YIELD MANAGEMENT
Definition
Yield management, or revenue management, is a pricing strategy that involves adjusting the price of a product or service in real time based on projected occupancy rates and future demand. Originating in the airline and hotel industries, it has now expanded to many sectors, including ticketing, rentals, restaurants, parking, and even retail for fresh produce.
Why it's important
- Maximize revenue per available unit: adjusting prices based on demand captures more value than fixed rates.
- Managing scarcity: For limited inventory (airline seats, hotel rooms), yield management ensures that the last available units are sold at the best price.
- Smoothing demand: keeping prices low during off-peak periods and high during peak periods optimizes the overall occupancy rate.
A concrete example
A rail company is selling tickets for a Paris-Marseille route. Ninety days before departure, the leisure fare is €39. As the train fills up, the yield engine adjusts the price: €59 thirty days before departure, €89 seven days before departure, and €129 one day before departure for the last remaining seats. Conversely, if the train fills up slowly, the fare remains at €49 until 7 days before departure. Over the course of the year, revenue per seat-kilometer increases by 11% at equivalent capacity, without any decline in the load factor.
How to measure/use it
Yield management is based on four key components: 1) detailed demand forecasting by segment and time slot, 2) pricing segmentation (price tiers, sales conditions), 3) a dynamic inventory allocation engine across price tiers, 4) real-time monitoring of seat occupancy. Modern tools incorporate machine learning to optimize these decisions at scale. In retail, yield management applies to fresh products based on their best-before date.
Common Mistakes
- Set fare classes once and for all: effective yield management continuously adjusts fare classes based on observed demand.
- Disappointing loyal customers: A customer who paid €129 for a product that someone else can get for €39 may feel cheated. Transparency regarding pricing policies is essential.
- Confusing yield with discount: Yield is not a strategy of selling at a loss, but rather a matter of optimizing by segment and timing.
Learn more
- Research & Data: Analysis of yield management opportunities by category.
- Solutions: Pricing Analytics and yield modules tailored to specific industries.
- Consulting: Development of yield-oriented pricing strategies for services and perishable goods.
- Resources: Check out our pricing FAQ to learn how to combine yield management with dynamic pricing.