Maximum Profits through Yield Management (+ Examples)

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What is Yield Management?

Yield management is a marketing strategy that aims to maximize profit through dynamic pricing by selling the right product to the right customer at the right time. It is a dynamic and flexible approach that takes into account various factors such as demand, price elasticity, competition and inventory. Yield management is also called revenue or profit management.

To be successful, yield management requires a deep understanding of customer behavior as well as market trends. It also needs to be constantly adapted to changes in the market.

Yield management is a pricing strategy that can be used in various industries, but it is particularly popular in the tourism and advertising industries. In hotel marketing, the concept is often used to optimize prices for hotel rooms, for example. A hotel may offer more rooms at a higher price during peak periods and fewer rooms at a lower price during off-peak periods.

In the advertising industry, yield management is often used to optimize prices for online ads. For instance, an online publisher can use yield strategies to sell more ad space at a higher price when demand is high and less ad space at a lower price when demand is low.

Managing yield can be a powerful tool for businesses, but it’s important to use it wisely. If you use yield management strategies to maximize short-term profits, you may miss the opportunity to build long-term customer relationships.

Factors of yield management

Successful yield management takes into account a variety of external and internal signals to define and dynamically adjust prices.

Here are some of the most important factors:

Own availability/utilization of capacity (e.g. number of rooms, airline seats)
General price elasticity
Past capacity utilization and demand forecasts
Seasonal fluctuations
Competitor prices
Type of customer (e.g. business or leisure)
Time of booking (6 months before travel vs. last minute)
Events
Cancellation rates
Commissions to third parties (e.g. booking platforms)
General market factors (e.g., high inflation, global pandemic)

Yield management examples

Have you ever been on vacation and the price of your room was increased as soon as you booked it? This is an example of yield management in action. Hotels, airlines and other tourism businesses use yield strategies to maximize profits.

Yield management in the advertising industry

The advertising industry is another industry where yield management can be used to maximize profits. Advertisers use the marketing strategy to sell ad space on their websites or other platforms to the highest bidder. This allows them to earn more money from their ad inventory. For that purpose Programmatic advertising is used in the advertising industry to manage yield. Programmatic advertising is a process of buying and selling ads using software. This type of yield management allows advertisers to automate the buying and selling ad space on their platforms. This can help them optimize their ad campaigns for maximum profit. It does this by using real-time bidding to always get the best possible price and generate maximum utilization.

The fill rate is usually more important to online publishers than the individual price of a display ad. The eCPM increases higher due to a higher fill rate than a slightly higher CPM of a sold ad slot. Yield management can help publishers increase their fill rate by auctioning ad space impressions to the highest bidder. This can also be done with minimum floor prices in mind.

Yield management example airline tickets

The airline industry is one of the most well-known examples of yield management. Airlines use the yield management system to sell tickets at the highest possible price while still filling their seats.

Airlines use a number of factors to determine the price of their tickets, including time of day, day of the week, and time of year. They also take into account how full the flight is, how far in advance the ticket was purchased and whether the customer is a business or leisure traveler.

Yield management can even maximize profits through calculated overbooking. By selling more tickets than there are seats on the plane. Thus, airlines can ensure that their flights are full and maximize their profits. In the actual event of overbooking on the day of travel, compensation is already factored into prices.

Hotels also use yield management to sell rooms at the highest possible price. Hotels consider the same factors as airlines when pricing their rooms, as well as whether guests are staying over a weekend or checking in for business. Events such as sporting events, concerts, or conventions can also affect hotel room rates.

The yield management system is equally used in car rental, cruise ship operators, or even food retailers.

Yield management methods

There are different methods in yield management. The most common are nesting and Expected Marginal Seat Revenue (EMSR).

Nesting in yield management

In nesting, first, customer groups are formed. In the second step, certain capacities are assigned to each one. Certain groups, such as business travelers, pay more for the same hotel room than a price-sensitive tourist. The small number of units per customer group ensures optimal capacity management.

EMSR in revenue management

Expected Marginal Seat Revenue (EMSR) is a method often used by airlines to set prices. EMSR is the revenue an airline hopes to generate by selling an additional seat on a flight. Here, the probability of an optimal booking rate is calculated for each booking class. These are probabilities that can be used to accurately calculate the ideal size of booking classes in advance.

Conclusion

Yield management systems use variable pricing strategies to ensure maximum utilization per available capacity. Customers with a high willingness to pay are offered different prices than price-sensitive customers. Underutilized capacities are an important factor in revenue management. Yield management ensures that ideally every customer gets an offer where they are willing to pay these prices, and consequently generates maximum utilization and revenue.