what is yield management?

Answer 1

Yield management, also known as revenue management, is the process of understanding, anticipating reacting to consumer behaviour in order to maximize revenue. Firms that engage in yield management usually use computer yield management systems to do so. Terms to describe this process are revenue optimization and demand mangement.

Answer 2

Yield is the ratio of return you get for your investment. In corporate circles this is known as return on capital employed. While there may be increase in revenue, it may call for additional capital to be employed thereby reducing the yield. Managing such contradictions and financial planning is known as yield management.

Answer 3

Yield management, also known as revenue management, is the process of understanding, anticipating and reacting to consumer behaviour in order to maximize revenue. 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 mangement.

In relation to Telecoms, a company that is focused on profits rather than sales is said to be undertaking yield management. Airlines, for example, use it. Airlines monitor through the use of specialized software how seats are being reserved and offer discounts when it appears as if seats will otherwise be vacant.

In addition, hotels used to use Revenue Management as a way to know when to sell what. Now demand management is becoming a more favorable way to calculate the rates, rooms and restrictions to sell in order to best maximize the return for the property.


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.

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, 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. The system will try to maintain a distribution of purchases over time that is balanced as well as high.

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.

[edit] Ethical Issues

As Yield Management is a type of 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) which decides the price. [1] 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 many 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.

[edit] 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 gouging customers, which results in additional revenue, 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 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 are not. Also, customers feel that the personal connection with the company is lost as the company sees them only as revenue generators. This can result in the loss of relationship marketing and goodwill between the parties. 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.