Yield management

Yield management is a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, time-limited resource (such as airline seats or hotel room reservations or advertising inventory). As a specific, inventory-focused branch of revenue management, yield management involves strategic control of inventory to sell the right product to the right customer at the right time for the right price. This process can result in price discrimination, in which customers consuming identical goods or services are charged different prices. Yield management is a large revenue generator for several major industries; Robert Crandall, former Chairman and CEO of American Airlines, gave yield management its name and has called it 'the single most important technical development in transportation management since we entered deregulation.' Yield management is a variable pricing strategy, based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, time-limited resource (such as airline seats or hotel room reservations or advertising inventory). As a specific, inventory-focused branch of revenue management, yield management involves strategic control of inventory to sell the right product to the right customer at the right time for the right price. This process can result in price discrimination, in which customers consuming identical goods or services are charged different prices. Yield management is a large revenue generator for several major industries; Robert Crandall, former Chairman and CEO of American Airlines, gave yield management its name and has called it 'the single most important technical development in transportation management since we entered deregulation.' Yield management has become part of mainstream business theory and practice over the last fifteen to twenty years. Whether an emerging discipline or a new management science (it has been called both), yield management is a set of yield maximization strategies and tactics to improve the profitability of certain businesses. It is complex because it involves several aspects of management control, including rate management, revenue streams management, and distribution channel management. Yield management is multidisciplinary because it blends elements of marketing, operations, and financial management into a highly successful new approach. Yield management strategists must frequently work with one or more other departments when designing and implementing yield management strategies. 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 People Express Airlines. Donald Burr, the CEO of People Express, 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 was forced to take a $744 million charge against earnings related to its ownership of National Car Rental. 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 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.