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Yield management, also known as Revenue Management, is the process of understanding, anticipating and reacting to consumer behaviour in order to maximize revenue or profits. corporations that engage in yield management usually use computer yield management systems to do so. The Internet has greatly facilitated this process. Other terms to describe this process are revenue optimization and demand management. Yield management can result in price discrimination, where a firm charges customers consuming otherwise identical goods or services a different price for doing so.

Three industries where yield management is used most heavily are passenger air transport, lodging and rental car. Airlines monitor through the use of specialized software how seats are being reserved and react accordingly, as for example by offering discounts when it appears as if seats will otherwise be vacant. Hotels use Revenue Management in largely the same way, to calculate the rates, rooms and restrictions on sales in order to best maximize the return for the property. In the rental car industry, Revenue Management deals with the sale of optional insurance, damage waivers and vehicle upgrades. It accounts for a major portion of the rental company's profitability, and is monitored on a daily basis.

Yield management system Enterprises that use yield management periodically review transactions for good (economics) or services already supplied and for goods or services to be supplied in the future. They may also review information (including statistics) about events (known future events such as holidays, or unexpected past events such as terrorist attacks), competitive information (including prices), seasonal patterns, and other pertinent factors that affect sales. The model (abstract) attempt to forecast total demand for all products/services they provide, by market segment and price point. Since total demand normally exceeds what the particular firm can produce in that period, the model (abstract) attempt to optimize the firm's outputs to maximize revenue.

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:

• by goods (such as a seat on a flight or a seat at an opera production)
• by group of goods (such as the entire opera house or all the seats on a flight)
• by market (such as sales from Seattle and Minneapolis for a flight going Seattle-Minneapolis-Boston)
• overall (on all the routes an airline flies, or all the seats during an opera production season)

Yield management is particularly suitable when selling perishable products, ie 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 theatre 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 the luxury of booking late).

In this way, yield management's overall aim is to provide an optimal mix of goods at a variety of price points at different points in time or for different baskets of features. The system will try to maintain a Distribution (business) of purchases over time that is balanced as well as high.

Good yield management maximizes (or at least significantly increases) revenue production for the same number of units, by taking advantage of the forecast of high demand/low demand periods, effectively shifting demand from high demand periods to low demand periods and by charging a premium for late bookings. While yield management systems tend to generate higher revenues, the revenue streams tends to arrive later in the booking horizon as more capacity is held for late sale at premium prices.

Firms faced with lack of pricing power sometimes turn to yield management as a last resort. 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. That is, they offer far higher discounts more frequently for off-peak times, while raising prices only marginally for peak times, resulting in higher revenue overall.

By doing this, they have actually increased demand by selectively introducing many more price points, as they learn about and react to the diversity of interests and purchase drivers of their customers.

Ethical Issues and Questions of Effectiveness Yield Management is a form of price discrimination, and as such faces predictable consumer resistance.

Some consumers are concerned that Yield Management could penalize them for conditions which cannot be helped and are unethical to penalize. For example, the formulas, algorithms, and neural networks that determine airline ticket prices could feasibly consider frequent flyer information, which includes a wealth of socio-economic information such as age and home address. The airline then could charge higher prices to consumers who are between 30 and 65, or live in neighborhoods with higher average wealth, even if those neighborhoods also include poor households. Very few airlines using Yield Management employ this level of price discrimination.

Some consumers also object that it is impossible for them to boycott yield management when buying some goods, such as airline tickets.

Yield Management also includes many noncontroversial and more prevalent practices, such as varying prices over time to reflect demand. This level of Yield Management makes up the majority of YM in the airline industry. For example airlines may make a ticket on the Sunday after Thanksgiving more expensive than the Sunday a week later. Alternatively, they may make tickets more expensive when bought at the last minute than when bought six months in advance. The goal of this level of yield management is essentially trying to get demand to equal supply.

When YM was introduced in the early 1990s, primarily in the airline industry, many suggested that despite the obvious immediate increase in revenues, it might harm customer satisfaction and loyalty, interfere with relationship marketing, and drive customers from firms that used YM to firms that did not. To some extent, frequent flier programs were developed as a response to to regain customer loyalty and reward frequent & high yield passengers. Today, YM is nearly universal in many industries, including airlines.

Experimental Studies of Yield Management Decisions Recently, people working in the area of Behavioral Operations Research have begun to study the yield management decisions of actual human decision makers. One question that this research addresses is: How much might revenues increase if managers relied on yield management systems rather than their own judgment when making pricing decisions? Using methods from Experimental economics, this work has revealed that yield management systems are likely to increase revenues significantly. Further, this research reveals that "errors" in yield management decisions tend to be quite systematic. For instance, Bearden, Murphy, and Rapoport showed that with respect to expected revenue maximizing policies people tend to price too high when they have high levels of inventory and too low when their inventory levels are low.

See also

• Geo (marketing)
• Variable pricing
• Price discrimination
• Last minute advertising
• INFORMS Institute for Operations Research and the Management Sciences
• Behavioral Operations Research

References

• Cooper, Alan. "Ethical Pricing." PoolOnline.Com. 2004. Through the Loop Consulting Ltd. 24 June 2006 http://www.poolonline.com/archive/issue28/iss28fea4.html

• "Definition and History of Yield Management." Amadeus. 24 June 2006 .

• McCaskey, David. "YIELD MANAGEMENT V RELATIONSHIP MARKETING." Wivenhoe. Wivenhoe. 24 June 2006 .

• Maglaras, C., Meissner, J. "Dynamic Pricing Strategies for Multi-Product Revenue Management Problems." MSOM 2006 .

• Netessine, S., Shumsky, R. "Introduction to the Theory and Practice of Revenue Management." INFORMS Transactions on Education, Vol. 3, No. 1, .

• Haag, Steven. Management Information Systems for the Information Age. Canada. McGraw Hill Ryerson Ltd. 2001, 2004-2006.

• "History of Sabre Airline Solutions." Sabre Airline Solutions. 26 June 2006 .

• Hayden, Kathryn, ed. "Aviacsa Becomes First Airline in Mexico to Select Sabre AirMax Revenue Manager." Sabre Airline Solutions. 12 June 2006. 26 June 2006 .

• Bearden, J. N., Murphy, R. O., Rapoport, A. "Decision Biases in Revenue Management: Some Behavioral Evidence." Manufacturing & Service Operations Management. In press.

• Becker, W. J., Bearden, J. N., Rapoport, A. "Perishable Asset Dynamic Pricing in the Laboratory."

• INFORMS Section on Revenue Management and Pricing .

External links

• Science of Better