Yield Management Analysis Essay Example

of 'yield'. Yield denotes the proportion of satisfactory items acquired from a process relative to the initial quantity of satisfactory items engaged in that process (Wood, 1985). The calculation of yield entails dividing the revenue generated by the potential revenue (Jones and Val, 1993). Thus, yield serves as an indicator for assessing a company's triumph in augmenting revenue.

Yield management is defined in various ways. According to Optism (2002), it is an economic technique that determines the most profitable pricing strategy for a product or service based on real-time modeling and forecasting of demand behavior. Nagle and Holden (1995) define it as a pricing method that involves setting different prices for different market segments in order to maximize revenue.

According to Jaucey, Mitchell and Slamet (1995), yield management is an integrated, continuous and systematic approach to maximizing revenue by manipulating a product's price based on predicted demand patterns. However, Kimes (2002) provides a more commonly accepted definition, stating that yield management is a method that helps a company sell appropriate inventory to the right customer at the right time and price. Furthermore, there are certain conditions required for implementing yield management. B. Required Conditions for Yield Management

The application of yield management has expanded beyond the airline industry to include hotels, rental cars, restaurants, cruise lines, convention centers, stadiums, arenas, movie and other theatres, internet service providers, and golf courses (Smet, 2003). However, companies in various industries must meet specific criteria to implement yield management.

Relatively Fixed Capacity

Yield management is suitable for service firms with limited capacity because companies without capacity constraints have the ability to adjust their

inventory based on demand. Capacity can be divided into two types: physical and non-physical. Physical capacity includes factors such as the number of seats on a plane, rooms in a hotel, or the size of a golf area in square meters. Non-physical capacity is typically time-based and connected to physical capacities, such as nights for hotel rooms, hours for restaurant tables, and time slots for golf courses. Although capacity in these industries usually remains fixed and difficult or costly to increase in the short term, some firms can adapt their capacity. For instance, airlines have the option to expand the size of their planes and add more seats, while restaurants can introduce additional tables or utilize outdoor seating during summer.

Predictable Demand

To optimize revenue, managers of capacity-constrained firms must anticipate various kinds of demand - reservations and walk-in customers. Determining the most profitable mix of customers requires information on the percentage of reservations and walk-ins, customers' preferred time slots, and estimated service duration. To obtain this information, firms require effective reservation systems, whether computerized or manual.

Perishable Inventory

Managers often overlook the importance of time as a crucial element. Instead of solely focusing on customer numbers or average revenue per customer, companies should consider the time factor and calculate the revenue generated by time-based inventory units. These inventory units perish if they cannot be occupied within a specific time period. Consequently, they cannot be stored and sold at a later date. A prime example of this is hotels being unable to store rooms for use the following night. The same applies to empty airline seats or unoccupied

advertising space.

Appropriate Cost and Pricing Structure

A firm using yield management must have a cost structure with high fixed costs and low variable costs. Sufficient revenue is needed to cover both variable costs and some fixed costs. Capacity-constrained industries can take advantage of their low variable costs to offer flexible pricing options, such as lowering prices during times of low demand.

Time-Variable Demand

Managers need to anticipate changes in customer demand depending on different time periods, such as the year, month, week, or day. Sectors like hotels and airlines see increased demand during weekends or summer months. Precise forecasting of demand allows for effective pricing and allocation of resources. Moreover, managers must also predict how long customers will need their service. In restaurants, accurately estimating meal duration helps manage reservations and inform walk-in customers about expected wait times.

The Strategic Levers of Yield Management

The aim of a successful yield management strategy is to gain efficient control of customer demand. To implement this strategy, businesses have two strategic options: pricing and customer use duration. Prices can be set at a fixed rate for all customers and times, or they can vary according to different times or customer segments. Duration can be either predictable or unpredictable. While controlling demand through variable pricing is an understandable process, managing duration poses a more intricate decision problem (Kimes and Chase, 1998).

The effectiveness of strategic levers depends on the nature of the service business. For businesses that have a fixed service duration and variable price, price incentives can be used to manage demand. Conversely, businesses without a

specific service duration must focus on defining the duration of their services (Enz and Withiam, 2001). Different industries, such as airlines, movies, restaurants, and hospitals, have different combinations of duration and pricing for their services (see Figure 1; Kimes and Chase, 1998). The classical tactic of yield management, which involves using price variation to shift demand for a known duration service, does not always work well for all industries. Industries like hotels, airlines, car-rental firms, and cruise lines are traditionally associated with yield management and can implement variable pricing for products or services with a specified or predictable duration (Quadrant 2).

The pricing models for different businesses can be categorized based on the combination of fixed prices and predictable or unpredictable durations. Movie theaters, convention centers, and sports stadiums fall into Quadrant 1 because they charge a fixed price for a service with a predictable duration. On the other hand, restaurants, golf courses, and most internet service providers belong to Quadrant 3 as they also charge a fixed price but face a relatively unpredictable duration of customer use. Health care businesses operate in Quadrant 4 where they charge variable prices depending on factors such as Medicare or private pay without knowing the duration of patient use. It's important to note that the boundaries between these quadrants are not rigid as there is no clear separation in reality.

Industries can have characteristics belonging to multiple quadrants. According to Kimes and Chase (1998), industries in quadrant 2 tend to have successful yield management applications. The authors explain that the predictable duration of services in this quadrant allows for a clear definition of the service portfolio,

and variable pricing helps maximize revenue from each service offered within that portfolio (Kimes and Chase, 1998).