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Encyclopedia > Yield management

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. Firms 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. This article is about consumers in economics. ... Behavior or behaviour refers to the actions or reactions of an object or organism, usually in relation to the environment. ... Revenue is a U.S. business term for the amount of money that a company earns from its activities in a given period, mostly from sales of products and/or services to customers. ... Profit is what is gained, after costs are accounted for. ... It has been suggested that The Firm be merged into this article or section. ... A BlueGene supercomputer cabinet. ... Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. ...


Two industries where yield management is used most heavily are passenge air transport and lodging. 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.

Contents

Yield management system

Enterprises that use yield management periodically review transactions for goods 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 models 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 models attempt to optimize the firm's outputs to maximize revenue. A good in economics is any physical object (natural or man-made) or service that, upon consumption, increases utility, and therefore can be sold at a price in a market. ... In economics and marketing, a service is the non-material equivalent of a good. ... An abstract model (or conceptual model) is a theoretical construct that represents physical, biological or social processes, with a set of variables and a set of logical and quantitative relationships between them. ... An abstract model (or conceptual model) is a theoretical construct that represents physical, biological or social processes, with a set of variables and a set of logical and quantitative relationships between them. ...


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 of purchases over time that is balanced as well as high. Wikibooks has more about this subject: Marketing Distribution is one of the four aspects of marketing. ...


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

As Yield Management can result in price discrimination, some question the morality of the participating firms’ motives. The ethical issues include the firms manipulation of personal information to judge one’s demand for a service or product; for example, it is rumored that airlines see who the purchaser is and use the frequent flyer information (say for example, age) as an input to the formula or algorithm (sometimes using a neural network)[citation needed] which decides the price. [1] Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. ... Simplified view of an artificial neural network A neural network is a system of interconnecting neurons in a network working together to produce an output function. ...


Another ethical issue is due to the underlying principle of yield management. That is, different prices are charged to different people for the same product or service to increase revenue. A firm that practices yield management through yield management systems relies on forecasts, and the manipulation of information via online transaction processing systems to find out the price to maximize revenue. It is understandable that some consumers see yield management as unfair and discriminatory. In the end it is up to the consumer to support a firm that relies on yield management. However this can be difficult in industries that it has become the norm, such as the airline industry. Online Transaction Processing (or OLTP) is a class of program that facilitates and manages transaction-oriented applications, typically for data entry and retrieval transaction processing. ...


These ethical "issues" are mitigated by the fact that for yield management to be a successful strategy to distribute inventories, those inventories must have different values in time. For example, a seat from Los Angeles to New York on the Sunday after Thanksgiving does not have the same value as that same seat one week later. Even more relevant, a seat on the same (hot) Thanksgiving flight sold the day before departure has an immediacy value that the same seat sold six months prior does not. While true that businesses employing yield management make maximum use of the fact that these resources have different values in time, it is these different values that drive the variances in price. Another way to state this argument is to say that although 12A and 12F appear to be providing the exact same service on a given flight, their values are not driven by the fact that they fly the same routes, but by agreeing to supply itself to a demander at a point in time.


Questions of Effectiveness

There have recently been questions about how effective YM is in the big picture. A firm that wants to satisfy its customers and have them come back are putting their customer relations in jeopardy by using YM practices. For example, American Airlines, which was a pioneer in the innovation of yield management systems, estimated that the utilization of YM increased its revenue by $1.4 billion between 1989 and 1991 [2]. While this stat is impressive and shows how YM can be effective, it is also misleading. Many argue that the benefits of offering different price points to customers, which results in additional revenue by stimulating demand, are felt upfront and are short-lived. The costs of lower customer satisfaction, loyalty and the loss of relationship marketing can have longer more serious effects and in the end might make the implementation detrimental to the firm. Because American Airlines was a pioneer with yield management, it is obvious that the innovation will result in a large increase in revenue. However, as the rest of the industry catches up with the technology of the YM systems, the competitive advantage can be lost, while the long lasting costs might remain. So it comes down to a cost-benefit situation for the firm. The extra revenue now is the benefit and loss of goodwill and possibly a drop in revenue in the future is the cost. It is of course up to the firm to forecast if the benefits outweigh the costs.


History of Yield Management: SABRE

Although yield management systems have been in existence since the late 1980’s, their development was actually initialized during the 1960’s. The original product offered by Sabre Airline Solutions [3] was a simple and primitive computer based program that allowed airline companies to enter reservation information into a computer instead of by a hand written in entry. It wasn’t until 1986 that Sabre (Semi-Automatic Business Research Environment) released the product that first created revenue-managing systems. Sabre Airline Solutions have continued to provide yield management systems since they were first introduced and now offer a product called AirMax Revenue Manager that is widely used in the airline industry. Shortcut: WP:CU Marking articles for cleanup This page is undergoing a transition to an easier-to-maintain format. ... This Manual of Style has the simple purpose of making things easy to read by following a consistent format — it is a style guide. ...


See also

Geo (Marketing) is a discipline within Marketing-Analysis which uses geographic information or Geolocation in the process of planning and implementation of marketing activities. ... Most firms use a fixed price policy. ... Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. ... Remainder advertising (also known as remnant or last minute advertising) refers to the advertising space that a media company has been unable to sell. ...

References

  • "Definition and History of Yield Management." Amadeus. 24 June 2006 <http://www.optims.com/UK/hight_profits.html>.
  • Maglaras, C., Meissner, J. "Dynamic Pricing Strategies for Multi-Product Revenue Management Problems." MSOM 2006 <http://www.meiss.com/en/publications/dynamic-pricing.html>.
  • Netessine, S., Shumsky, R. "Introduction to the Theory and Practice of Revenue Management." INFORMS Transactions on Education, Vol. 3, No. 1, <http://ite.pubs.informs.org/Vol3No1/NetessineShumsky/>.
  • Haag, Steven. Management Information Systems for the Information Age. Canada. McGraw Hill Ryerson Ltd. 2001, 2004-2006.
  • Hayden, Kathryn, ed. "Aviacsa Becomes First Airline in Mexico to Select Sabre AirMax Revenue Manager." Sabre Airline Solutions. 12 June 2006. 26 June 2006 <http://phx.corporate-ir.net/phoenix.zhtml?c=73098&p=irol-newsArticle&ID=871265&logo=logo02,>.

  Results from FactBites:
 
Understanding Yield Management (1308 words)
Yield management, minus polite trappings, is basically the combination of processes, analysis, and techniques a vendor applies to the types of products it offers in order to induce (or compel) its customers to pay as much as possible.
Yield is a complex word that can refer to profitability in a number of ways, but the essence of being in business is to manage the greatest possible spread between costs and revenues.
Thus yield management is more effective (or at least easier) when you have as few skills and other tools as possible that might enable you to circumvent it.
Definition Yield Management - RevDev Consultants (1181 words)
Yield Management is the science of micromanaging product supply to match the product demand at the same level to generate incremental revenues.
Yield management is the application of information systems and pricing strategies to allocate the right capacity to the right customer at the right place at the right time.
Yield management is a sophisticated form of supply and demand management that balances both pricing strategies and inventory management.
  More results at FactBites »

 
 

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