What is Yield Management?
Yield management is a pricing strategy that targets profit maximization from perishable goods by understanding, anticipating and influencing human behavior. Yield management system is often used in the service industries such as airlines, hotels, car rentals and insurance. It’s also known as a revenue management system. This tool, when used in a right way and at the right time, helps companies have a better strategic control over its inventories and reduce loss. Revenue management best practices help managers predict accurate consumer demand, develop an effective pricing strategy, make appropriate adjustments to the product prices and generate a significant amount of revenue in a particular span of time.
Example of a Yield Management System
You might have noticed the price of air tickets declines during the off seasons. It happens because the airline company automatically adjusts the ticket price after a successful consumer demand forecasting. If the yield management system predicts a low demand for flight tickets, the price will automatically get adjusted. Similarly, the price of air tickets jumps during the holiday seasons. Here the price of the product changes according to the rise or fall in the product demand, or the buying behavior of the consumers. This management strategy helps a company generate maximum profit by selling the optimal number of units at the right price and the right time.
Why Companies Use Yield Management System?
In most of the cases, companies try to assess the future trend of consumer behavior in a frequently changing marketing condition, communicate the available information quickly to the product sales and distribution outlets, initiate an optimum allocation and use of inventory and price the products accurately so that maximum number of consumers can be approached in an effective manner. Companies use computers and internet to implement an effective yield management process.
Benefits of Effective Yield Management System
- Adjusts Price According to Market Segment: Yield management system helps companies control price discrimination by doing appropriate market segmentation. For example, consumers from different market segments have different needs and product preference. For example, consumers who are price sensitive prefer to travel on weekends and focus more on saving money. So yield management helps companies understand a market segment and decide the most appropriate product price for that segment.
- Helps a Business to Focus on New Market: This system also helps companies focus its pricing strategies on new markets so that a company can continue to grow in its industry. If a chain of hotels particularly catering to the business travelers finds out most of its hotel location are popular family holiday destinations, it can come up with new product packages and prices to grow its market and customers.
- Improves Customer Experience: The research process involved in the revenue management system helps companies understand consumer needs accurately. It helps them provide the best service to the customers and improve the consumer experience.
- Helps to Develop Competitive Pricing: Effective yield management strategies help companies decide competitive pricing. It gives the companies a competitive edge over their competitors.
- Promotes Co-ordination in Company Divisions: When managers get information about the future product demand and consumer behavior, they immediately share the information with the marketing and sales department and also with the service representatives. It promotes better coordination in different divisions and maximizes profit.