Free Essay: Yield Management

Yield management is a set of variable pricing strategies that is applied by service vendors that experience capacity constraints in order for the realization of optimum revenues from their business operations. The basic concept of this strategy is to enhance the provision of the correct service to the right customers at the right time and cost. However, it should be noted that this strategy can be applied to businesses with certain traits. One of the characteristics of a business that can use the yield management strategy is that it has to have a fixed number of products to sell like airline or bus seats, and hotel rooms among others.

Another characteristic of a business enterprise that can use the yield management strategy is that the value of the product that it deals in should be time-constrained, meaning that it can lose its value after the expiry of a given time frame. It should also occur that the business serves different customers who are willing to pay for different prices for a similar product or set of products on offer.

Yield management is basically a combination of techniques, analysis and processes that a service vendor applies to the types of products that it offers so as to compel or induce its customers to pay the highest amount of money that they can. Most airline companies apply this strategy to not only keep its airplanes full but also to sell as many highly-priced seats as possible. In a similar way, hotels also apply it to not only have all their rooms occupied by guests but to also fill them at the best rates possible.

One thing that should be noted about yield management is that the techniques applied are often highly automated since they require complex and challenging calculations, real-time checks of solid inventory and all-time updates. In order to execute effective yield management, a business has to be very keen and tactical in managing the spread between costs and revenues. The efforts of the service vendor should always be focused on travel costs ‘management’ to the least levels for customers in order to minimize the cost or revenue spread as thoroughly as possible. Thus, it should be noted that yield management is more effective and even much easier when the service vendor has skilled personnel and tools that might enhance its circumvention.

Yield management also involves provision of discounted inventory for certain travelers i.e. those who are able to meet the restrictions. With this, usage levels will be improved and greater efficiency will also be achieved. This means that some customers will be required to pay more than others for the same services. Based on the degree of the discount that is negotiated, the service vendor is able to make more money through letting some inventory go without being used in case that discount interfered with inelastic demand that might otherwise, be sold at an increased price. Despite the benefits of yield management, it should be noted that it also has its risks.

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Reference:

http://www.wardell.org/understanding_yield_management.htm

https://www.hotelschool.cornell.edu/research/chr/pubs/reports/abstract-13622.html