the table is cleared and reset. The result is an increase in table
utilization and hence revenue per available seat hour (REVPARSH).
2. Price

• To use yield management, companies must

develop logical differential pricing policies.
• Passengers in the economy section of a flight
from Paris to Hanoi may pay from nothing to
over 2000 €. The fares vary according to the
time of reservation, the restriction imposed or
the group or the company affiliation.
 3.Pricing knowledge

• Yield management is essentially a form of

price discrimination. As with other business
such as telephone service, cinemas, when
demand is low, discounted prices are
available, but when demand is high,
discounted rates are unavailable. By offering
multiple rates, firms hope to increase their
revenue.
 4. Over booking policy

• Companies overbook to protect themselves

against the possibility of no shows.
• To develop an overbooking policy, a firm must
collect information on no-show and cancellation
rates over time. Companies can develop other
methods, such as guarantees, customer reminders
or deposits, to reduce the likelihood of no-show.
• In addition firms must develop internal methods
for dealing with displaced customers.
 5. Information system

• For a yield management system to be

successful, it must be integrated with other
information technology systems of the
company.
• The lack of computer integration is one of the
biggest obstacles facing successful yield
management implementation.
 IV. UNRESOLVED ISSUES AND THE FUTURE

• Although yield management has met with

success in many industries, many issues remain
unresolved. Major unresolved issues include the
best and appropriate uses of forecasting
information systems.
• In addition, other areas such as expansion into
other areas of business, regional or city-wide yield
management and integration with E-commerce
other great potential.
 
 1. Forecasting

• A detailed an accurate forecast is the key

ingredient for any yield management system.
• Recent research in the hotel and airline
industries shows that simple exponential
smoothing and pick-up methods provide the
most accurate forecasts.
• Without good forecasting, yield management
systems may result in erroneous
recommendations and poor performance.
2. Information system integration
• A yield management system requires an additional
computer system which must be integrated into the
Information technology structure of a company.
• Companies using computerized yield management
systems have faced severe integration problems and
are frequently unable to rely on two way interfaces
between their yield management system and other
information technology systems until such issues are
solved the implementation of yield management will
be difficult.
 3. Pricing

• Most yield management system assume that

the set of prices are given and that the role of
the yield management system is to determinate
which prices are open and which are closed.
• Hotels are actively researching dynamic pricing
and are trying to determinate how to apply
optimal pricing in real-times. A 1 per cent
increase in price can result in a net income gain
of 10-15 per cent.
 4. Customer satisfaction

• Long term studies on the impact of yield

management on customer satisfaction and
loyalty have not been conducted.
• If customers perceive that firms are behaving
in an unfair manner, they are less likely to
patronize that firm.
• Customers are more likely to view yield
management practices as fair.
 5. Incentive system
• Some companies that have tried to implement
yield management have been unsuccessful
because of a lack of attention to appropriate
employee incentive systems.
• Incentive systems which help to align the goal
of maximizing revenue must be developed if a
yield management system is to be truly
successful.
 6. Expansion to other part of the business

Yield management has typically been applied to

the reservations of individuals, but in the hotel
industry, for example this effectively precludes
groups, tour operators corporate accounts and
other non-rooms revenue (food, beverage,
recreation, retail) some hotel chains are seeking
to develop total hotel yield management in an
attempt to maximize their total revenue rather
than just their rooms revenue.
 7. Integration with E-commerce

• E-commerce significantly change the way in

which companies sell their capacity. E-
commerce such as Opodo.com or
priceline.com give capacity constrained firms
an opportunity to sell their capacity directly to
consumers and profitability and efficiently to
dispose of unsold perishable inventory.
 8. City-wide yield management

• In a relative issue, some companies notably

Mariott and Disney are trying to do more than
maximize the revenue of a single hotel. They
try to maximize the revenue over all hotels.
• Maximizing revenue across hotels requires a
sophisticated campus-wide system approach
in which business can be easily transferred
one unit to another.