why is it that the guy sitting next to you on the plane paid half the price you paid for your ticket? Why was a hotel room you booked more expensive when you booked it six months in advance then when you checked in without a reservation [or vice versa]? The answers lie in the practice known as yield management. Yield management can be defined as the process of allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue or yield. Yield management can be a powerful approach to making demand more predictable. Which is important to aggregate planning.
Yield management has existed as long as there has been limited capacity for serving customers. However, its widespread scientific application began with American Airlines’ computerized reservation system [SABRE], introduce in the mid-1980s. the system allowed the airline to change ticket prices on any routes instantaneously as a function of forecast demand. Peoples ‘Express, a no-frills, low-cost competitor airline, was one of the most famous victims of American’s yield management system. Basically, the system enabled hour-by-hour updating on competing routes so that American could match or better prices wherever Peoples ‘Express was flying. The president of Peoples ‘Express realized that the game was lost when his mother flew on American to Peoples’ hub for a lower price than Peoples’ could offer!
From an operational perspective, yield management is most effective when
1. Demand can be segmented by customer.
2. Fixed costs are high and variable costs are low.
3. Inventory is perishable.
4. Product can be sold in advance.
5. Demand is highly variable.
Hotels illustrate these five characteristics well. They offer one set of rates during the week for the business traveler and another set during the weekend for the vacationer. The variable costs associated with a room [such as cleaning] are low in comparison to the cost of adding rooms to the property. Available rooms cannot be transferred from night, and blocks of rooms can be sold to conventions or tours. Finally, potential guests may cut short their stay or not show up at all.
Most organizations [such as airlines, rental car agencies, cruise lines, and hotels]management yield by establishing decision rules for opening rate classes as a function of expected demand and available supply. The methodologies for doing this can be quite sophisticated. A common approach is to forecast demand over the planning horizon and then use marginal analysis to determine the rates that will be charged if demand is forecast as being above or below set control limits around the forecast mean.