Have you ever wondered why the prices of movie tickets are high on weekends and low on weekdays? Why the ticket prices for the morning shows always cheaper than the evening shows? Why do some passengers get a better deal than you and end up saving a good amount?
There has always been a problem of meeting the fluctuating demand with the fixed supply in the service industry. This is where Yield Management (YM) come into the picture and plays a critical role in maximizing profits by efficient utilization of a company’s fixed assets to meet the fluctuating demand.
Since the time Yield Management (also known as revenue management), was introduced in companies serving perishable products, it has been very effective in maximising revenue. Yield management works on the economics of demand and supply with the focus on managing an organizations fixed assets in a most effective way to maximize the revenue. The concept of yield management is widely used in organizations which serve perishable products. An airline ticket not sold becomes un-sellable after the flight takes off and turns out to be a loss for the airlines. Yield management principles focus on effectively and efficiently manage the demand with the fixed assets and capacity of the organization.
The Yield management concept was introduced when all major airlines were trying to compete with the low cost airliners.
Since the Hotel industry works on a similar concept of perishable products, the yield management principles were adopted by many hotels. Similar to the airlines, the products or goods sold by Hotels become un-sellable after a particular point of time. A room not occupied for a day in a hotel is a direct loss as the revenue for that particular day for that particular room is lost for the hotel and cannot be recovered.
History of Yield Management
The concept of yield management was introduced in the 1970’s just after the deregulation of airlines in the US took place. It all began with a low cost airliner “People’s Express” which started offering low cost tickets to the customers. The amenities provided to the customers on the airplane were accordingly compromised by People’s Express to meet the revenue numbers. This airline soon started becoming very popular among the customers and started gaining market share. All major airlines suddenly cam under lot of pressure due to losing customers and market share. Two major airlines, United Airlines and American Airlines decided to come up with strategy to compete with People’s Express. These two airlines reduced the cost of a portion their tickets to very low levels, even lower than People’s Express ticket prices. The second portion of the tickets was sold at a much higher price to cater to the regular customers these two airlines that were ready to pay higher prices for the services and amenities offered in the airplanes. This dula pricing strategy started attracting the segment of customers for which the price of a ticket was the biggest criteria to choose airlines and the higher class which were more interested in good quality journey. Soon customers of People’s Express too started moving towards these two major airlines and People’s Express began losing its regular customers and the market share. Soon People’s Express filed for bankruptcy.
Post the fall of People’s Express, the world took a very important lesson and lead to the widespread of the yield management concept.
With successful deployment of yield management in the airlines industry enabling them to maximize revenue, the concept was soon adopted by many other industries, the hospitality industry being one the first few after the airlines industry to deploy yield management principles and techniques.
Benefits of yield management
Customer Satisfaction
Yield management works on the concept of customer segmentation. Different customers have different needs and different expectations. E.g.: Business travellers are more concerned about getting a room while travelling as most of their visits are organized at the last moment. These business travellers are ready to pay more since the need of a room for stay is very high and important for their business. A different segment of customers demand pleasant stays with all amenities and do not worry about paying more. On the other hand there are the “price sensitive” customers who demand the reservations at the lowest possible price. Their criterion for selecting a hotel for stay starts with the pricing and ends with pricing of the hotel. These customers are ready to sacrifice on the amenities front as long as they get the best prices. These above mentioned three segments of customers cannot be provided the same services. If their respective demands are not met, these customers would go ahead and find another alternative and decide to select a competitor. The concept of yield management helps to meet the different demands of different segments of customers with same fixed assets. This strategy helps the hotels to keep as many rooms occupied as possible which otherwise would have remained vacant due to lack of options for different segments of customers. This approach also keeps the customers satisfied and happy as their priorities and needs are met. This also helps to generate a good will and word for the hotel as the satisfied customers recommend the hotels where their needs and demand were fulfilled. This enables hotels to compete with their competitors and reach a bigger market share.
Higher utilization of the fixed capacity
A hotel cannot increase or decrease the number of rooms overnight or as per the fluctuating demand. A room vacant for a day is a loss of revenue which cannot be recovered. Therefore it becomes very important for the hotels to utilize the assets of the hotel very wisely and efficiently. A hotel can maximise its revenue if the rooms are sold at different process to satisfy the needs of customers of various segments. Since the capacity is fixed, better the pricing model, higher the revenue. The efficient utilization of the fixed assets of a hotel adds to the both the top and bottom line of the hotel thus increasing its sales and revenue.
Managing demand instead of supply
Yield management concentrates more on the demand followed by efficiently using the supply of fixed assets of the hotels. The demand fluctuates with time and managing it in the best of form becomes very critical. Most hotels pay more attention to the supply which is their fixed assets and then plan things and bookings. However, yield management focuses on the demand of the customer’s segregated or classified into various segments based different criteria’s and after studying their demands. After the introduction of the yield management concepts most of the hotels have started utilizing their assets based on the fluctuating demand.
Advanced Sales
The concept of advanced sales brought a revolution in the industries serving perishable products. This gave the opportunities to hotels to make use of their fixed assets and have as many as booked in advance. This idea helped the hotels in keeping as many as possible rooms occupied during all the season. Different hotels used different strategies with different pricing models to sell their services. Some drop their prices whereas some offer packages which encompasses tours and travels and various other services.
