As a Government traveler, I am often astounded by the differences in airline ticket prices when I travel. I may have paid $350 for a Government-fare seat in coach class while the business traveler in the seat beside me paid $1,200. This is the result of yield management. In this instance, airlines are trying to sell the right seats to the right type of customer at the right time and for the right price.
Yield management uses information about customer purchasing behavior and product sales to develop pricing and inventory controls that produce greater revenues and deliver products that are better matched to the customers’ needs. Yield management is well-suited for travel service providers because of the following characteristics:
- Perishable Inventory
- Relatively Fixed Capacity
- High Fixed Costs, Low Variable Costs
- Advance Reservations
- Fluctuating Demand
- Appropriate Cost and Pricing Structure
- Ability to Segment Markets
Overbooking is a tool used in yield management by businesses such as airlines, hotels, and rental car agencies. In order to account for no-shows, these businesses routinely overbook based on historical data on no-shows. If more customers show up than anticipated, the business will be forced to “bump” a customer to another flight, provide alternative lodging and possibly other compensation, or provide free upgrades or perks such as unlimited mileage for rental vehicles. Businesses must also take into consideration the loss of customer goodwill. Bumping a regular customer could anger the customer and the business could thereby lose potential repeat business.
Discount allocation is the process of determining the number of discount fares to offer on a flight. The ratio of discount versus full fares (called buckets) is not fixed during the reservation period and is moved appropriately as the departure date approaches. Airlines use special software to monitor how seats are being reserved and react accordingly, for example by offering discounts when it appears that seats will remain unsold. It also varies on the basis of forecast, past experience, and special events. The opportunity cost of selling a discounted ticket instead of a full fare one has to be measured in order to make the best decision possible.
Yield management, with its fundamental basis in market segmentation, can assist travel service providers in maximizing the effective use of their fixed available capacity, thereby contributing to financial success. Service firms should have the ability to divide their customer base into distinct market segments, such as business and leisure, to which they can apply the principles of differential pricing. For airlines, this means implementing purchase restrictions, length of stay requirements, and fees for changing or canceling tickets. Hotels use this system in largely the same way to calculate the rates, rooms, and restrictions on sales in order to best maximize their revenue. For hotels, this means restrictions such as length of stay, nonrefundable rate, or close to arrival. In the rental car industry, yield management deals with the sale of optional insurance, damage waivers, and vehicle upgrades. It accounts for a major portion of the rental company’s profitability, and is monitored on a daily basis.
To most travelers yield management might seem like price discrimination at its best, however, it is still a proven method of increasing a travel service provider’s revenue while delivering products/services that better suit its customer’s needs.
by Angela Williamson
“The contents of this message are mine personally and do not reflect any position of the Government or my agency.”