Yield management is a variable pricing strategy, based on understanding, anticipating and influencing consumer behaviour in order to maximize revenue or profits from a fixed, time-limited resource (such as airline seats or hotel room reservations or advertising inventory).
As a specific, inventory-focused branch of revenue management, yield management involves strategic control of inventory to sell the right product to the right customer at the right time for the right price. This process can result in price discrimination, in which customers consuming identical goods or services are charged different prices.
Yield management is a large revenue generator for several major industries; Robert Crandall, former Chairman and CEO of American Airlines, gave yield management its name and has called it “the single most important technical development in transportation management since we entered deregulation.”
By optimising yield management, an independent hotel or a chain of hotels can adjust its prices, to meet the total demand characteristics of its markets.
Prices can be determined by:
- Service
- Group of services
- Market (consumer type or geographical), or
- A combination of the above
Yield management models are most effective where the service being supplied is characterized as:
- Capital intensive
- Perishable (revenue is lost if the product/service is not sold at a particular point in time)
And the demand side is characterized by:
- Variability of demand, and
- Variability of value
These days, smart yield managers or yield management teams use specifically- developed software, particularly when formulating variable pricing strategies.