Yield Management - Use By Industry

Use By Industry

There are three essential conditions for yield management to be applicable:

• That there is a fixed amount of resources available for sale.
• That the resources sold are perishable (there is a time limit to selling the resources, after which they cease to be of value).
• That different customers are willing to pay a different price for using the same amount of resources.

If the resources available are not fixed or not perishable, the problem is limited to logistics, i.e. inventory or production management. If all customers would pay the same price for using the same amount of resources, the challenge would perhaps be limited to selling as quickly as possible, e.g. if there are costs for holding inventory.

Yield management is of especially high relevance in cases where the constant costs are relatively high compared to the variable costs. The less variable cost there is, the more the additional revenue earned will contribute to the overall profit. This is because it focuses on maximizing expected marginal revenue for a given operation and planning horizon. It optimizes resource utilization by ensuring inventory availability to customers with the highest expected net revenue contribution and extracting the greatest level of ‘willingness to pay’ from the entire customer base. Yield management practitioners typically claim 3% to 7% incremental revenue gains. In many industries this can equate to over 100% increase in profits.

Yield management has significantly altered the travel and hospitality industry since its inception in the mid 1980s. It requires analysts with detailed market knowledge and advanced computing systems who implement sophisticated mathematical techniques to analyze market behavior and capture revenue opportunities. It has evolved from the system airlines invented as a response to deregulation and quickly spread to hotels, car rental firms, cruise lines, media, telecommunications and energy to name a few. Its effectiveness in generating incremental revenues from an existing operation and customer base has made it particularly attractive to business leaders that prefer to generate return from revenue growth and enhanced capability rather than downsizing and cost cutting.