Criteria for Application of Yield Management
In mid 1980s hotel industries faced issues such as excess capacity, high business failure rate and very slow growth of the business. Around that time period almost all airlines in US had started adopting the yield management methods. The hotel industry looked at the practices of yield management used by airlines and began to adopt it in the mid 1980. Hotel industry fulfilled the criteria which applied to the airlines to make the yield management effective. The criterion is:
Capacity
The yield management concept could be applicable only where the capacity for service or products was fixed. A hotel cannot increase or decrease the number of rooms available overnight. An airliner cannot increase or decrease the number seats available for passengers in an airplane. If the seats in the airliner or the rooms in the hotels are not occupied, then after a certain point of time, these products would become un-sellable.
Demand
Yield management could be useful when the demand fluctuated with time. In the airline or hotel industry the demand of services varies throughout the year. During the holiday season, the demand for rooms in hotels for stay or seats in an airplane is very high. However during the exam times of students, the same travelling in airplane, hotel stays reduce significantly.
Perishable products or services
Yield management could be used when the product or services sold were perishable and became un-sellable after a certain point of time. When an airline takes off with vacant seats or when a hotel has vacant rooms it is a non-recoverable loss for the airliner and the hotel.
Segmentation
It could be used where the market segmentation was possible. Different customers have different need and for any organization, it become extremely critical to understand and segment the customers based on their needs. If the customer satisfaction is low, it is very unhealthy for the business in today’s’ competitive world. As per Britran (1993), customers of hotels arte classified into three major categories – the Business Travellers, tourist and groups. However many hotels have started classifying there customers in finer categories based on their needs and the amount they are ready to pay. The pricing of the rooms for the various segments is done very carefully as it may lead to short and long term loss for the hotel. In the short term loss, the hotel loses the potential revenue and in the long term it loses a customer who could have booked rooms frequently at the hotel or could have recommended it to many other people. This customer dissatisfaction and be lethal for any hotel as the “word of mouth” can spread like a fire in a forest. This long term loss is thus both monetary and non-monetary.
Critical Success Factors
Yield management can act as a powerful tool for capacity management as it not only deals with the pricing but it also develops a relationship between market share and demand. Although, yield management is very critical, the successful deployment of yield management is not easy. An organization must posses few abilities to implement yield management. These abilities are explained below:-
Ability to understand and analyze demand
An organization must posses the ability to analyze the historical data of demand for the products or services and forecast accurately. The analysis should not only capture the occupancy rate but also the peak booking times in the year.
The peak booking times can be different for different industries. The rooms in hotel can be booked may be six months in advance however the airplane tickets can be booked only few months in advance. Accurately forecasting based on the historical data of demand forms the heart of a successful yield management system.
Right segmentation and classifications of customers
An organization must be able to able classify its customers either as regular customers or adhoc post which the percentage of each segment should be studied. This classification helps determining the number of products or services like rooms in hotel or tickets in an airline to be left for the last minute customers. The regular customers can further be classified into price sensitive and non-price sensitive customers. The prices sensitive customers are those who have a limited budget and cannot exceed that. These segments of customers mostly plan ahead and books tickets well in advance to get the best deals. The second segment is the non-price sensitive customers who are either business travellers or very frequent travellers and cannot book tickets in advance due to lack of time and priorities. The non-price sensitive segment also includes customer who wish to have high quality of service on their journey or stay irrespective of the prices.
Accurate segmentation and selective targeting customers is one of the important foundations of yield management.
Pricing model
It is very important for an organization to get the pricing right when offering multiple prices. A small mistake can lead to incorrect pricing resulting in heavy losses. These prices have to be worked upon after analyzing the demand and what the customer is ready to pay. The common belief is the companies vary ther prices on daily basis. However the true picture is that the prices are based on analysis of historical data, demand and supply. These multiple prices are fixed well in advance and are modified only when the forecasting model goes wrong. A poor pricing model can also lead to loss of regular customers resulting in loss in the market share.
Back up plan for “no–shows” and cancellation
A back up plan of overbooking plays a very significant role in yield management. As there are always customers who do not turn up or cancel their tickets, it becomes very important for hotels to overbook their services. The data of cancelled reservations can although be tracked on real time basis, the no shows can be predicted closely only by analyzing the historical data and forecasting accordingly. This over booking strategy acts as a back up plan and ensures efficient utilization of an organization’s assets.
Technology
Whether small or big organizations, implementing yield management without technology support is very difficult or almost impossible. A single synchronized database with real time updating of records is very critical for any yield management system. Many companies allocate human resources, provide management support however fail to concentrate on technology leading to a failed attempt to deploy yield management. With organization like hotels where the services can be booked from any locations and at any time via various modes, the role of technology becomes the decisive factor for the successful implementation of yield management. A manager cannot physically keep a count of the number rooms, types of rooms occupied and vacant, the number of reservations, customers expected to arrive in a day manually. He/she would need lot of technology support to analyze the current occupancy rate, best overbooking rate possible without affecting the customer.
The above mentioned 5 abilities are the mandatory minimum requirements for any yield management system. Even in the absence of any one of the abilities, yield management principles cannot be deployed or sustained.
Yield management allows companies to take control of the under-capacity and over-capacity problems and can give the company a distinctive advantage over its competitor.
