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What is Yield Management? Definition & explanation with examples

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Yield management, also known as revenue management in German, is a concept known in the hotel, aviation and transportation industries. It describes the method of adjusting prices according to demand in order to maximize the company’s profit.

This means that prices can vary in real time and change based on availability. By using yield management, companies can optimize their utilization and thus increase their profits. A good example of this method is airline ticket booking. The closer the travel date, the higher the cost of the ticket. Early booking, on the other hand, ensures a favorable price.

Yield Management Example from Logistics

In the logistics industry, yield management can be used to optimize truck utilization, for example. Here, empty runs are minimized by adjusting prices and capacities based on current demand.

Another example is cargo yield management in airline freight traffic. Here, yield management is used to control the capacities and prices of cargo flights based on demand.

Yield management enables companies in the logistics industry to increase efficiency, reduce costs and maximize profits. By adjusting prices and capacities to demand, they can ensure that their resources are used optimally.

The history and development of yield management

Yield management emerged in the 1970s during the deregulation of the U.S. airline market. Prior to that time, airlines had fixed prices for their flights, regardless of demand and capacity. However, deregulation made it possible to set prices flexibly, which led to a new dynamic in the market.

The established airlines were suddenly confronted with new competitors in the form of low-cost airlines. These offered flights at significantly lower prices, which put considerable pressure on the traditional airlines. To remain competitive, they had to find a way to adjust their prices without lowering the entire pricing structure to the low-cost level.

Thus, the concept of yield management was born. By adjusting prices and capacity based on current demand, airlines were able to maximize profits. This principle was later applied to other industries such as hotels and logistics.

The various elements of yield management – Explained using an airline example

  • Market segmentation and price differentiation: the overall market is divided into homogeneous market segments based on the customers’ willingness to pay. Each segment is assigned to a specific booking class with different prices.
  • Demand management over time: Demand from leisure travelers, who are less willing to pay high prices, typically occurs early, while demand from business travelers, who are willing to pay more, occurs later. To ensure that high-value demand is not crowded out by low-value demand, quotas for high-value demand are reserved early.
  • Overbooking: More seats are sold than are physically available to achieve 100% occupancy and avoid vacancies due to last-minute cancellations and “no shows.”
  • Formation and individual control of booking classes: Airlines divide classes of carriage into different booking classes, each of which has different quota sizes and prices and is individually controlled.
  • Nesting: High-value booking classes can access quotas of lower-value booking classes, but not vice versa.
  • Traffic flow-based booking class control: Seat availability is based on whether demanders belong to a high-value or a low-value traffic flow.
  • Sales origin-based booking class control: seat availability is based on which sales region has the highest prices.
  • Forecasting models: Demand patterns and no-show rates are forecast to manage current booking patterns in a revenue-maximizing manner.
  • Information technology systems: Due to the large number of control decisions and data required, powerful information technology systems are necessary.

Advantages and disadvantages of yield management for companies and consumers

Advantages for companies

  • Increased revenue: Dynamic pricing allows businesses to maximize revenue by adjusting prices based on current demand.
  • Better understanding of booking patterns: Yield management enables businesses to better understand their customers’ demand patterns and adjust their pricing strategies accordingly.
  • Higher perceived value: by targeting price differentiation, companies can increase the perceived value of their products or services.

Disadvantages for companies

  • Potential unfairness: Variable prices can create the impression that identical products or services are being sold at different prices, which can be perceived as unfair.

Benefits for consumers

  • Falling prices: By matching prices to demand, consumers can benefit from lower prices, especially during periods of lower demand.

Disadvantages for consumers

  • Price uncertainty: as prices vary, consumers may be unsure when to book to get the best price.
  • Potential unfairness: as mentioned above, variable pricing can be perceived as unfair if one consumer pays more than another for the same product or service.

Yield Management vs. Revenue Management

Although both concepts may seem similar, the main difference lies in their focus: Yield Management focuses on maximizing revenue through variable pricing, while Revenue Management is a more holistic view of revenue growth that also considers other aspects of the business model.

Yield Management: this concept originated in the airline industry and focuses on maximizing revenue per available seat mile (or per available room in the hotel industry). It is a dynamic pricing strategy that varies based on demand and capacity. The goal is to maximize profit by selling the right amount of product or service at the right time and at the right price.

Revenue management: this concept is broader and refers to a company’s overall strategy for increasing revenue. It goes beyond pricing and also takes into account aspects such as customer relationship management, sales channel management and brand segmentation. Revenue management aims to maximize overall sales by optimizing the balance between demand and supply while increasing customer satisfaction.

Conclusion on the subject of yield management

Yield management, also known as yield management, is an important aspect in the modern business world. This strategy aims to maximize a company’s profit by optimally managing the price and availability of products and services. The key to successful yield management lies in keeping price and availability information up to date and adjusting the strategy to demand and the market. An effective yield management strategy can provide significant benefits and help companies increase profits and satisfy their customers. It is important for companies to carefully plan and implement yield management to achieve the best possible results.

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