What is yield management?
Yield management is a business discipline that tries to maximize profits by balancing the prices at which it sells tickets based on the demand for and availability of those tickets.
Yield management is mostly used by airlines and other companies in the travel industry, such as cruise lines and hotels.
The two main variables in this strategy are:
Price – how much you charge for a ticket.
Demand – how many people want to fly.
How does it work?
Yield management uses a few basic principles to get the best price for every seat on every flight.
These four variables help calculate how much you can charge for a ticket:
Demand – How many people want to fly, from the moment they buy until the day before departure.
No-shows – How many people who have already bought tickets don’t go (i.e., they don’t show up at the airport)
Flight characteristics – Things like the flight’s origin and destination, what time of day it is.
Airline competition – How many other airlines are selling flights on that route.
What does this mean for me?
You can get better prices if you book your trip early.
If you book early, it’s possible that the airline doesn’t have to sell seats at a low price anymore.
An example of this would be a flight on a Tuesday with few competitors during the day. The airline might not have to lower their prices too much to fill those seats.
This is a simplified explanation of yield management.
If you’re a business traveler, this is good news for you. Yield management allows airlines to have more flexibility in their pricing to offer more competitive prices to buyers.Yield management allows airlines to have more flexibility in their pricing to offer more competitive prices to buyers. #yieldmanagement Click To Tweet
So next time you book a business trip, check out the price on your airline of choice’s website early on Tuesdays and Wednesdays to see if you can get a better price!
Why do airlines use it?
The main reason airlines use this strategy is to maximize profits.
Price-sensitive passengers might buy a ticket when the price becomes more attractive. For example, few people want to travel during Christmas or winter break. However, if an airline can charge less for flights around that period, they’re likely to fill empty seats and make money from the increase in demand.
As long as they’re making more money than if they’d kept the price high, then they don’t mind selling tickets at lower prices.
Examples of companies that have used yield management to their advantage
As said before there are also other industries that use yield management:
hotels often offer their lowest prices on the weekends and higher prices during the week.
Cruise lines often offer discounts for their first voyage of the season.
Different taxi fares are charged during other times, based on demand. For example, New Year’s Eve is a hectic time, and people may be willing to pay extra to make sure they get home!
The pros and cons of using yield management in your business
Reasons why you should use yield management:
- It fills seats that might otherwise go empty. Filling plane seats makes the experience more enjoyable for everyone on board.
- You can use yield management to offer competitive prices. The market has many players, so it’s possible that other companies could lower their costs if you don’t keep yours attractive as well.
- Possible to generate more revenue by filling empty seats.
Reasons why you should not use yield management:
- It’s complicated and expensive to calculate and monitor the yield management strategy’s variables. This is especially true if your business has a lot of different locations or offers varying services, such as hotels might.
- More advanced pricing means more advanced demand forecasting. This requires a lot of research and data analysis to get right, which can be costly.
- It takes a long time for the airline to book flights because they have to wait until all four variables are known before computing prices that will fill seats. Airlines know how many people want to travel from moment one, but they can’t say how many will show up until the day of the flight!
- It’s complicated for consumers to understand.
There are a lot of cons to using yield management, but the main advantage is that your business can make more money! Airlines wouldn’t offer such low prices without buying and selling seats at different prices.
Yield management may not be the best strategy for you if you don’t have time or resources to invest in it. But if you decide to use this strategy, there are many exciting things you can learn!