Yield Management - History

History

Deregulation is generally regarded as the catalyst for yield management in the airline industry, but this tends to overlook the role of Global Distribution Systems (GDSs). It is arguable that the fixed pricing paradigm occurs as a result of decentralized consumption. With mass production, pricing became a centralized management activity and customer contact staff focused on customer service exclusively. Electronic commerce, of which the GDSs were the first wave, created an environment where large volumes of sales could be managed without large numbers of customer service staff. They also gave management staff direct access to price at time of consumption and rich data capture for future decision-making.

On January 17, 1985, American Airlines launched Ultimate Super Saver fares in an effort to compete with low cost carrier PEOPLExpress. Donald Burr, the CEO of PeopleExpress, is quoted as saying "We were a vibrant, profitable company from 1981 to 1985, and then we tipped right over into losing $50 million a month...We had been profitable from the day we started until American came at us with Ultimate Super Savers." in the book "Revenue Management" by Robert G. Cross, Chairman and CEO of Revenue Analytics. The Yield management systems developed at American Airlines were recognized by the Edelman Prize committee of INFORMS for contributing $1.4 billion in a three-year period at the airline.

Yield management spread to other travel and transportation companies in the early 1990s. Notable was implementation of Yield management at National Car Rental. In 1993, General Motors Corporation was forced to take a $744 million charge against earnings related to its ownership of National Car Rental Systems. In response, National's program expanded the definition of Yield management to include capacity management, pricing and reservations control. As a result of this program, General Motors was able to sell National Car Rental Systems for an estimated $1.2 billion. Yield Management gave way to the more general practice of Revenue Management. Whereas Revenue Management involves predicting consumer behavior by segmenting markets, forecasting demand, and optimizing prices for several different types of products, Yield Management refers specifically to maximizing revenue through inventory control. Some notable Revenue Management implementations include the NBC which credits its system with $200 million in improved ad sales from 1996 to 2000, the Target Pricing initiative at UPS, and Revenue management at Texas Children's Hospital. Since 2000, much of the dynamic pricing, promotions management and dynamic packaging that underlie ecommerce sites leverage Revenue management techniques. In 2002 GMAC launched an early implementation of web based revenue management in the financial services industry.

There have also been high profile failures and faux pas. Amazon.com was criticized for irrational price changes that resulted from a Revenue management software bug. The Coca-Cola Company's plans for a dynamic pricing vending machine were put on hold as a result of negative consumer reactions. Revenue management is also blamed for much of the financial difficulty currently experienced by legacy carriers. The reliance of the major carriers on high fares in captive markets arguably created the conditions for low cost carriers to thrive.